The unconstrained fund's 25-stocks portfolio is one of the most concentrated in the Morningstar UK Large-Cap Blend Equity category. Manager Mervyn Douglas, who has run this fund since May 2006, weights his stocks roughly equally and pays little attention to the benchmark ://www.hemscott.com/markets/uk-markets.do">FTSE All Share index
The portfolio resulting from this strategy has displayed a wide style dispersion during his tenure, but has had a value bias over the past year. The asset-weighted average valuations and growth rates for its holdings are below category norms, and the fund is sprinkled liberally with value plays such as Prudential, AstraZeneca, and GlaxoSmithKline. Whilst this should cut volatility relative to funds with heavy weights in more speculatively priced fare, the fund's concentrated portfolio still makes it a relatively high-risk proposition. In addition to investing roughly 4% of assets in each holding, Douglas's stock selection strategy can leave the fund with largish sector over and under-weights. For example, his valuation criteria kept him underweight in mining last year, which badly hurt the fund, and more than offset the salutary effect of the fund's financial underweight since July 2007 - which is after the US mortgage crisis erupted.
Performance during Douglas's tenure has been mixed. The fund posted strong results in his first year at the helm, but from May 2007 on, the fund has badly lagged its Morningstar peer group. However, it's worth noting that he fared well during a one-year stint at L&G Growth Trust, where he ran a similar equal-weighted portfolio. We would also point out that the fund's underperformance in the past year came largely through what we consider a sensible degree of caution--unlike many of his peers Douglas simply didn't play the momentum in mining to any real degree. That hurt the fund in the very short-term, but it's the kind of courage in one's convictions that we like to see--particularly when it comes to running a concentrated fund like this.
We like the format of the fund, and believe Douglas's strategy has the potential to give it appeal to investors who can accept its high level of risk. However, Morley is only recently recovering from a degree of management instability and although we acknowledge the strides it has made in this regard, it still has to prove those days are behind it. Moreover, Douglas has thus far shown an ability to deliver during up markets, but has failed his only severe down-market test running money in this format. For the reasons we noted above, that's not necessarily a deal-breaker, but it and questions around Morley keep the fund from being a truly compelling pick just yet.
