The Analyst: Small can be beautiful for teams, too
Saturday 09 August 2008
We often give most of our attention to the companies best placed to demand it, through advertising and brand awareness. Sometimes, though, if we are looking for something a bit special we have to go off the beaten track.
This can be just as true in financial services, the advertising inches of fund managers is not necessarily proportional to their performance. This week, I'm veering off the beaten track to introduce a small Scottish outfit with just one fund: the Saracen Growth Fund.
The fund is managed by Jim Fisher, who entered the industry in 1975, clearly a man who has notched up significant experience and in a variety of economic climates. He established Saracen Fund Managers in 1998, launching the Saracen Growth Fund in March 1999. Since then, it has built up one of the best performance records of any UK fund.
Despite this, the fund has only reached a nimble £180m, leaving it ideally flexible for stock market investment.
More recently, Mr Fisher has been joined by Craig Yeaman, with 10 years of experience in UK Equities in both income and smaller companies funds. You may question whether two people alone are able to do the job of companies that employ banks of analysts. A larger research team does not ensure a better quality of data.
It can often mean that there are long lines of communication which are not conducive to effective decision-making. A smaller team, such as Saracen, with no lines of communication can get to the point very quickly.
The fund invests in 45 to 80 stocks from the UK market, with a view to holding these for the longer term – so there is a an extremely low turn over. Interestingly, this is a strategy employed by one of the other great fund managers, Neil Woodford of Invesco Perpetual.
Stocks are chosen on their own merit with no consideration for their size within the FTSE All Share Index – there is no template for building the portfolio. Value is essential to stock selection, but it is not sufficient for a stock simply to be reasonably priced. There are a number of other key areas analysed.
Companies that fit the criteria are those with growth in dividends and earnings, and that are prudent with the cash they generate. Technicals feature heavily in the selection process, looking carefully at the highs and lows of share prices. When a stock hits a new low, Mr Fisher is always interested to know why and whether this is a buying opportunity as it was for Marks & Spencer, the only retailer in the portfolio.
Saracen have fundamental data for companies going back to 1995 in their offices, and this is used to examine their performance individually and against their competitors. Part of this analysis reveals how profitable the business is and how those profits can be expected to vary over time.
While investments are not chosen by sector, figures from the Department of Trade and Industry are examined to give an idea of which industries are doing well or are going to struggle in the short term.
Currently, the fund is constructed so that 50 per cent is exposed to the FTSE 100, 12 per cent to the Mid 250 and just over 30 per cent in smaller names. The number of stocks has recently been reduced to 53 making it a more concentrated portfolio. The largest holding is Xstrata at 7.1 per cent, followed by Royal Dutch Shell and BP, but this is not an index tracker.
Within the top 20 holdings you will also see groups from Hyder Consulting to Oxford Instruments. The smaller companies element of the fund may put some people off over the short term, but all the companies within the fund will have been scrutinised rigorously to show that they have great potential and are very robust.
As the fund has no mandate dictating from where stocks must be selected, it could be seen as a one-stop shop for UK investment, giving investors access to the best investments from across the board. Some time this year might mark the bottom of the UK market, but it is not possible or sensible to try to market-time your investments.
A better strategy is to choose fund managers that have weathered the storms of the market cycles and will see you through the more turbulent times.
Although not a household name, I believe that Saracen Growth Fund is worth consideration to avoid being caught out in the rain.
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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