Emma Wall: Hello, and welcome to the Morningstar Series, Why Should I Invest With You? I'm Emma Wall and here with me today is Philip Matthews, Manager of the Schroder UK Alpha Plus fund.
Hello, Philip.
Philip Matthews: Hi.
Wall: So there has been quite a lot of change in the fund over the last 18 months. March 2013, Richard Buxton announced that he was going to leave the fund that he had created. October last year, you started running the fund and have changed the mandate quite significantly, doubled the number of stocks. Could you talk to us about how and why you made that decision?
Matthews: Yes. I mean, I'm running the fund in exactly the same way that I ran my Jupiter Growth & Income fund; say, historically it was a much less concentrated portfolio to the one that I inherited. So, with the kind of risk framework that I'm used to working within meant that changes needed to happen on the fund. It has worked well for me in the past and that's where I feel comfortable having the fund at the moment.
So, one other kind of major changes, as we say, is being kind of broadening out the number of stocks. But also, when I took over the fund, I felt that the components of the fund needed to change a lot as well, because markets over the last couple of years have been very, very strong.
The fund was exposed to those parts of the market, which have performed well, but it felt to me that a lot of that had worked its way through in valuations and you weren't really being rewarded for taking on that type of cyclical risk now in the way that you have been 18 months earlier.
So there was a requirement really to kind of rotate the portfolio around, as well as kind of broaden out from a risk standpoint.
Wall: So, for investors as well as stock picking being important, portfolio turnover is something they are becoming increasingly concerned about because of fees. Have you done that now? Do you think you've got the portfolio where you wanted? You've sort of Philip Matthews-it-up, and this is where you are?
Matthews: I've turned over 60% of the fund. So, it has been a relatively kind of dramatic turnover. I'm not doing it for the sake of it. So, I'm positioning the portfolio to those parts of markets where I think the best risk reward is. But also there were, as I said at the beginning, some kind of portfolio construction changes that need to happen as well to broaden out the portfolio, but that has now happened.
So, from now on portfolio of a turnover does just eat into fees. So there is no point in doing it unless you think you are swapping one stock into another stock, which has got better kind of risk return characteristics.
Wall: And looking at the portfolio you have now, is it very much a stock-picker's portfolio? Or are you taking into consideration some of the things that may hit U.K. equities over the next year, things like the election and the economy?
Matthews: Yeah. I mean you're always trying to reflect what you think is going to happen over the next 18 months in the portfolio. My starting point is valuation and just trying to find stocks where I think values are relatively low and are not anticipating a particular outcome necessarily happening in order to justify current share prices.
So, I'm much happier kind of tilt the portfolio towards slightly lower valuation parts of the market, looking at things like kind of 10-year average earnings, looking at where do I find the kind of best combination of value and quality in the market. So I have got two screens that I look at for that.
But I'm not a fund manager who takes a particular macroeconomic view or has a particular view about whether I think Tories or Labour are going to win the election. And I'm making a very kind of specific bet against that. What I'm looking at is over a broad, long period of time how the particular companies perform and where do their valuation sit in a kind of historic context, where the profits sit in a historic context.
I'm really just trying kind of to maximise your chances of getting the investment right. So, if you avoid paying high multiples to companies, investing into companies where profits and operating margins are at all-time highs, where earnings expectations are very strong, and your margin of error in those types of companies is much lower. So, it's always trying to kind of bias the odds in your favour as a fund manager.
Wall: Thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
