They’re the ultimate in active management, and they know no fear. Kam Patel looks at the new breed of unconstrained equity funds where the manager’s word is final

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Home Is Where the Heart Is

Standard Life Investments UK Equity Unconstrained Fund

An improving UK economic climate and downturn in sentiment over emerging has seen investors paying more attention to opportunities closer to home. And Standard Life Investments UK Equity Unconstrained Fund has been turning in historical performances that rival the best that the emerging world can offer. But only for investors who can accept a relatively high degree of risk.

 

Like its rivals, the Standard Life Investments fund is actively managed by a team that’s focused on selecting stocks without any reference to index weight or size – its focus is purely on taking advantage of opportunities. Industrials (37.4%), financials (20%) and consumer goods (14.7%) comprise the bulk of the portfolio holdings.  And FTSE 100 and FTSE 250 companies make up 32% and 55% of the fund respectively. Top ten holdings include International Personal Finance, Bodycote, Smith (DS) and Rio Tinto.

 

So far the performance has been impressive. On a cumulative basis, the fund has returned 165.7% over five years, versus 53% for the IMA UK All Companies sector. Over three years it has generated 87.4% versus 45%, while on a one year call it returned 61.2% against the IMA sector’s 27.3%.

 

StanLife Investments' UK Equity Unconstrained, fund manager Ed Legget says that on a 12-36 month view his team continues to believe prospects for UK equities remain bright.  “Valuations are in line with history,” he says, “balance sheets are strong, and the global economy continues to slowly recover from the stresses caused by the financial crisis. This should provide a supportive back drop for UK listed corporates to grow profits in real terms and in turn grow cash returns for shareholders and this in turn should allow the UK stock market to continue to make progress.”

 

Potential upsides for the fund include global economic growth accelerating faster than current expectations – leading to a sharper pick up in corporate profits and in turn a further steepening of the yield curve. “The combination of the two provides a supportive backdrop for a broader asset allocation switch out of bonds and into equities, this in turn may lead to an upward re-rating of the stock market further enhancing equity investors’ returns,” says Legget.

 

Risk factors for Legget comprise anything that provides a significant hit to global growth expectations – the most likely scenarios at the moment for him being further unrest in the Middle East, which would lead to a sharp rise in the oil price and/or a re-surfacing of the Eurozone crisis.

 

 

 

Tapping Into Eurozone Stability

European Equity Unconstrained Fund

 

Investor sentiment over Europe has improved since the darkest days of the eurozone saga – and, with less talk of a break-up these days, investors have been increasing their exposure to the region.

 

Standard Life European Equities Unconstrained Fund aims to provide long term growth by investing in European equity markets (including the UK). As with StanLife’s unconstrained UK equity offering, the European vehicle’s management team is free to select stocks without any reference to index weight or size – so investors need to have the stomach for a high degree of stock specific risk. The investment team is focused on picking a relatively small portfolio of companies, currently 30-40 in number.

 

The consumer discretionary sector accounts for 15.8% of the current portfolio, including holdings in retailers, media and consumer services firms, consumer durables and apparel specialists, and automobiles and also car component makers. Other key sectors for the fund include industrials (15.3%) and financials (15%).

 

Geographically, the biggest exposure is to the UK (28.3%), followed by Germany (15.8%) and Sweden (11.8%). Top holdings include Ryanair, Swiss Re and Swedish bank Svenska Handelsbanken.

 

Since its launch in April 2008 – not an auspicious moment – the fund has returned 21.9%, compared with 6.6% by the benchmark. On the same basis, it has generated 33.5% versus 22.3% over three years; and 18% versus 17.7% over one year.

 

Manager Stan Pearson remains “broadly optimistic” over prospects for European equities, with a return to reasonable profit growth in 2014. “Valuations are supportive and attractive, relative to other assets,” he says. “Europe will benefit from a recovery elsewhere, and from a stabilisation in the rate of decline across much of the region.”

 

“We prefer broadly based companies,” Pearson says. “Those that have been able to invest in the downswing of the last few years will benefit, and the strong will get stronger by taking market share.”

 

He also notes that corporate activity is improving: “The difficulties of the last few years have forced a number of companies to address deep seated problems and take action. Our view is that turbulence in markets provides selective opportunities.”

 

Not surprisingly, Pearson says that the greatest risk to the fund would be a resurgence of the euro crisis, bringing with it disruption to peripheral markets. Conversely, a resolution of the problems with the banking structure, together with a strengthening of the institutional base, would be a “big boost” for Europe.

 

 

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All-Round Global Performers

Lindsell Train Global Equity Fund

 

The revival of investor confidence over the last few months, combined with worries about QE tapering, has seen equity fund sales powering ahead in recent months. And global equity has been the top performer, securing net retail sales of £515 million in July – the highest level since November 2012.

 

The Lindsell Train brand will need no introduction to most people. The highly regarded Nick Train and manager Michael Lindsell got together in 2000, and have carved out a solid reputation for delivering with a long-term investment approach which also manages to keeping trading activity, and therefore cost, to a  minimum.

 

Lindsell Train Global Equity Fund is ‘unconstrained’ in all but name. Its brief is to generate shareholder capital growth over the longer term from a focused portfolio of global equities. At the country level and on a NAV basis, Japanese equity currently accounts for nearly 30% of fund, UK equity 24.6% and the USA 29.7%. Europe ex-UK makes up 13%. Top sectors include consumer staples (44.7%), consumer discretionary (22%) and information technology (17.2%), and the top ten holding include Pearson (7.4%), Heineken (6.9%) and Unilever (6.4%)

 

Since its launch this fund has returned 40.2% versus 28.8% for the benchmark, and over one year it has returned nearly 30% versus 21.3 for the benchmark.

 

Manager Michael Lindsell is upbeat on prospects. “With long term bonds and cash yielding less than inflation, savers should now be drawn to the “sound stocks” owned by the fund. Not only are dividend yields attractive: they should also grow in line with or faster than inflation.”

 

He adds: “We are focused on investing primarily in specific consumer franchises and media content owners, and two holdings in listed stock exchanges, and we expect our franchises to continue to generate cash for their shareholders despite a weak economic backdrop.”

”Potential investors should recognise that a downside to the Lindsell Train investment approach includes scenarios where the market focuses on more speculative assets, or economically sensitive stocks, Lindsell Train portfolios typically will not hold positions in companies like these, and our holdings might underperform relative in such an environment.”

 

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The Vindaloo Option

Schroder ISF Indian Opportunities

 

For those with particularly steady nerves and strong stomachs, a new product from Schroders aims to counter what it sees as a strategically misplaced mood of panic over the world’s second largest nation. India’s woes have certainly been very public – the rupee posted its biggest one-day slide last month, on news of the Fed’s QE tapering programme –and the ripples from the Fed have undermined sentiment over emerging markets in general.

 

But has the exit been overdone? Certainly the likes of JP Morgan and emerging market specialist Ashmore think so.  Jan Dehn, head of research at Ashmore, for instance, says it is “simplistic” to judge the emerging market asset class by just a few countries – and that emerging market countries are “no more vulnerable to Fed tapering than developed economies”.

 

India, Dehn says, “does not have a crisis. Rather India is in need of macroeconomic adjustment to restore external and internal equilibria, which require currency adjustment and domestic demand discipline. India is undertaking both.”

 

Schroders’ new launch suggests its fundamental agreement. The Schroder ISF Indian Opportunities aims to complement its existing Schroder ISF Indian Equity, but with a different management style.

 

The new fund, which launched only on 10 September, takes an unconstrained all-cap approach, as distinct from the older fund’s fundamentally larger-cap approach, and it is not managed relative to a benchmark.  It will draw on the special stock-picking strengths of seven Indian market experts at Axis AMC, of which Schroders is a 25% owner, and it will be looking primarily for opportunities in the equity and equity related securities of Indian companies that have substantial business exposure to India.

 

Chandresh Nigam, managing director and chief executive officer, Axis AMC, says: “India has been amongst the fastest growing major economies in the last 20 years. While India has certain short and medium term cyclical challenges, it has a number of long-term competitive advantages that have allowed it to grow on a sustained basis.

 

“More importantly, quality Indian companies have been able to participate in this growth by growing their profits and rewarding shareholders. Our investment process focuses on bottom-up stock selection of quality companies that are likely to sustain growth over the medium to long term.”

 

“Furthermore, we believe that the Indian economy is resilient and once the immediate headwinds subside, both global and local investors should revert their focus back to the long term potential of the country.”