Investment: The Fund Manager: The ups and downs of a `dynamic' growth style

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The Independent Online
JEFF SAUNDERS joined Standard Life in Edinburgh in 1983, and never expected the millennium would find him still at the firm, now as investment director responsible for UK Equities. "I started straight from university," he says. "I read PPE at Oxford, but I was not too keen on the politics bit, so I wondered what I could do with a philosophy and economics degree. I applied to various financial institutions and it turned out fund management was what I was cut out to do."

He was soon a key member of Standard's fund management team. "We launched a range of unit trusts in 1986 and I was given one of the smaller ones to run, which didn't go down too well with some of the people who had been here a lot longer than me.

"I never really expected to stay this long. I had come to Edinburgh from the Midlands to join Standard Life, one reason being that they majored on training. With a stockbroking firm, for example, you were thrown in at the deep end to sink or swim. I thought this way, I would be able to find out about the businesses of stockbroking and fund management, then move to a job in the City."

That move has not yet come, thanks to the strong long-term track record he has built up for Standard Life UK Equity Growth. Twice in the last three years it has won the Standard & Poor's Micropal First Award for 10-year performance. He says: "The most recent award was particularly pleasing - I had been managing the fund for the whole of that period."

This success has led to an increased demand from investors. "The fund has more than doubled over the past year. I try not to let the size affect things. It was around pounds 10m when we started, which gave us tremendous flexibility, so I was just buying the stocks which were most interesting. But as the fund grew, it became clear that investing in smaller companies meant dealing costs were eating into net profits."

The solution was for Standard Life to launch a specialist smaller companies fund. Mr Saunders adds: "We decided the Growth fund would concentrate on the 350 stocks. The idea is to invest in the top 10 per cent of the 350, which means the 35 companies that have the most attractive growth prospects."

This divergence of performance between large and small caps has had an effect on the way Mr Saunders manages the Growth fund. "I had tended to assume it didn't matter whether you were investing in smaller or larger companies, so long as the individual growth characteristics were right, with the result that the fund's portfolio became skewed from the FTSE 100.

"The problem with this is that the FTSE 100 represents 80 per cent of the market so we were, in effect, taking very big- bets against the FTSE. This didn't matter when the FTSE performed more or less in line with the whole market, but over the past two or three years, the picture has changed." The trust still has a relatively high proportion of its holdings in 250, rather, than FTSE 100, companies. "I feel it was a risk we were taking without being adequately rewarded," says Mr Saunders. "I have been trying to correct it by, for example, looking at a situation where there are two similarly attractive companies, one a 250 stock and one in the FTSE 100, and picking the larger stock.

"But within its peer group, the fund still has a bias towards smaller 250 stocks, with only 40 to 50 per cent in the FTSE 100. A lot of our competitors will be much closer to 80 per cent."

This profile is reflected in the trust's major holdings, where the largest is BP Amoco (7.04 per cent), followed by Securicor (4.71), EIDOS, (4.31), Lonmin (4.25) and Barclays (3.5).

Mr Saunders also has a distinctive approach to identifying "growth" companies. "We are not actually looking for companies that will provide growth per se, because we assume that the market is efficient in static terms, so growth expectations are already discounted in the share price. If I had to describe what we do in a word I would say we are `dynamic' investors." What this means is looking for elements that are going to change the market's view of a particular company. "If you can find a company where something happens to improve growth prospects then that is the type of company we want to get involved in," says Mr Saunders. "GEC Marconi has been a strong performer for us this year, although a year ago it would have been seen as a declining engineering company rather than a growth stock.

"But we preferred it to a company like Glaxo Wellcome, which has long been rated as a growth stock and had become over-valued as a result. What is most important is the way growth perceptions are changing for certain stocks."

Such a philosophy inevitably requires a pro-active management, adopting what the fund's investment strategy statement describes as a "robust stock selection process", which means the fund will be more volatile than many of its peers.

"The long-term performance figures are a reflection of the fact that we take short-term positions, so it can be very volatile in the short term," says Mr Saunders. "Our investors know this is not an index fund and they are prepared for volatility."

Fundamental Facts

Fund Manager: Jeff Saunders (right)

Age: 37

Fund: Standard Life UK Equity Growth

Size of Fund: pounds 161.9m

Fund Launched: May 1986

Manager of Fund: Since September 1988

Current Yield: 0.71%

Initial Charge: 3.50% (Investors may be able to buy at lower cost via a discount broker)

Annual Charge: 1.50%

Current Bid/Offer Spread: n/a (Open-Ended Investment Company)

Minimum Investment: pounds 500

Minimum Monthly Savings: pounds 50

Standard & Poor's Micropal Rating (maximum KKKKK): KKK

Fund performance (to 8 November 1999)

One Year 10.66%

Two Years 26.45%

Three Years 47.28%

Five Years 138.65%

Seven Years 193.74%

Ten Years 306.86%

Source: Standard & Poor's, Micropal