Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Daniel Vaughan.
Hello Daniel.
Daniel Vaughan: Hi.
Wall: So, we're here today to talk about U.K. growth, one of the sectors that you look after. What's the first fund we're going to highlight today?
Vaughan: I'm going to talk about three funds today. They've got the common name of growth in their title, although stylistically they are all slightly different in approach. But of course, they have the common objective of trying to make a long-term capital gain for their fund investors.
First one I'm going to talk about is the Invesco Perpetual UK Growth Fund managed by Martin Walker. Now, Martin, he is relatively experienced. He has been at Invesco Perpetual since 1999, worked with some very talented investors during his time there and he is now one of the senior members of that team alongside Ciaran Mallon and Mark Barnett. He has been running money in this style since 2003, so he has managed money through a full market cycle.
Wall: There have been some ups and downs since then?
Vaughan: Yes. And he has been through some tough times, but one of the things we like about him is his ability to stick to his approach through more challenging market conditions for his style. He is relatively pragmatic, so you shouldn't expect too much variability in his returns. He combines top-down with bottom-up in his stock selection and as I say, he is pragmatic and valuation-orientated. So, he is not an out-and-out growth investor. We quite often see his fund moving between the blend and the value style boxes on our charts.
Examples of his pragmatism we saw coming out of the global financial crisis where he moved into more economically sensitive areas of the market such as the consumer names and more recently he has been attracted to the energy names where he sees their outlook as more positive than reflected in their share prices, so he is willing to go into those kind of names.
He runs relatively concentrated portfolios. This fund in question has around 50 names, although it has also run the UK Aggressive Fund which is closer to 30 and then more punchy best ideas type fund.
The second fund is the Jupiter UK Growth Fund. This is also a relatively focused fund, it's around 35 names. Until very recently this was run by Ian McVeigh and Steve Davies jointly and it's undergone a transition over the last few years so that it's now solely run by Steve Davies.
Wall: And that can be a red flag for fund analysts, can't it? When management changes and although you say that he was a co-manager and now he has just gone to single manager. So, perhaps not as difficult one to work out what the future will look like?
Vaughan: Well, he had been working alongside Ian McVeigh since 2007 when McVeigh hired him from the sell-side. We've had frequent contact with him through the years. He was appointed co-manager and given a fund to run in his own right, so he built a track record which was strong and gave us comfort and we think it's an example of overtly transition from one manager to another.
Wall: And how will that fund then differ from the one that we've just heard from Invesco, which you say that is a blend of growth and other stars. How does this one differ?
Vaughan: Well, the current portfolio is growth-orientated. He is look for companies where the sales growth is reasonably high and sustainably so, growth above the rate in GDP, but that growth is sustainable and forecastable and also, that growth is backed by strong cash flows. So, that's the core of the portfolio. But what tips it sometimes into the value category more than growth is this bucket of recovery situations which he will buy into.
Wall: Does that mean there is quite a volatile shape because, you know, bottom feeding as they call it, can make for a sort of performance history that can be a little volatile?
Vaughan: Well, the performance history is certainly volatile. As the part of that is they are going into the banks, which they went into quite fully, seeing those names trading below their book values and with prospects that they thought were better than were in the share price, they will go into those. I think that it has 17% of the portfolio in banks the last time we reviewed the fund.
Wall: But that sector has come good.
Vaughan: It's come good at times and it's also been a real hindrance to their performance at times. So, I mean, this is a concentrated fund again with some big sector bets. Consumer discretionary is another example of their big bet. I think around 40% of the portfolio is in those names; so, willing to really back their conviction when they see an intrinsic value for the names way above the current market price.
Wall: What's the third fund today?
Vaughan: The third fund is another example of a pretty punchy portfolio, Mark Slater's Slater Growth Fund. It's actually up until 2009 it was more constrained, but once they loosened those constraints we've seen the pure Slater style come through into that fund. The foundation of their approach is very much the PEG ratio, so that's relationship between price/earnings ratio and the forecast growth rates.
They were again looking for sustainable growth rates and because they have got a free rein to look throughout the market for these kinds of names, he is quite often a portfolio-biased to small caps. So, he has got around 70% in the small and micro-cap.
Wall: That's something to be aware of because I think some people think of U.K. growth as perhaps a core holding for a portfolio, but if you have a small cap bias you should be aware then that can be a bit more volatile, perhaps is suitable for smaller holding within a portfolio?
Vaughan: Yeah, definitely a more volatile performance profile potentially and especially as this is a focused portfolio and he is willing to run his holdings up to 10% which is the maximum he can have in one name and 10% could be in a small cap name, yeah, you've got to be very wary of what the portfolio makeup is.
Wall: But he knows what he is doing. He has been doing it for a while.
Vaughan: He has been doing it for a very long time. I mean wrote a – or he co-authored a book with his father Jim Slater, called "The Zulu Principle" where they have set out this kind of approach to growth investing and is probably the purest of the three funds in terms of that growth style.
Wall: Daniel, thank you very much.
Vaughan: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
