The Analyst: Not a celebrity, but a star performer
Saturday 17 November 2007
The BBC website has a rather fun little section called Celebdaq. This is a pseudo stock market that tracks how often a celebrity is mentioned in the media during a given week.
Each celebrity is given a "share price" that rises if they are in the news a lot, but falls when they are out of the limelight. A look at the market movements provides an interesting view of the zeitgeist.
If one were to play a similar game with fund managers, then names like Anthony Bolton and Neil Woodford would have been big risers in recent years. These investment sages are frequently consulted and quoted because everyone wants to know their view of the market. However, they do not have a monopoly on wisdom. There are many highly talented fund managers that you won't see mentioned in the papers as often and it is easy to forget about them. This could be a mistake, as over the long term I would expect them to outperform.
One manager who has been somewhat forgotten is Neil Pegrum from Cazenove. This seems particularly unfair because he is one of the most experienced managers in the UK and has a fantastic track-record. This week, I will attempt to bring him back into the limelight with a look at how he manages his fund: Cazenove UK Dynamic.
Mr Pegrum's style has always been flexible and pragmatic; perhaps this is the reason for his exceptional performance. He is what I call a genuine stock-picker, focusing on the mid- and small-cap area where there is more inefficiency, and where his experience and expertise can be used to the full. The truth of the matter is that, after more than 20 years in the market, he has excellent contacts and has also seen the majority of management.
The team at Cazenove adopt a business cycle approach, where they try to understand how the economic cycle is affecting different sectors and how this relates to individual stocks. Mr Pegrum feels this is useful because it gives him an additional perspective on the themes running in his portfolio. Although he can draw upon the expertise of his colleagues, he is 100 per cent accountable for the fund and (unlike some other Cazenove managers) has the freedom to invest anywhere in the market. The fund can take large positions if he has a high conviction in certain stocks.
The Cazenove UK Dynamic Fund is a concentrated portfolio of 30 to 50 stocks. Of course, this means that it will often be positioned completely differently to the All Share Index, and performance since its launch three years ago has been very strong.
I think what is most impressive about the performance is that Mr Pegrum has avoided the majority of oil and metal stocks. He admits to underestimating the persistence of the bull run in natural resources, but to be fair to him he has made up that lost performance in other areas. Investors should remember that past performance is not a guide to future returns and the value of investments can fall as well as rise.
I believe one stock Mr Pegrum will always be associated with is Micro Focus. It's still his biggest holding, and has been one of the biggest drivers of fund performance. Unfortunately, it has been driving the portfolio in both directions!
Micro Focus is a software company with a strong market position, a high barrier to entry and growing revenues. But when the company first floated on the stock market, management became distracted and took their eyes off the ball. After two profit warnings, the company's share price had nosedived.
However, Mr Pegrum's long experience taught him to take another look at the company rather than panic. A new management team came in and he felt that they could rejuvenate the firm. Mr Pegrum, who was far closer to the business than many others, recognised that there was still huge potential in this company. He was proved correct; the company's share price has more than recovered since then. Indeed, last week it rose 21 per cent on the back of strong results.
Mr Pegrum believes the current market environment suits the true stock-pickers. There is a need to be really careful; in other words, to avoid the losers, particularly some of the more exotic rubbish on AIM. He continues to look for companies with pricing power in a structurally strong sector, with management teams he trusts.
I believe this is just the kind of fund manager investors need managing their money. You can argue endlessly whether larger companies are cheaper than smaller companies (or vice versa), but a genuine stock picker can outperform in any market. I believe Neil Pegrum is one of the best.
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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