The fund manager's recipe for success: buy when the market crashes

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The Independent Online
Fund managers are mostly an anonymous breed, yet their decisions are crucial to the performance of the personal equity plans, unit and investment trusts into which small savers pour their cash. How do they make their decisions? How much scope for flair and outperformance is there given the investment parameters of the various funds they manage? Do they sometimes get it badly wrong? Today sees the start of a new series asking managers of leading funds how they do their job.

Foreign & Colonial Investment Trust, the first public investment trust, has remained true to its objectives since its launch in 1868. It now has pounds 1.6bn of assets, an army of loyal small investors, attracted by the monthly savings scheme, who make up 49 per cent of the total shareholding, compared with the average for listed companies of 17 per cent.

Michael Hart, chairman of Foreign & Colonial Management, who has been manager of the trust since 1969, says its style is to be slightly contrarian. "We are prepared to buy into difficult markets in the expectation that they will recover."

So far the strategy has paid off. In the prolonged bear market of 1974, F&CIT drew up a list of good-quality companies that were on price earnings multiples of around 5 and yields of 10 per cent. It bought into those companies in the expectation that in five years their ratings would be far higher. They were.

The same strategy was adopted in the stock market crash of 1987. "We increased our gearing and bought into the crash," says Mr Hart. Last year it nibbled away at bonds, feeling that inflation fears were overdone.

The trust has also handsomely outperformed the FT All-Share Index since the late 1980s, helped by the narrowing of the discount to net assets. Its shares are now at a discount of under 1 per cent.

Not everything goes to plan, however, and Mr Hart concedes he has had some nervous moments. There was a 30-month period of underperformance in the early 1980s. "We do also back a few dogs occasionally," he admits.

In the first half of this year F&CIT's worst-performing stocks were Eurotunnel, which showed a 38 per cent decline, and Eastern Group, which was down 16 per cent. Hanson's bid for Eastern has changed the outlook for the electricity company but the Eurotunnel situation looks dire, admits Mr Hart. By contrast, Mr Hart's most successful investment was BTR, which he spotted at an early stage at the start of the 1970s. He met Sir Owen Green, who built up the industrial conglomerate in the 1970s and 1980s, liked what he saw and bought shares. BTR is still F&CIT's fifth largest equity holding, although some shares were sold as a precautionary measure when Sir Owen retired.

Meeting management is an important element of picking and holding stocks, says Mr Hart. He likes to see the directors of the companies he invests in once a year to make sure everything is on track.

"We are fundamental investors," he explains. "We look at all yardsticks, like share price to earnings ratios, yields and cashflows, take a view on management and take advantage of euphoria and gloom in markets."

Mr Hart, whose expertise is the UK, relies on input from his F&C colleagues for the US, Japanese, European, Asian and Latin American parts of the portfolio.

Investment in the more volatile, smaller markets is often done through another F&C trust, like F&C Emerging Markets Investment Trust. F&CIT keeps more than 40 per cent of its assets in the UK to ensure it meets its target of growing the dividend faster than inflation and to be tax efficient.

Since the ending of exchange controls in 1979, the trust has played currency markets to good effect. "We do it through loans," Mr Hart says. "If we want to reduce exposure to the dollar, we borrow dollars and put them to work in another area."

F&CIT took a big bet on the Japanese yen in the first half of this year, which initially did not work out well as the yen appreciated against sterling. However, the 25 per cent fall in the yen in the second half has provided a boost to net asset value. At the end of September some 13 per cent of the trust's assets were in Japan, but its currency exposure to Japan was only 9 per cent. Yen borrowings have shrunk from pounds 130m to around pounds 85m.

The ability to borrow in times of inflation and rising stock markets is also a plus, says Mr Hart. "The combination of currency and gearing has made quite a contribution to the trust over the years."

The trust was one of the earliest into Japan in the early 1960s, went into Hong Kong, Thailand and other Asian markets ahead of the pack, and made forays into Latin America before it became fashionable.

More recently it has invested in South Africa through five blue chip stocks and is presently sizing up Russia. "We could make a move there before too long," says Mr Hart.

New moves are carefully weighed because F&CIT invests for the long term. It has holdings in some 250 stocks held on average for five years. Some have been held for 30 years.

Mr Hart reads investment publications widely, but places no great faith in gurus or theories. "It is a question of common sense and taking advantage of the excesses of the market," he maintains.

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