By Keiron Root
By Keiron Root
4 October 2000
Harry Morgan, the manager of Edinburgh Managed Growth Portfolio Trust, began as a private client stockbroker. "I graduated in history from Cambridge and got a job with a stockbroking firm because that was what you did with that academic background," he says. "I had a traineeship with Henderson Crosthwaite, now part of Investec, and was there for five years or so."
He moved to Edinburgh to join Adam & Co, an established private bank. Four years ago, he moved to Edinburgh Fund Managers as head of its private client team.
Mr Morgan has responsibility for several funds, chiefly the Edinburgh Managed Portfolio, a "fund of funds" unit trust that offers investors a portfolio of other collective funds, rather than direct shareholdings. "Essentially, a fund of funds is a way of accessing the expertise of a number of unit trust managers which, if put together in the right combination, will outperform your benchmark.
"They are simple products. You invest in one fund and you only have to deal with one piece of paper as far as tax is concerned. But at the same time, they are a classic way of reducing risk because you are getting exposure to a range of markets, a range of stocks and a range of underlying funds. The result is that risk teeters into blandness.
"The downside is the element of double-charging and there is really no way round that, although we hope that, with our buying power, we can reduce the costs significantly. With one exception, we get substantial trail commission from all of the funds we hold which we put straight back into the fund. This means it can be more cost-effective for investors to use our funds than to buy the underlying funds directly.
"If I get money coming into the fund, I do not have to invest it immediately. If we don't like the look of the market, we will run the fund with quite a high cash position - up to 7 or 8 per cent - which is not the case with many other retail funds."
The fund of funds is a recent success. "In the early days, fund of funds managers would simply look for a fund with a good performance record and buy that, but these days you have to be more professional and be seen to be more professional. This means we have a rigorous investment process within the group, trying to agree a strategy on where we think markets are going to go on a global scale.
"In the overseas part of the portfolio, we favour the US over continental Europe. Recently, we have had 11 to 12 per cent in Europe and 7 to 8 per cent in the US, but we may switch that around, or have similar proportions in both regions. We are still cautious on the whole of the Far East and will have no more than 3 per cent in Japan. We tend to work around bands with about 55 per cent in the UK, 30 per cent in overseas markets and 15 per cent in cash and bonds. We never have less than 50 per cent in the UK."
Another key aspect of the Portfolio fund is that it is not limited to investing in Edinburgh's other funds, but can select from the whole UK market. Indeed, there has to be a very good reason for another Edinburgh-managed fund to be included in the portfolio.
"For the smaller company part of the portfolio, at the moment we like our own fund, Edinburgh UK Smaller Companies, but we can have no more than two of our own funds in the portfolio at any one time," says Mr Morgan. "Outside that, we need to ask ourselves who is good at running the 'middle-of-the-road' core growth funds and the answer would be Deutsche, HSBC, Schroder and Royal & SunAlliance."
The fund is firmly oriented to generating capital growth, based on a group of core funds, including Deutsche UK Blue Chip, HSBC UK Growth & Income, Royal & SunAlliance Equity and Dresdner RCM UK Growth, which account for more than 25 per cent of the portfolio.
"I call these core funds the 'Great Gatsbys', after the line in the book where Gatsby says that you can't repeat the past and the reply is, 'Why, of course you can'. They offer sustained outperformance, consistent returns and consistent personnel. Other good examples would be INVESCO European and our Edinburgh North American fund. Beside these, we like to find the 'seismic shifters', the funds in the right place at the right time with a performance that benefits as a result."
The "seismic shifters", in theory at least, will provide the extra performance that will take the portfolio above its benchmark. With around 1,800 UK authorised unit trusts and OEICs to choose from, a detailed knowledge of management styles and portfolio strategies is essential to identify winners. It is not enough to know a fund is performing well - you have to know why it is performing well and for how long that level of performance is likely to be maintained.
Mr Morgan says: "Take Dresdner UK Growth. It has always been a good fund but last year it had 15 to 20 per cent in information technology. We were into the fund a bit late, but we benefited from the major boost this gave to its performance. Another which could come into this category was S&P Japan Growth, which had a large holding in Softbank. That was largely responsible for it shooting up 200 per cent last year, although it has come down a long way. We sold our holding in S&P Japan and put it into Baillie Gifford Japanese and Schroder Tokyo."