Schroder UK Equity has taken steps to right itself, but we’re not entirely sold on it yet.
This fund languished under previous manager Christopher Metcalfe, who ran the fund from late 2003 to April 2006. His benchmark-focused style resulted in returns that slumped around the Morningstar UK Large-Cap Blend category average. In essence, his portfolio, which mostly stayed in FTSE 100 territory, didn’t have the panache to run competitively versus peers who were willing to take on more risk.
New manager Simon Brazier hasn’t wasted any time in putting his own stamp on the portfolio. His aim differs from Metcalfe’s at the outset: he’s striving to beat the FTSE All-Share by 2% net per annum whereas Metcalfe focused more exclusively on giant- and large-caps. To do this, Brazier has made a few key changes. He has increased the number of holdings from Metcalfe’s median of 76, to 92 as of December 2006. He has also gradually increased the fund’s exposure to companies further down the market-cap ladder. Since taking over here in May 2006, Brazier has decreased this stake to 29% (it had hovered near 45% under Metcalfe), while doubling the small-cap weight to nearly 14% (all as of December 2006).
Brazier’s willingness to dip down the market-cap ladder gives the fund the latitude it needs to at least have the potential to outperform in different market environments—something that was less evident under Metcalfe. However, it also comes with risks. Smaller-cap companies tend to be less stable than giant-caps, and small- and mid-cap valuations also look a bit stretched at this point in the cycle.
Whether or not Brazier can make those risks pay will depend on how well he executes his strategy. He’s a go-anywhere manager whose main criterion for his picks is a combination of high future earnings growth, good cash flow, and able management. He homes in on firms that have a thematic edge like unique technology, a strong franchise and expansion story, or positioning within a duopoly. For example, fund holding Centaur is known for its magazine publishing group, but it also has a small financial services arm that deals with e-filing technology for big institutions like Goldman Sachs and Lehman Brothers. Brazier thinks this branch of the company could deliver more growth than is commonly expected, and also believes it could be an attractive spin-off. The resulting portfolio has valuations and forward earnings growth estimates that are a bit above category averages, suggesting that the net effect of Brazier’s style is to pay up a bit more than his rivals for firms with superior future growth prospects.
Thus far, Brazier’s portfolio has done all right: since July 2006 (by which time he had reconstructed the portfolio to fit his objectives) through April 2007, the fund returned a percentage point and a half above the FTSE All-Share and a little less than two percentage points above its category average. But, we ultimately think this is just too short a time period to be indicative of Brazier’s abilities, and that’s the main issue here at the moment: Brazier just doesn’t have enough of a history to form a meaningful picture of his abilities. He was mentored by veteran manager Richard Buxton, which argues in his favour, but this is his first go at managing a retail fund, (he has managed institutional mandates at Schroders since 2002, but his records on those offerings are not public).
We’re glad Schroders has taken steps to improve this offering, but we’re reserving judgment until we see a bit more of what Brazier can do. In the meantime, investors can also find less chancier options in funds with more tried-and-true managers.
