Leading up to the much anticipated FE Alpha Manager Awards on 14th April, we asked managers featuring in our FE Alpha Manager Awards shortlist three key questions which not only sum up the past few months – but also, if magic was real, what they would conjure up if they had a magic wand!
First up we put the questions to the managers in the UK Equities, UK Equity Income and UK Smaller Companies awards categories – three sectors which have had to deal with last year’s UK General Election, market highs (who remembers the FTSE reaching 7,000 last April?) and lows (oil, anyone?) and the wide-reaching implications of China’s economic slowdown.
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Manager: Dan Nickols
Fund group: Old Mutual
Thank goodness moment: When markets fell last year, an array of our structural growth stocks – Just Eat, Paysafe (formerly Optimal Payments) and Fever-Tree Drinks – continued to perform very strongly.
Toughest call last year: Actually, 2015 was one of the easier years in which to outperform (certainly over the course of my career). The decision to remain nil-weighted in mining and very underweight oils added significant value.
If you had a magic wand, what would you make happen next year: This year, I hope we vote to stay in the EU and, far more importantly, that Leicester City wins the Premier League title (as my kids are Leicester fans)!
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Manager: Luke Kerr
Fund group: Old Mutual
Thank goodness moment: When markets fell last year, an array of our structural growth stocks – Just Eat, Paysafe (formerly Optimal Payments) and Fever-Tree Drinks, for example – continued to perform very strongly.
Toughest call last year: I suspect the toughest call for many managers last year was what to do with their oil, mining and industrial shares. We were fortunate to enter the year with negligible exposure to these areas and maintained this position throughout the year.
If you had a magic wand, what would you make happen next year: Simple, double all my stocks and go on holiday!
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Manager: Julian Fosh
Fund Group: Liontrust
Thank goodness moment: Royal Dutch Shell's bid for BG Group after the latter's repeated profits warnings.
Toughest call last year: Sticking with oil stocks, despite falling (cash flow) returns and share prices.
If you had a magic wand, what would you make happen next year: I would like to see a recovery in the markets so that equity investors (continue to) experience positive absolute returns, despite low growth and interest rates being at historic lows.
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Manager: Neil Woodford
Fund Group: Woodford
Thank goodness moment: I don't think of the world that way. I think of the portfolio as a collective because that's exactly what it is. Whether markets are rising or falling, it's the overall strategy that counts. And I want the funds to be judged over the long-term, over which time their performance in a short-term market blip becomes irrelevant.
Toughest call last year: Selling Rolls-Royce. Despite a series of profit warnings in recent years, we had previously taken share price weakness as an opportunity to add to the holding, believing that the dip in profits and cash flows would be relatively short-lived. November's trading update changed this, however. The operational problems, which had initially affected the military aerospace and marine businesses, had spread to the core civil aerospace business, resulting in material downgrades to profit and cash expectations, and shaking our confidence in the investment case.
Rolls-Royce is a very long-term business, which is sensitive to assumptions around manufacturing and servicing costs, and operational metrics such as the number of hours flown, reliability and operational longevity. Our decision to sell the shares reflected a significantly increased level of uncertainty about how these metrics will play out over the next three to five years in a way which will benefit Rolls’ shareholders. In many ways we hope we are wrong, but we continue to believe that it is in our investors’ best interests to exercise caution for now.
If you had a magic wand, what would you make happen next year: I don't have a magic wand, but there are lots of things I would wish for in the years ahead. Some of them we are trying to help with, by backing early-stage businesses with innovative, disruptive and potentially life-changing science.
Manager: Christopher Metcalfe
Fund group: Newton, a BNY Mellon company
Thank goodness moment: National Express was a good stock for us last year. When markets were stressed you would look at that holding and think it had a good spread of businesses which are not particularly economically sensitive. Additionally, it has proven management, a decent free cash flow yield supporting a reasonable dividend yield, a sensible level of debt and a rating that is not too outlandish compared to many in today’s rarefied world.
Toughest call last year: Making a European stock one of our biggest holdings in the Newton UK Income fund last year took a lot of thought. We will buy overseas holdings in the fund if we see exceptional value. Wolters Kluwer fitted that description. It had a good spread of capital light businesses in its four divisions; it was over the worst in transforming the business from print to digital and had started growing the top line again. Against this backdrop the free cash yield just looked far too high and we made it into one of the biggest overweight positions in the fund.
If you had a magic wand, what would you make happen next year: I am torn between an inaugural summit of Donald Trump and Jeremy Corbyn, and the redoubtable Charlene Chu becoming Governor of the People’s Bank of China.
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Manager: Chris Reid
Fund Group: Majedie
Thank goodness moment: One thing I have learnt in 16 years analysing stocks is that stocks can re-rate in all market environments. The insurer Amlin was a top 10 fund holding last year because management and employees were doing a fantastic job improving the business, and yet the stock market just couldn’t stop mistrusting it. Eventually it got taken out by an overseas buyer and while we were gutted to see it go, the bid made our clients a lot of money and once again proved that investing in improving businesses does work over the long-term.
Toughest call last year: The UK Income Fund is all about finding companies whose stock can re-rate through operational improvement and that means we spend most of each day shifting uncomfortably in the seat. Buying Lloyds all through the back end of last year has been really hard because the banks sector is widely reviled, and because of PPI people just don’t seem to believe Lloyds is through the worst. Although the jury is clearly still out on Lloyds, with potential income coming to us of c.8% over the next 12 months, I think that will prove to be one of this fund’s best decisions.
If you had a magic wand, what would you make happen next year: I invest in the world as it is today rather than how I might perhaps like it to be, so I try hard not to hope for anything happening in the stock market in the future. However, strictly from a professional point of view, I would reluctantly utter the spell that keeps the UK in the EU, but one that is far improved operationally from what it is today, because, as 14 years of marriage has taught me, in the end it is better to Jaw-Jaw than to War-War.
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Manager: Francis Brooke
Fund group: Troy
Thank goodness moment: It’s not all about positive like-for-likes, as WH Smith makes clear.
Toughest call last year: Not reducing consumer goods and utility stocks in the first quarter when ‘defensive’ portfolios were widely regarded as significantly overvalued.
If you had a magic wand, what would you make happen next year: No more dividend cuts!
