There's an art to making money out of Europe

The Fund Manager: Swapping words for a working life in the City
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By Keiron Root

By Keiron Root

30 August 2000

Some people get tired of City life, pack it in and take a job in the world of books or theatre. But Nick Williams did the opposite and left publishing for fund management.

"I read English language and literature at Oxford and I tried working in a publishing company and I didn't enjoy it very much," he says. "I hated it, because it was neither arty nor commercial. I reasoned that something arty would not pay much, so I opted instead for a commercial career."

But his first taste of City life left something to be desired. "I started at British & Commonwealth in February and it had gone bust by June, which was not a particularly happy experience for those of us who worked there, or the private clients we were looking after."

But Mr Williams was part of a team quickly recruited by Fleming Private Client Asset Management, where he became an assistant portfolio manager. "I was helping to choose investments in international markets for private client portfolios but I wanted to get into the more institutional type of fund management, and I was particularly interested in the European markets."

Now Mr Williams has his sights firmly fixed on his desires. "I have been managing the Singer & Friedlander European desk since January 1994, at which stage there was very little to be managed. The Continental trust, for example, had a market cap of only around £3m, compared to £90m today, so it has been an interesting journey so far."

Mr Williams has been with Singer since May 1993, taking over as lead manager of the Continental trust in July 1994. "It was set up as a way for Singer & Friedlander private clients to get exposure to European markets, and though we now have some institutional investors in the fund as well we have stayed true to that ethos to a great extent.

"We try to keep volatility relatively low and lock in the profits we have made. Our benchmark is the FT Europe (ex UK) Sterling Index, because that is the most representative of the trust's brief, but we are not, in any way, closet index-tracking. It is a 'bottom up' fund: we are looking for individual companies whose share prices we think are going to go up. We reckon an active approach will manage risk better than a passive one. If an index is falling there is no point in just tracking it - you have to try to beat it."

The downside of trying to limit risk in this way is that the fund will tend to miss out on periods of dramatic market outperformance.

"When markets are moving up, the portfolio's performance will typically be OK relative to the index, but it will never go through the roof, because we eschew choosing momentum-type stocks. For example, in the last quarter of 1999 we just didn't have the same level of performance as many other funds because we were not heavily exposed to TMT stocks.

"But our clients were happy with that approach and it certainly hasn't done us any harm since the tech sector has suffered a few wobbles. We have never held stocks and I don't imagine that will change. We control risk through a practical common-sense approach. The portfolio is always well spread, with between 55 and 75 stocks at any time, and there is a good spread of capitalisations. The largest companies in the fund could be the largest companies in the market, and the smallest could be only around £100m market cap.

"Marketability is also important and we would aim not to hold more than three days' trading volume of any one stock. We don't invest in any company where we haven't met the management, and we concentrate on how a company is likely to perform rather than how it has performed.

"At present, the make-up of the fund bears out our attitude to risk. Our biggest holding, Alcatel, is 2.2 per cent of the fund and we never have more than 2.5 per cent in any one holding.

"I believe each investment should have equal validity in the portfolio so, logically, each holding should be the same size when we buy it. We aim to invest 1.8 per cent of the portfolio at time of purchase.

"The target price is 40 per cent on the upside and if an investment reaches that target in the short term, which we define as three to six months for the riskier small-caps and six to nine months for the less risky large-caps, they will either be sold, if they do not justify continued investment, or we cut back the holding to 1.8 per cent of the portfolio and treat it as a new investment.

"I adopt this process partly as an aide-mémoire and partly as a technique to stop us getting too overweight in any one stock."

He outlines how the process works. "Our second-largest holding is Elan, the Irish pharmaceutical company and we should be thinking about taking profits there because it is approaching our target price.

"Our top 10 holdings are not representative of any particular themes we are following. Rather, they are a collection of individual companies trying to produce a significant increase in their share price.

"We got into Alcatel, which is basically a telecom hardware stock, when it looked undervalued. Its portfolio of products looked interesting, particularly in fibre optics. But we have generally been underweight in telecom infrastructure stocks. We don't hold Deutsche Telekom or France Telecom because we thought they were overvalued."

Mr Williams sees opportunities for his portfolio in the consumer sectors. "We have done very well this year out of investing in the luxury goods sector, but I wonder if we shouldn't now be looking at the share prices of some of the more general retailing stocks?

"They have had an appalling time, especially when there are signs of a recovery in this sector of the US market, which is usually a good leading indicator for the European markets."

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