Click here for our coverage of the latest Morningstar Investment Conference UK in our special report: What the Experts Say, on subjects ranging from Brexit and risk management to the cost of funds and the future of advice.
Emma Wall: Hello and welcome to Morningstar. I’m Emma Wall and I’m joined today by Craig Yeaman, Manager of the Saracen Growth Alpha Fund.
Hello.
Craig Yeaman: Good morning, Emma.
Wall: So your fund at the moment is predominantly invested in small growth style stocks, stocks that have done incredibly well over the last four years. However, we have started to see a resurgence in value orientated stocks taking over in 2016. You are an all cap manager; do you see yourself repositioning the fund to take advantage of that?
Yeaman: No. I don’t actually. As you say, I am an all cap manager, at present I have 17% in the large cap with the remaining 83% in small and mid-cap. You’re right in saying there has been a move more towards value, but actually we think much of this is because of the dreaded word that we’re hearing at the movement, which is Brexit.
So many companies that we are invested in are underperforming. That however gives me the opportunity to top up the holdings because I run a concentrated fund. We will invest between 30 and 45 stocks at any one point in time and at present we only hold 30. So I’m very happy with the stocks that we hold. So rather than move the fund more towards value, we will continue to invest where we are and actually top up the positions.
Wall: And when you took over the fund, it was much more [positioned] across the cap scale, wasn’t it? I think you said earlier the fund had 55% in larger caps. Why do you find this small cap space so compelling then?
Yeaman: Well, the reason is these companies can grow quicker than the multinationals. And if you actually look at the FTSE 100, it’s not a very good indication of where the economy is at. Its dominated by financials, its dominated by oil and commodity stocks. If we look further down the market cap scale and the companies I’m invested in tend to be overlooked by the market, then we see quicker growth, we see margins are stable and can actually grow. If you look at the FTSE 100, many of these companies are under pressure, both from a margin and a turnover point of view.
Wall: And what sectors are you seeing those opportunities then? You mentioned you’re avoiding financials and miners, which make up a lot of the FTSE 100. But smaller down the cap scale, what sort of sectors are you interested in?
Yeaman: Well, actually we are still seeing a lot of value in house builders which may come as a surprise, but if you look at the margins that these companies are earning, they’re actually material. So for example, my largest holding, a company called, M J Gleeson, that’s earning 18% operating margins and they’re housing division. If you look further down, we can talk about industrials.
Now industrials is not an area that’s doing particularly, but of course, it’s made up from a number of different companies. So the companies that we are invested in, which could include Avon Rubber, for example, it could include Hill & Smith, they are still earning double digit margins and actually been able to grow that margin.
Wall: And you mentioned the dreaded word Brexit earlier. Yesterday, in a leading national newspaper, 300 business leaders put their names behind the Vote Leave campaign. And they were predominantly small and medium sized businesses, who said that they were being strangled by the red tape of the EU. You invest obviously in small and medium sized businesses, is Brexit or indeed the EU something that you consider when making those business decisions?
Yeaman: No, it’s not something that I consider, but I think you’re right in seeing that is potentially a large impact for small and mid-cap companies, because there is a lot of red tape there. Now if you’re a multinational company you have advisers everywhere and it’s easier to navigate. For small and mid-cap, it’s not quite as easy. But coming back to the beginning of the conversation, a lot of my stocks which are domestic stocks have been hit on sentiment.
So this has given me the opportunity, as bizarre as it may sound, to actually top up my holdings, because they are being impacted by a potential Vote Leave and although we don't think it's going to happen, the market is obviously nervous. There’s a lot of cash sitting on the sidelines and people aren’t willing to actually commit.
Wall: And so when the market reverts to norm, following whatever result we get after June, 23rd, you’re confident that those stock prices will rise again?
Yeaman: I’m very confident the stock prices will rise and we can talk about a number of stocks like that, but the house builders for example, have been hit very hard, the retailers have been hit hard and we are taking this opportunity to actually top up the positions.
Wall: Great. Thank you very much.
Yeaman: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
