There is nothing wrong with tracking an index and Shares is a strong advocate of using exchange-traded funds to provide broad brush exposure to certain asset classes or geographies. Nor are we shy of using funds where appropriate, especially if the manager has a great record or the portfolio gives an investor a chance to play a theme or country which would otherwise be difficult or expensive to access. What we do take umbrage with, however, are those fund managers who charge fees for an active service but actually run little more than a closet tracker fund.
By second-guessing their rivals, sticking close to benchmark weightings and buying the biggest constituents of the UK stock market many money managers like to meld in to the crowd. This way, at the end of the year they will likely come out looking no worse, or no better, than their peers, pocket their fees and keep their job.
The good news is there are fund managers willing to back their own judgement and go against the crowd. They will ignore index weightings and benchmarks altogether, take large positions in smaller companies or even go short. In our view these are the ones to really watch. Relative outperformance is nice but it does not pay the bills. Only the absolute returns generated by experts like Crispin Odey of Odey Asset Management, who shot to critical acclaim in 2008 selling the banks, will do that.
You do have the option of putting money in such stars’ funds, but in some cases, notably Odey’s hedge funds, the minimum initial investment is not always within everyone’s reach. An alternative strategy is to therefore watch what these shrewd stock pickers are doing and emulate them. The hard part is finding out what they are up to as the market can move fast when it learns a proven profit generator is building a position and the fund managers will not want to chase a stock if they can possibly avoid it - the aim is to buy low and sell high, after all. But regulatory requirements can oblige disclosure of key holdings when certain thresholds are reached and this week Shares is doing the detective work for you. We have identified four purchases made by proven star fund managers in the past month which could well be worth following.
They include a £682,413 swoop for STV (STVG) by David Crawford for his top-performing City Financial UK Equity Fund which represents a new position for the manager in the Scottish broadcaster. We also note with interest Harry Nimmo’s acquisition (21 May) of 500,000 additional shares in Workspace (WKP) for the Standard Life Investments’ UK Smaller Companies collective that he has run since the fund’s launch in 1997.
Meanwhile, two trades by the Liontrust Asset Management (LIO) dynamic duo of Anthony Cross and Julian Fosh also catch our eye. They include an additional 500,000 shares acquired (30 May) in Manchester-based online security firm NCC (NCC) in the wake of a year-end profit alert (18 Apr). That purchase was for their Special Situations Fund but we also flag the 13 million shares bought earlier this month (7 Jun) in geospatial data specialist 1Spatial (SPA:AIM) for the Liontrust UK Smaller Companies portfolio, another of their top-performing charges.
Proven process
Investors can learn a lot by studying the investment process of bona fide star fund managers. The good news is the regulatory disclosure regime of the Financial Conduct Authority (FCA) means, as with director dealings, it is possible to track who is buying what and when. When stakes rise above 3%, and then change in 1% increments either up or down thereafter, these share dealings must be communicated to the market (see box, page 18).
In the wake of the 2007-08 financial crisis, when short sellers were (misguidedly) blamed for the collapse of the banks the FCA, or Financial Services Authority as it was then, introduced a mirror image of this regime for short selling via contracts for difference (CFDs). This has since thrown a light on the trades of hedge fund managers like Odey and his retail-market focused peers that operate within the Investment Management Association’s (IMA) Targeted Absolute Return sector for unconstrained investment mandates.
Most fund managers rank themselves by reference to their competitors which effectively allows them to argue it is acceptable to lose clients’ money - so long as they are not losing as much as their rivals and ideally sit in the top quartile (25%) of their peer group in performance terms. This is fine for a tracking, or ‘buy-and-hold’ strategy, where investors are in it for the long haul and are prepared to take the slings and arrows of equity market volatility on the understanding that fees of less than 1% will not unduly impair their ability to unlock the power of compounding and the reinvestment of dividends. Yet annual fees of 1.0% to 1.5% can add up just as quickly as the dividends harvested by someone who owns income-generating stocks via their own broking account, so you really need to be ensuring you are getting maximum performance in return for paying those charges.
Granted, it would have been nigh-on impossible for the long-only fund managers who make up the IMA’s core UK All Companies sector to have made money in 2007 and 2008 when the market went through the floor. Even so, benchmarking does not exactly promote a culture of excellence if it unwittingly helps to excuse a manager when he or she tracks the index down. This has been tacitly recognised by the launch of the IMA’s Targeted Absolute Return sector home to managers like City Financial’s Crawford, whose UK Equity Fund was 13.2% short the FTSE 100 at the start of May, just ahead US Federal Reserve chairman Ben Bernanke’s move to float the idea of ‘tapering off’ quantitative easing (22 May) which has put markets in such a flap.
‘In my opinion, the market is moving into the latter phases of its cycle,’ wrote Crawford in commentary attached to his latest monthly fund factsheet, published before the early summer sell-off.
‘This view is corroborated by the sense of euphoria that seems currently to be associated with stock investing. Increasingly, of late, my contemporaries seem to be invigorated with recent rallies in equities and there is a definite sense that investors are being tempted into the market based on anxiety of having missed out. This type of herd investing is further fuelled by the sell-side brokers and the result is that investors are gradually drawn into stocks at levels where the risk does not necessarily justify the return.’
This statement is very telling in many ways, encapsulating the wisdom of Warren Buffett’s contrarian philosophy to ‘be fearful when others are greedy and greedy when others are fearful’ at the same time as warning his peers they may be forgetting basic principles of risk and return. Therefore, when Crawford buys an out-of-favour stock like Scottish TV broadcaster STV is it worth taking notice because perhaps he has spotted something the market has overlooked.
If professional portfolio managers are susceptible to following the herd then the public at large who buy their funds are even more so when it comes to rushing into the latest ‘hot’ asset manager or sector. Warren Shute, a financial planner at Lexington Wealth Management is particularly wary of the IMA’s UK Equity Income sector at present where April’s £358 million of net retail sales catapulted the segment to the top of the trade body’s tables.
Many retail investors are still, unfortunately, overly swayed by the one and three-year track records promoted by the more racy elements of the fund management industry. Ideally, investors should look at five-year track records, or more. Many of the best fund managers have been running their portfolios for much longer, such as Standard Life Investments’ Harry Nimmo. He has been in charge of Standard Life’s UK Smaller Companies fund since its inception in 1997.
Around the block
The Edinburgh-based money man’s fund has generated a 74.3% return over the past five years, more than twice the comparable 34.6% advance in the FTSE SmallCap. Over ten years his vehicle is up 415.2% versus a 130.6% return from the index, so the annual 1.6% annual management charge is easy to justify in this instance. Over the past year Nimmo has lagged the market, with a 19.3% gain versus from 28.2% the FTSE SmallCap. This is probably because his discipline of picking cash-generative and disruptive business concepts with international growth potential has been out of favour in a market that has been in risk-on mode and chasing riskier cyclical companies.
If you focus on managers with established, long-term track records who have seen and survived at least one full economic cycle then it should be possible to spot those who may just be a flash in the pan. Mark Lyttleton, the former BlackRock fund manager, launched a long/short equity retail fund in April 2005, smack in the middle of the last bull market run. The BlackRock UK Absolute Alpha fund was one of the first of a new breed of retail collectives intent on delivering absolute returns whatever way the market went. It was a brave move to abandon a rising benchmark and one which initially paid off when the market fell out of bed in 2007 and 2008 and Lyttleton used the tools he had at his disposal to preserve his clients’ wealth. But he was unable to replicate his early success and after a run of poor performance Lyttleton left BlackRock in March 2013 and was reportedly among those arrested last month as part of an investigation by the FCA into insider dealing.
By targeting names with long tenures you should be able to avoid the major pitfall of relying on near-term performance records. After all, money managers tend to move about a lot so the fund performance you see may not be the result of work put in by the current incumbent. While it might sound a cliche, a fund manager is often only as good as their team, relying as they do on support from equally bright buy-side analysts and the management house’s proprietary quantitative and qualitative models.
Where to look
Although big funds need to move stealthily, so they do not move the price unduly as they accumulate a stake, it is possible to track their trades. The ‘major shareholding’ announcements on the regulatory news services are the key here. It also is easy enough to check out whether a manager’s track record is up to scratch , since performance data by IMA sector are freely available on websites such as www.citywire.co.uk, while Shares’ sister website www.moneyam.com also provides detailed data and insight, sliced and diced by sector, fund manager, performance and also fees (see page 21). For further information, such as length of time running the fund, you will have to go to the asset manager’s website where monthly fact sheets can be found.
The monthly fact sheet will tell you the appropriate IMA category. In the case of the dynamic duo of Anthony Cross and Julian Fosh’s Special Situations fund the correct classification is the IMA’s UK All Companies sector. The vehicle, launched by Cross in November 2005 who then hired Fosh in 2008, has generated a 114.7% return since 2008, to leave it ranked third out of the segment’s 277 collectives with a five-year track record.
The ‘Liontrust Economic Advantage’ process, as used to run the Special Situations Fund, was originally conceived by Cross and first applied in 1998 to his UK Smaller Companies fund. That collective sports a 107.9% five-year track record, good enough for third among the 53 funds in the IMA’s UK Smaller Companies sector that have been in existence since 2008.
By keeping the intellectual property within the company, rather than with the individual, Liontrust’s patented process will give it the best chance of repeatable success long after Cross and Fosh finally decide to hand over the reins. Liontrust learned the hard way about the dangers of promoting star fund managers when the exit of top equity income performers Jeremy Lang and William Pattisson in January 2009 prompted a near catastrophic fund outflow. Assets under management fell from £3.3 billion to £1.2 billion by June 2009 and that was despite a rising market.
If you know where to look there is plenty of interesting information to be found that can reveal much about the buying and selling activity of shrewd fund managers. Only a select few managers are consistently good stock pickers so it is worth taking some time to work out which ones are worth following and deciding who can be merely monitored for future reference or ignored entirely.
Learn the rules and regulations
Rules on the disclosure of major shareholdings are the responsibility of the Financial Conduct Authority (FCA) and are set out in part five of the Disclosure Rules and Transparency Rules (DTRs) of the FCA’s Handbook. They can be found at http://www.fshandbook.info/FS/html/FCA/.
These strictures apply to companies on the Official List traded on the London Stock Exchange’s (LSE) Main Market and also to Aim-quoted corporations. The LSE’s separate rulebook for Aim refers to the DTRs directly.
The DTRs refer to ‘voting rights’ rather than shares since some shares do not have voting rights attached and only notification of changes in holdings with voting rights is required. The investor has to notify the company when its stake equates to 3% of its total voting rights and then of every 1% increase thereafter, or of any subsequent 1% reduction until the holding falls back below 3%.
Once the company is told of a major shareholding change it must then relay this information to the market. Announcements tend to be fairly timely since the shareholder has to tell the company within three business days of any adjustment to its holding and the company then has to issue a regulatory news release within a further two business days. Similar rules were introduced for shorting in 2009. The initial threshold for reporting a short position is 0.25%.
Get to know the fund managers
Harry Nimmo
UK Smaller Companies (Standard Life Investments)
Five-year total return: 74.3%*
In his 16 years running the fund since its inception in 1997 Nimmo has picked a number of small cap stocks that have gone on to make it in to the FTSE 100. Such successes include blue-chip outsourcing plays Serco (SRP) and Capita (CPI). He was also an early investor in online retailer ASOS (ASC:AIM). Nimmo looks for profitable companies that are also generating cash, have a disruptive business concept with international growth potential. He also likes the continued involvement of an owner/ manager. The fund manager’s approach includes running a daily quantitative screen over the UK equity market in search of new opportunities and he takes a three to five-year investment view.
Anthony Cross and Julian Fosh
Special Situations Fund (Liontrust Asset Management)
Five-year total return: 114.7%*
It was during his time as a buy-side analyst at Schroder Investment Management that Cross (pictured left) developed the thoughts he ultimately formalised as the Liontrust Economic Advantage when he joined the company in 1997. The process has many parallels to Warren Buffett’s idea of looking for ‘economic castles surrounded by unbreachable moats’ where Cross and Fosh (pictured right) seek to focus on the competitive advantages that are hardest to replicate. The duo identify three key intangible assets which give a company an advantage, namely intellectual property, strong distribution channels and a significant proportion of recurring business.
David Crawford
City Financial UK Equity Fund
Five-year total return: 82.9%*
Crawford has run this fund since its inception in March 2008 when the collective became one of the early long/short retail focused vehicles which make up what is now the IMA’s Targeted Absolute Return sector. He employs a contrarian approach to investing with short positions taken via contracts for difference (CFDs). The portfolio has proved to be one of the survivors of the Targeted Absolute Return segment. An 82.9% total return since 2008 ranks it first among the 16 vehicles in the sector which have five-year track records.
NCC (NCC) 112.0p
Market value: £231.0 million
Yield: 2.8%
Star buyers: Anthony Cross, Julian Fosh, Special Situations Fund (Liontrust Asset Management)
Consideration: n/a (500,000 shares at undisclosed price)
DATE: 30 May 2013
Anyone taking a stake in IT testing and cyber security supplier NCC (NCC) will do so in the view it can quickly bounce back from a spring profit warning (18 Apr). The Manchester-based firm’s current sticky patch may be no more than a bout of indigestion after a busy spell of acquisitions, with integrating New York-based Intrepidus creating sales execution glitches.
The nature of the problems are rectifiable since simple management mistakes can be corrected and sales teams and processes reshaped, although we will have to wait until next week’s finals (4 Jul) to see if, and by how much, NCC’s 20% margin target has been pushed out. Even so, the Assurance arm is still likely to report revenues up 16% for the year to end May, with 9% of that growth coming from organic sources, according to one analyst.
Thankfully, there is precious little evidence of falling demand, with hacking attacks accelerating if anything. NCC is today a genuine international IT security business having successfully grown from its old escrow roots. Since 2008, the company has increased revenues 175%, taxable profits 164% and earnings per share (EPS) over 140%, based on 2013 forecasts. Investors have quite reasonably bought the NCC story in the past as a relatively safe growth company in the hot cyber security space. That has not changed, but the alert does illustrate how carving out a place in valuable markets is neither fast nor risk free. (SFr)
1Spatial (SPA:AIM) 7.75p
Market value: £27.0 million
Yield: n/a
Star buyers: Anthony Cross, Julian Fosh, UK Smaller Companies Fund (Liontrust Asset Management)
Consideration: n/a (13 million shares at undisclosed price)
Date: 7 June 2013
The geospatial data microcap is tapping new location mapping technology and remains very much in land grab mode. A possible break into the black ahead of schedule could be the catalyst for a strong rally. This is one potentially hot ‘big data’ stock as 1Spatial (SPA:AIM) uses its software platform to create, manage, analyse and display geospatial data for a range of clients with assets spread far and wide. Customers include Unilever (ULVR), Unisys (UIS:NYSE), US Census, Ordnance Survey GB, the Brazilian Army, and Ordnance Survey Ireland.
The Cambridge head-quartered £27 million cap last month (24 May) tapped investors for £18 million to buy a 75% stake in Star-Apic, a Belgium-based provider of geographic information systems software and solutions, specialising in land and infrastructure management. Considering that some of the world’s biggest agencies already rely on 1Spatial (Ordnance Survey in Britain uses its software to update its records every day) this looks a smart move that will significantly add to the company’s capability in the rapidly growing big data market. The fresh funds will also bolster sales and support a new Middle East office, allow ongoing research and development work and provide the fire power for more acquisitions down the line.
An early mover into the big data space, 1Spatial chalked-up revenues of £5.2 million last year to end January, but that figure was surpassed in this year’s first half alone, when sales jumped 146% to £6.4 million in the period. This implies something around £12 million to £13 million for the 12 months, when figures are published, probably next month. No forecasts are available but that could mean a break into the black. (SFr)
STV (STVG) 136.0p
Market value: £52.9 million
Yield: n/a
Star buyer: David Crawford, City Financial UK Equity Fund
Consideration: £682,413 (505,491 shares @ 134p)
Acquired: Mid May, over a few days
The operator of the Scottish broadcasting rights for the ITV Network could be set for a sizeable rerating as cash flows in, gearing comes down and the market cottons on to the potential for a resumption of dividend payments. As borrowings decline, a prospective price/earnings ratio (PE) of 4.7 times, based on a consensus earnings per share (EPS) call of 29.2p for 2013, could mean STV (STVG) suddenly looks very cheap indeed.
Year-end net debt of £45.3 million (31 Dec ‘12) compares to negative shareholders funds of £20.9 million so the balance sheet is not the prettiest. Add that to lofty operational gearing, in the form of huge fixed costs related to running terrestrial transmitters, and the result can be substantial earnings volatility and were it not for signs of improvement in the UK economy, STV would be one to avoid. A small drop in sales could greatly impact the bottom line, erode cashflow and test interest cover covenant stipulations. Yet any improvement in advertising revenues would make the firm a powerful recovery play, albeit one to rent rather than own for the long term.
ITV (ITV), operator of the majority of the ITV Network rights, is pushing on toward the highs it reached immediately after its creation in early 2004. By contrast, worries over STV’s debt pile mean it trades at a fraction of the £12.54 struck in March 2007 prior to the onset of the financial crisis.
Once the tough comparatives of last summer’s UEFA European Championship and London Olympic Games are out of the way, strong year-on-year third-quarter advertising sales growth could be the catalyst for a market reassessment. Numis Securities believes net debt will fall rapidly and reach £29.9 million by the end of 2014, when the broker also expects the declaration of a 5p per share dividend. (SK)
Workspace (WKP) 406.1p
Market value: £582.7 million
Yield: 2.8%
Star buyer: Harry Nimmo, UK Smaller Companies (Standard Life Investments)
Consideration n/a (500,000 shares at undisclosed price)
Date: 21 May 2013
Office, studio and warehousing landlord Workspace (WKP) is set to build on its growth of last year as a refinancing announced at this month’s finals (11 Jun) leaves the firm with an £80 million war chest.
The Real Estate Investment Trust (Reit) has some 100 properties in London, covering around six million square feet. Its 4,000 tenants are mainly small businesses operating in the digital economy as well as online retailers and household names such as artist Damien Hurst, fashion house Ralph Lauren and greetings card specialist Moonpig.
The refinancing has diversified the group’s borrowing away from clearing banks and extended its maturities from 2.9 years to 7.8. It involved £158 million of private placement notes, £45 million of unsecured debt provided by a UK fund and £150 million of unsecured bank debt.
In the year to April it made a £76.4 million pre-tax profit, up from the £48.5 million reported in 2012, while trading profit after interest increased 12% year-on-year to £17.9 million. The total rent roll was £52.7 million, up from £50.2 million a year earlier, while earnings per share reached 12.2p, 3% higher than a year earlier. The group’s net asset value increased 13%, which led management to increase the full-year dividend by 10% to 9.6p per share.
Workspace’s growth will not only be acquisitive. Management has been working on refurbishing, re-developing and expanding its properties. It has planning permissions to build new modern spaces to boost rental income. It completed four refurbishments during its last financial year and has four others underway, which will add 72,000 square feet to its portfolio. (MD)
