The Fund Manager: Andrew Spencer of Save and Prosper: How Spencer makes his mark in management

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The Independent Online
YOU DON'T have to be an economist to run money effectively, but being one should be an advantage. That's what Andrew Spencer believes, as head of UK and European equities at Fleming Asset Management, and manager of funds for Fleming and the group's unit trust subsidiary, Save & Prosper.

Mr Spencer did not nourish childhood dreams of a career in fund management. Then again, he says: "You couldn't really call it a `happy accident'. When I was leaving university I felt I should do a job that was least bad, and fund management seemed more interesting than the alternatives, like becoming an accountant for Shell. Also, I had spent three years learning the finer points of economics and, being much younger and more idealistic in those days, I felt I should apply them in the real world. I thought I would give it a go and I've been here ever since. I have worked for only one company, which is unusual."

Mr Spencer, now 34, is responsible for two of the Save and Prosper unit trusts, UK Growth & Income, which he runs jointly with another manager, and UK Premier Equity Growth, which he has managed himself for over five and half years. "It started life as something called `Special Situations' and was a complete pig of a fund," he says. "My brief was to turn it around and set it off again in a new direction. We changed its name to Premier Equity Growth a couple of years ago."

For each of the past six years, the trust has outperformed the FTSE All Share Index, an indication of the improvements made under Mr Spencer's stewardship, although its relatively unimpressive 10-year record is a reminder of its previous underperformance.

The pounds 400m trust requires a manager who takes a broad view. Mr Spencer says: "My style is slightly different to a lot of other fund managers because I take what might be called a `holistic' approach, looking at the balance of the whole portfolio. I look at sets of companies and try to build a balanced portfolio from there, rather than stress the merits of individual stocks.

"We are looking for companies that will contribute to steady growth over a long period. We know in the long run value outperforms, but this is true only at the extremes, for the bottom 10 or 20 per cent of undervalued companies. The best model for identifying them in the UK is the humble p/e (price/earnings) ratio."

Mr Spencer's philosophy of investment management is based on a fundamental understanding of psychology. "You start with the basic human desire that people like getting something for nothing. When you go shopping in the Portobello Road, you are looking for that sneaky bargain and if you look hard enough you can find the same type of sneaky bargain in the stock market."

The "special situations" origins of the fund (investing in companies with a specific reason for growth, such as new management, restructuring or new products) has not been jettisoned, although the emphasis these days is on larger stocks. Mr Spencer also points out that being cheap is not sufficient reason to invest in a stock.

"There are three types of cheap company. There are companies that are cheap because they are in secular decline, for example, textiles, which has been declining for 30 or 40 years. You are not really interested in those. The second group are those down there because of cyclical factors. The third type are companies where the management has made a bad job of it. In such cases, you can kick the management out and turn those companies around. I try to invest in the latter two groups. I look for companies with tthe best chance of getting out of a hole or are showing signs of growth".

The portfolio also holds more conventional growth stocks. "The other part of what we do is based on companies which are clearly growing and have business in growth markets. There is a psychological basis for this too. People like to feel comfortable and they get a warm, reassuring feeling from stocks which rise. This means looking at companies such as Vodafone or Microsoft who are displaying rock-solid earnings growth. In other words, we are looking for companies with exceptional growth prospects."

He adds: "We call it the `Barbell Approach'. We look for those companies at either end of the barbell - the value end and the growth end - but don't pay much attention to the mediocre ones in the middle. We have done particularly well out of ARM Holdings, which was one of our growth picks. It has a super growth profile, in a clear market niche with tremendous in-built earnings growth from its supplier agreements. At the other end, we have Rexam, which has been a bit of a basket case, but is on a p/e ratio of 10 or 11. The last couple of sets of results have been pretty encouraging and European growth prospects are improving, with Rexam tied into that growth."

He admits: "It is not as exciting as saying we have found a wonderful company under a stone, but when it works it will deliver very solid growth. We achieve it by holding a lot of companies. For example, the Premier Equity Growth portfolio holds 180 at the moment. We have to have reasonable risk controls as well. Even if we do not like Glaxo Wellcome, for example, we are still going to have some in the portfolio."

This point is significant, underlining the fact that the Premier Equity Growth portfolio is monitored in line with the profile of the UK stock market. Its largest holdings are, by and large, the biggest blue chip stocks, Glaxo Wellcome (3.7 per cent), BP Amoco (6 per cent), British Telecom (4.9 per cent), Vodafone Airtouch (3.8 per cent) and Lloyds TSB (3 per cent). The trust also has more than 4 per cent in S&P's UK smaller companies' fund, to give it small- cap exposure. Mr Spencer says: "The highest active weighting (ie above the market weighting of a stock) in the portfolio is 1.1 per cent, so we don't `bet the farm' on anything. If I was to put 5 or 6 per cent overweight into a stock, it would be saying to investors I know what is going to happen to this company and, frankly, I don't.

"Like any fund managers, we are going to make mistakes and if a stock goes wrong you have to take out the back and shoot it. You have to do it quickly - there is no room for sentiment in running a portfolio."

Fundamental Facts

Fund Manager: Andrew Spencer

Age: 34

Fund: Save & Prosper Premier Equity Growth

Manager of Fund: Since December 1993

Size of Fund: pounds 407.30m

Fund Launched: 16/09/1982

Current Yield: 0.43%

Initial Charge: 5.5%

Annual Charge: 1.5%

Current Bid/Offer Spread: 6.01%

Minimum Investment: pounds 1,000 (subsequently pounds 250)

Minimum Monthly Saving: pounds 35

Standard & Poors' Micropal Rating (maximum KKKKK): KKKKK

Fund performance

(to 9 August 1999)

One Year: 4.46%

Two Years: 25.90%

Three Years: 63.50%

Five Years: 112.67%

Seven Years: 209.37%

Ten Years: 90.76%