Managers who do so are clearly positive on the company’s chances and are therefore trying to capture as much upside as possible. This takes nerves of steel however, and a great deal of experience.
There have been instances in the past when managers have fallen foul of holding too much of their fund in just one company. Investors only need to look back to 2010 when a huge proportion of them were caught out by BP’s oil spill.
The question investors have to ask themselves is: do I trust the manager’s high-conviction approach?
Here, FE Trustnet looks at some of the companies that the UK’s highest-profile managers are investing at least 7.5 per cent of their portfolio in, and asks the Share Centre’s Graham Spooner what he thinks the prospects are for those chosen stocks.
Neil Woodford – AstraZeneca
FE Alpha Manager Neil Woodford (pictured) is a big fan of the FTSE 100 pharmaceuticals company AstraZeneca.
He holds more than 9 per cent of the firm in his Invesco Perpetual High Income, Invesco Perpetual Income, and SJP UK High Income funds, as well as his Edinburgh Investment Trust.
His high exposure to the company means that roughly £1.3bn of his £14bn Invesco Perpetual High Income fund is invested in it. Across all four of his funds, he owns around £2.4bn worth of shares in the business.
Although Astra has a market cap of more than £40bn, Woodford is still one of its major shareholders.
Woodford is by no means the only manager to rate AstraZeneca. Our data shows that 170 funds in the IMA universe count it as a top-10 holding. In the IMA UK Equity Income sector, 44 of a possible 100 count it as a major holding.
The stock has had a slightly rocky 2013. Though investors in Astra will have seen returns of more than 18 per cent year-to-date, it witnessed a sharp sell-off in late May.
It has outperformed the wider FTSE 100 index over this time, however.
Performance of stock vs index year-to-date
Source: FE Analytics
Spooner says that investors who want exposure to a defensive pharmaceutical company should probably go with GlaxoSmithKline.
"We prefer Glaxo as it is a bit more defensive and less risky," he said.
"Astra doesn’t have the pipeline that Glaxo has; however, I would say we are aggressive sellers. You do get a better dividend with AstraZeneca – the yield is over 5 per cent. But we feel it is potentially under pressure from copycat drugs and one or two products coming off patent," he added.
That is not necessarily bad news for Woodford, however – he has more than 8 per cent of Invesco Perpetual High Income, Invesco Perpetual Income, SJP UK High Income and Edinburgh Investment Trust in Glaxo.
Nick Train – Unilever
FE Alpha Manager Nick Train has a high exposure to the multi-national consumer goods firm Unilever.
The company – which has a market cap of nearly £80bn – has a 9.6 per cent weighting in his Finsbury Growth & Income trust, a 9.6 per cent weighting in his CF Lindsell Train UK Equity fund, and a 6.8 per cent weighting in his Lindsell Train Investment Trust.
Some of Unilever’s best-known products include Ben and Jerry’s, Radox, Lynx and Pot Noodle.
Like AstraZeneca, Unilever is popular among Train’s peers. There are 121 IMA funds that count the FTSE 100 company as a top-10 holding, including First State Global Emerging Markets, First State Global Emerging Markets Leaders and First State Global Emerging Markets Sustainability.
Spooner is also optimistic about the stock’s prospects for the future.
"We like it and it has been on our buy-list for quite some time," he said. "It has done pretty well recently and has outperformed our expectations over the last 12 months or so. We often compare it to Reckitt Benckiser, but Reckitt has well outperformed over the last decade."
"However, Unilever’s management team is becoming more pro-active and is now playing catch-up. It is moving into the emerging markets, so for a blue chip portfolio, it is one of our favoured stocks."
"It is quite highly rated as the share price has done well. Nevertheless, we like it as a long-term hold," Spooner added.
As Spooner points out, Unilever has underperformed against Reckitt Benckiser over the last decade, with returns of 240.81 per cent to Reckitt’s 442.81 per cent.
Performance of stocks over 10yrs
Source: FE Analytics
However, the returns of the two stocks have been broadly similar in recent times.
Mark Slater – Entertainment One
FE Alpha Manager Mark Slater has 10.57 per cent of his £50m MFM Slater Growth fund in media company Entertainment One. This is actually in breach of the 10 per cent limit set out by the IMA.
The company, which is best known for Peppa Pig and the Twilight film series, has grown in size recently and now has a market cap of more than £500m.
Eight funds count Entertainment One as a top-10 holding – although three of them are run by Slater. One of the notable exceptions is FE Alpha Manager Philip Rodrigs’ Investec UK Smaller Companies fund.
The stock was initially listed in March 2007 and since then investors in Entertainment One would have seen returns of 85.05 per cent. However, as the graph shows, those returns have been hindered by a prolonged period of underperformance during the financial crash and subsequent aftermath.
Performance of stock since Mar 2007
Source: FE Analytics
Spooner says Entertainment One has a bright future and investors should expect the company’s share price to appreciate further from here.
"You don’t get a dividend from it, but they hope to join the dividend list soon. They have also applied for an LSE premium listing, which means it might feature in more of the index tracker funds – which will be good for the share price."
"It made a large acquisition of Alliance Films at the start of the year and is trying to change from a mainly Canadian and UK company, so it can have a more global presence."
"Analysts look fairly positive and it doesn’t look overly expensive either," he added.
Ian McVeigh – Lloyds Banking Group
After being massively out of favour after the financial crash, UK retail banks are now back in the limelight following strong performance in 2012 and 2013.
Although there are still a lot of investors who wouldn’t touch them because of their previous experience, a growing number are putting money back into the sector.
FE Alpha Manager Ian McVeigh was one of the first managers who dipped his toe back into the sector. He currently holds 7.7 per cent of his £887m Jupiter UK Growth fund in Lloyds Banking Group, worth approximately £68m.
Many other manager are also optimistic about Lloyds.
Sixty IMA funds count it as a top-10 holding, including Sanjeev Shah’s Fidelity Special Situations fund and City Financial UK Select Opportunities, which is headed up by FE Alpha Manager Leigh Himsworth.
Performance of stock over 10yrs
Source: FE Analytics
Long-term investors in Lloyds have struggled, with losses of 30 per cent over 10 years. However, it has bounced back massively in recent months. Investors who bought shares in the bank a year ago would have seen returns of more than 135 per cent.
Spooner says this trend could well continue.
"The story is looking good for Lloyds, as there are signs of improvement," he said.
"This has been shown in the share price, plus it didn’t fall as heavily as other stocks during the recent correction. It is being helped by its restructuring plan, which is seemingly ahead of schedule. Confidence in the housing market is increasing, which is also good for Lloyds."
"The Government has said it is going to sell our stake in Lloyds and there are a number of large institutions prepared to take a slug of it, which underpins the long-term confidence in the bank."
"We only have it as a hold at the moment, but we are getting more positive," he added.
