It's what you sell that counts

The Fund Manager

Chris Murphy has an analytical approach to managing the Framlington UK Growth Trust, based on identifying the major economic themes that will allow UK-based companies to prosper. The style stems from science and his start on two major stockbrokers.

Chris Murphy has an analytical approach to managing the Framlington UK Growth Trust, based on identifying the major economic themes that will allow UK-based companies to prosper. The style stems from science and his start on two major stockbrokers.

"My background is as a physicist and I went straight from taking my degree to work for Shearson Lehman as an equity analyst, then to James Capel, also as an analyst," he says. "I was with each firm for two years or so and I've been with Framlington for seven."

Mr Murphy became a fund manager at Framlington. "As an equity analyst, I was focused on the water and electricity industries and I wanted to broaden my scope. As a manager, you are involved in identifying and developing invest- ment themes and structuring a portfolio to take account of them, selecting stocks which fit in with those themes."

Mr Murphy's believes the key theme for growth funds is the growth of global competition. "We are living in an increasingly competitive world with clear winners and clear losers. You will find your business is quickly gone if you can't offer the best price or the best delivery time.

"I look for companies which can add value for their customers, or ones in areas of the market experiencing a fundamental secular growth trend. Global competition means companies won't be able to grow their profits by increasing their prices. They either increase their sales volume or market share, or reduce their costs. We spend a lot of time looking for good-quality company management teams who can do this.

"And it's important when you are investing in a growing business that is growing that you don't fall in love with it.

"You have to continually reassess the businesses you are investing in, and you can't let yourself believe that just because a business has been growing for 10 years that it will continue to for ever."

This underlines a central principle of fund management, that the key to long-term performance is not so much what you buy as what you sell. But Mr Murphy says the most important element of his approach to running the UK Growth fund is to keep a constant watch on the whole portfolio.

"You hear people talk about the importance of the 'sell discipline'. It really is the 'buy-sell-hold discipline' that matters. You must know why all the stocks in your portfolio are there. Some businesses will provide steady results over time, and it is important to identify these as long-term holds, as well as assessing reasons for buying more aggressive growth stocks and selling them when they start to underperform.

"I would regard myself as an active manager and that means being prepared to make major changes in the portfolio if circumstances demand it. Take, for example, Rentokil Initial, one of the darlings of the market for a long time. Here was a company which set itself very high growth targets, which it achieved for a while, then missed its target by 2 per cent a couple of years ago.

"To us, that was a major flag that the business was no longer on an upward trend and, although it was one of our major holdings and had missed its target by only a small amount, we sold almost immediately.

"Lloyds TSB was another example. All through the Eighties, it was the model for the banking sector. More recently, it has been unable to sustain its performance. Although it was our largest bank holding, it had to go.

"And once you have identified a theme, you have to back it. When circumstances change, you also have to be prepared to move to the next one. For example, the fund has been very TMT (technology/media/telecoms) orientated. We cut those positions very aggressively in February when we thought they were grossly overvalued.

"We have moved into more defensive stocks, companies such as AMVESCAP in the financial services sector, an area which is showing strong secular growth, and some of the banks, such as HSBC and Standard Chartered.

"The financial sector has been strong since the summer, on the back of the agreed bid for Woolwich by Barclays, and telecommunications stocks have suffered. We have also been looking at the biotechnology sector for some of our more aggressive growth investments."

Mr Murphy says the TMT theme will almost certainly be back. "The shakeout we have seen in some areas of the market this year has been healthy. A lot of adjustment is needed to people's expectations of what growth rates should actually be, especially in the US.

"Once these have returned to more realistic levels, this will give us the opportunity to move back into TMT stocks."

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