I am always on the lookout for younger fund managers who might become the Nigel Thomas or Neil Woodford of tomorrow. Alex Savvides, manager of the JO Hambro UK Dynamic Fund, could be a contender. Few people will have of heard of him, yet he has been running this fund for four years with considerable success, returning around 27 per cent against about 7 per cent for the sector.
At around £12m the fund is small, though this can be advantageous as Mr Savvides should have no problems moving in and out of positions quickly. That said, if the fund was larger the process would largely be unaltered. He focuses on investing in companies that have experienced declining fortunes – perhaps where growth has disappointed or dividends haven't met expectations, but where there is scope for a turnaround. It is what might be classified as a "special situations" approach.
The twist is that to be considered for the portfolio a share must pay a dividend. There is no minimum level, and there is no yield target for the fund; it's just Mr Savvides prefers companies with the discipline of paying a dividend because it has to come out of cash flow. Dividends can't be faked, and if payouts fall it's a sign things are going wrong.
Mr Savvides identifies three types of opportunity. First, the company has underperformed due to over-investment or mismanagement that can be turned around. Second, firms seeing a change in fortune due to developments in their particular industry investors have not fully understood – classic recovery stocks. Finally, those with easily identifiable balance-sheet problems and need extra capital. In these instances, much of the bad news is often already priced in, and you have a good chance of making a lot of money over the long term if the company survives.
Probably the best way to illustrate the fund is through some of the holdings. Of the 700 or so companies Mr Savvides screens, around 150 make it through to face serious scrutiny.
Around a third of these are chosen, producing a concentrated portfolio. He looks for good-quality firms, with a long track record capable of self-help.
3i, the private equity company, is one example. Shares trade at a 35 per cent discount to the net asset value of its portfolio, though Mr Savvides believes this is more like 55 per cent once the listed companies are stripped out. This offers a large margin of safety when buying the shares. 3i's problems stem from having high level of gearing during troubled periods. However, this has been reduced under a change of management. It is a high conviction stock for him and one of his biggest positions at 3.5 per cent.
Another stock where he anticipates recovery is QinetiQ. Here, expensive debt to fund acquisitions to diversify the business has been a headwind to performance. New management has slashed debt, but so far Mr Savvides believes the market has taken time to notice, and today's share price undervalues the company significantly.
Although Mr Savvides may be relatively new to fund management, he has 15 years' experience under his belt, of which eight is with JO Hambro.
I believe he is an exciting prospect. However, the one aspect of the fund I don't like is the performance fee calculated as 15 per cent of any outperformance of the FTSE All Share index. Not an unreasonable benchmark – I just dislike performance fees. The fund does have a relatively low annual management charge to help compensate though, and I think it is one to look out for.
Given recent falls in the stock market it should benefit from an eventual turnaround in sentiment.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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