The Analyst: Include the best stocks? What an idea

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I have featured esoteric and higher-risk funds in this column more often than not. However, this week I am going back to basics and focusing on a new core UK fund: Collins Stewart UK Focus. Collins Stewart is an independent financial services company, and recently stepped into the shop window of retail fund management.

This fund, which was launched only a few weeks ago, is to be run by David Shapiro, who has 20 years experience of managing money. What I found interesting about his appointment is that he will actually own 50 per cent of the business. I always like owner-managers because it gives them a terrific incentive to make their fund a success.

Shapiro has put a considerable amount of his own money into the business and indeed into the fund. His family and friends are also investors, so if he wants peace at home he will have to perform well!

His investment approach is one that I think makes intuitive sense – in fact, it's probably how the man in the street thinks all funds are managed. Firstly, it is a concentrated portfolio that only includes the manager's best stock ideas. This is an approach that (sadly) not many managers follow; in my opinion too many are fixated on their benchmark index and pad their portfolios out with mediocre shares.

What you won't be getting with this fund at present is exposure to banking, mining, pharmaceutical and major oil firms. With reference to banks, Shapiro feels that there are still too many unknowns at present, and he wants to see clear evidence that the credit crunch is coming to an end before he can feel comfortable investing in them.

Shapiro's investment heroes include legendary figures like Benjamin Graham and Warren Buffett. He is very much a believer in their style of "value" investing, which relies on identifying high-quality companies that are being undervalued by the market. Accordingly, his investment philosophy looks at three crucial factors: quality, returns and value.

For quality, he is looking for companies with pricing power, strong balance sheets, a competitive advantage and growing cash flow (which he views as the lifeblood of a company). He is also looking for a good return on capital. This is basically the ability of a company to create value through the investment of its cash flow. Finally, he is looking for a share price that represents a large discount on what he sees as the intrinsic value of the company.

This is most definitely not a short-term trading fund; I expect the turnover of the portfolio to be low. This is another strategy made famous by Warren Buffet, who once said that his favourite amount of time to hold a stock is "forever".

Perhaps the best way to understand the philosophy is to look at one or two examples in the portfolio. For example, Shapiro believes that Tesco represents especially good value, with sustainable cash flows of over £1bn. The company is also showing substantial expansion in Asia and Europe, yet this seems to be largely ignored by many analysts. Commercial property is also a favoured area of Shapiro's, through holdings such as CLS Holdings, which has a conservatively financed portfolio of income-producing properties across the UK and Europe.

At present, the Collins Stewart UK Focus portfolio is about 40 per cent larger companies, 40 per cent medium-sized companies and 20 per cent smaller companies. While Mr Shapiro doesn't try to make sweeping calls on the global economy, he does believe that it is deteriorating for the present, and he therefore prefers slightly larger companies. That said, he is beginning to find many more undervalued companies than were around a year ago.

The only bad thing I have to say about the fund is that it has a performance fee – namely, 20 per cent of any outperformance of the FTSE All Share. I personally dislike such fees – it feels as though you're paying more for what you always used to get for less – but I am afraid they are becoming increasingly common.

Shapiro's objective is to try to outperform the FTSE All Share Index by 3 per cent each year. That is a bold target. If he succeeds, it would make him among the top performers in his peer group. He certainly seems to have the skill set and the incentives required. It is too early to know whether he will be successful, but his new fund is certainly one to keep an eye on.



Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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