Mark Dampier: It takes time and patience to excel as a fund manager
Saturday 14 June 2014
Passive investing has a number of advantages over active management. There is no fund manager risk; costs are lower; and passive funds give you the market or index return. The latter point is actually not strictly true. Once costs, however low, are factored in, passive funds are guaranteed to underperform.
Unfortunately, many active fund managers are merely closet trackers, but they charge higher fees for the privilege. Finding good active managers in a limited talent pool is no easy task. It often takes a number of years before a good fund manager begins to stand apart from the crowd. The likes of Neil Woodford, Nigel Thomas, and even the young Warren Buffett, had to work hard to earn the respect of investors, and they didn't achieve success overnight. Like any profession, from football to brain surgery, it takes time to develop the skills and experience required to gain an edge and excel above others.
It is with this in mind that I turn to George Godber, who manages the CF Miton UK Value Opportunities Fund alongside Georgina Hamilton. The fund isn't quite two years old yet and while Mr Godber previously ran a similar fund at Matterley, this was alongside Henry Dixon, so it is difficult to establish the exact impact each had on performance.
In addition you need to recognise the impact of fund manager style and size of company on returns. Over the past five years smaller and medium-sized companies in the UK and across most other stock markets have performed strongly. Any fund manager with a bias to this area should therefore have received a boost.
How much of this is luck and how much is skill is a difficult question to answer. At Hargreaves Lansdown we aim to analyse a fund manager's track record over the longest possible term, at least incorporating an entire business/economic cycle. This helps to strip out variable, or short-term factors, including where a manager might have benefited from momentum in a narrow area of the market.
Mr Godber has been performing well, but he has been invested predominantly in smaller and medium-sized companies. Time will tell how he develops and adapts to different stock market conditions, but I believe he could be an up-and-coming manager worth keeping an eye on for the future.
In terms of style he is very much a "value" manager and he looks for a "margin of safety" when investing in a company. He looks to buy £1 of assets for 50p, for example, but also aims to ensure the company is healthy enough to survive and is not a complete write-off. This requires a lot of number-crunching as well as site visits to check that a company's assets actually exist.
This approach tends to lead him towards companies with real assets such as buildings and machinery or intellectual property such as copyrights and patents. It also results in some more interesting opportunities being uncovered, such as Michelmersh, a brick company which is recovering strongly after being hit hard in the recession.
Another example of a company that many fund managers overlook is Aer Lingus. Its planes are currently valued at £800m, but it has £400m cash on the balance sheet and a market capitalisation of just £600m. Mr Godber does not believe the value of its Heathrow landing slots are fully reflected in the valuation and he sees significant upside in the business.
Valuation forms an important part of the process and Mr Godber is currently finding a lot of sectors too expensive to buy into, including pharmaceuticals & biotechnology; telecoms; food retailers; semiconductors; utilities; and household & personal products.
The discipline of not investing in companies and sectors he believes to be overvalued gives the fund a defensive quality and I would expect it to hold up better than some funds when stock markets fall, though it could also lag a strongly rising market.
My one caveat with this type of investing is that you have to be patient. A value-type approach often takes time to come through as over shorter periods the stock market can be pulled one way or the other merely by sentiment.
The fund is approximately £80m in size, so remains small and flexible.
At Miton Mr Godber is surrounded by some experienced fund managers, including Gervais Williams and Bill Mott, and I would expect this to be beneficial over the long term.
Mr Godber is a young fund manager who is certainly worth watching in my view.
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.hl.co.uk
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