Mark Dampier: Mining the winners despite the volatility
Friday 26 July 2013
The economic backdrop has been dismal for five years, contributing to significant stock market volatility, and yet most major market indices have made good progress. The FTSE 100 has grown by 39 per cent with dividends reinvested, for example. I often refer to this as the impossible rally because so few investors and commentators believed it could happen.
Some fund managers have significantly outperformed the headline stock market index over this period, and interestingly, those who embraced the volatility have been among the best. Warren Buffett once famously exclaimed "I love volatility", as it allows him to take advantage of opportunities thrown up by "Mr Market".
Of all the fund managers I have met, Ed Legget, manager of Standard Life Investments' UK Equity Unconstrained fund, has navigated the economic and stock market environment of the past five years better than most. He has remained upbeat the whole time, using volatility to his advantage. He has exploited stock market falls to invest in quality companies at bargain prices, rotating out of them after a good spell and reinvesting profits in other areas that have performed poorly. As a result, the fund is one of the best-performing in the IMA UK All Companies sector, having risen 139 per cent over the past five years.
Remarkably, Mr Legget has achieved this with a wholly different approach to some other popular UK fund managers. Neil Woodford of Invesco Perpetual, for example, has positioned his funds in more defensive sectors and adopted a "buy and hold" approach. Mr Legget has tended to shun defensive sectors to invest in companies more reliant on stronger economic growth.
There have been times when the fund has struggled, particularly when economic concerns reared their head and markets fell. On balance, however, sticking to his guns has worked well for Mr Legget. He has felt the problems of the UK and global economy to be well discounted in share prices and has moved the portfolio around depending on where he sees the best value.
The banking sector remains a favoured area for Mr Legget. Much of the investing community remains sceptical, but valuations are low and he believes the change in leadership at the Bank of England will lead to a more pragmatic approach to financial regulation. Alongside positions in Barclays and Lloyds, Standard Chartered and HSBC have recently been introduced to the portfolio. These two banks are supported by solid balance sheets, sensible management teams and an increasing focus on returning cash to shareholders, he suggests.
His pragmatic approach is now leading him to take another look at the mining sector. Share prices have tumbled, partly in reaction to slowing economic growth in China, but he takes the view that growth will not implode and that the share price falls have been overdone. He cites BHP Billiton and Rio Tinto as interesting companies, noting that the latter offers a 4.5 per cent yield. He views this as safe even under the most pessimistic assumptions for commodity prices.
Some profits have recently been taken from domestically oriented sectors after a strong run of performance, but housebuilders, distributors and retailers remain well represented within the portfolio. He continues to focus on companies that he believes are trading on compelling valuations, such as Wincanton, Enterprise Inns and Pendragon. He also sees great value in companies generating revenue from emerging markets, particularly after recent stock market falls.
Mr Legget's approach could be described as investing in companies and sectors that have become unpopular and selling them once they become fashionable and you read about them in the financial pages. He sticks rigidly to his process, but his willingness to embrace market volatility and move the portfolio around to take advantage of opportunities has contributed to the blazing performance.
This contrarian approach could complement the policies of other fund managers who tend to buy and hold for the long term, or position their portfolios more defensively. I am surprised Mr Legget has not received more attention, but I am confident for the future and believe this fund could be a good addition to a diversified portfolio.
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 hl.co.uk/independent
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