Four core holdings for a new portfolio
Spring has officially arrived. I’ve added fresh flowers to my window boxes, marked my calendar for...
With a history dating back more than 180 years, the Grand National is undoubtedly one of the biggest sporting events in the world.
Held at Aintree racecourse, the handicap steeplechase is over 4 miles long and the sight of more than 40 horses going over the first fence is one of the most famous in all British sport.
Last run in 2019, it is estimated that 13 million people bet on the race with up to £250 million heading to the bookies. The average price of a horse winning the race is 20/1*.
The race itself is all about stamina. Horses have to jump 30 fences and less than half of them usually make it to the end without falling, refusing or unseating the rider.
That slog usually means that while the winning horse always need a bit of luck, it also has to be resilient and take the rough with the smooth – a bit like some investments.
We take a look at four fund managers who’ve done the hard yards and have proven themselves over the long-term, regardless of the market backdrop (while also giving you four horses for the big one on Saturday).
On average, favourites win about 35% of horse races. But that win percentage can fluctuate based on the distance, surface and class. This years’ National favourite, Cloth Cap, is a very short price, but has shown himself capable of winning regardless of all these factors.
The Fidelity Global Special Situations fund, managed by Jeremy Podger, has also shown its ability to succeed in various environments. The fund has a clear set of defined rules and four types of investment themes: corporate change – spotting a big structural change in a business; exceptional value – profitability is expected to improve significantly in the next three to five years; unique business – strong revenue and good cash-flow; and special situations – where there may be a merger or spin-off, for example.
Jeremy has an exceptional track record of consistently adding value. It is very well diversified with around 100 to 150 holdings and is unlikely to take large country or sector bets. In the last five years it has returned 109% to investors**.
A lot of experts will tell you form goes out of the window when it comes to the Grand National – given the number of horses and the scope for things to go wrong. While there is an element of truth in this, there are also a number of trends to help you narrow the field. For example, horses which have not won over 3 miles previously or not run in the past 60 days, tend to struggle due to stamina concerns.
There are a number of tail and headwinds in financial markets at the moment. The cuts and potential recovery in dividend payments; the impact of a Brexit resolution; and how to tackle the threat of inflation are three prominent examples. A fund which is well positioned to meet all three of those events is the LF Gresham House UK Multi Cap Income fund, which has a bias towards smaller companies.
Managed by Ken Wotton, the fund ignores parts of the market, such as oil and gas, mining and property. Instead, the firm concentrates its resources on areas where it thinks it has an edge.
Stocks are initially screened for financial strength and cash flow. The manager then undertakes detailed analysis and makes use of Gresham House’s internal resources. Ken focuses on the quality of management teams and their alignment with investors. He also prefers simple businesses with a clear strategy and a large market opportunity in the 40-70 stock portfolio. Ken’s long-term track record in evaluating smaller companies is exceptional, having managed the LF Gresham House UK Micro Cap fund since launch in 2009, with strong outperformance.
The ground makes a big difference in a horse race. Some horses are known as mudlarks which, as you might expect, means they prefer the heavens to open and for the ground to be as wet and muddy as possible. A good example is Bristol De Mai, a good horse who becomes great in this scenario.
It’s a similar story for value managers at the moment. After years of dearth, all of a sudden, they’ve seen a strong bounce on the back of the success of the vaccine rally and an agreement over Brexit – an ideal scenario for companies to recover.
Alex Savvides has been managing the JOHCM UK Dynamic fund since its inception in 2008. His process is all about ‘corporate change’ and he scours the market for undervalued companies that are making positive improvements to their businesses. This is a true multi-cap fund which includes some mid and small-caps, but Alex is also not afraid to own the largest companies. He has historically held a number of mega-cap stocks which he thinks are often overlooked by other investors. The portfolio is typically concentrated with 35-50 stocks.
The old saying is horses for courses and there is no horse with more experience around Aintree than Vieux Lion Rouge. Having raced over the National fences nine times (four in the Grand National itself) and only failed to complete a race once in his career.
The Invesco China Equity fund is managed by Mike Shiao and Lorraine Kuo. The team is based on the ground in Hong Kong and Taipei, so can conduct regular company meetings and in-depth analysis of each firm. The managers believe there are plenty of market inefficiencies, most of which are caused by sentiment swings and can therefore be exploited through careful research. They only look to invest in high-quality, defensive companies with unique products, but which are under-priced, when building a concentrated portfolio of 40 names.
**Source: FE fundinfo, total returns in sterling, 28 March 2016 to 26 March 2021