Very model of a modern investment expert
The Fund Manager: Tim Gregory, Gartmore UK Income
Wednesday 01 September 1999
At Credit Suisse Mr Gregory embarked upon his career in retail fund management, working with one of the most prominent names in the business. "I trained as a fund manager under [Dr] Bill Mott, managing smaller companies and income funds. Then I joined Prolific in 1994 as head of smaller companies and as joint income fund manager, taking over as head of income when Neil Birrell left to join Framlington."
His move to Gartmore three years later involved a concentration on income fund management and a move from his specialisation in small caps. "I joined Gartmore in April 1997 to reinvigorate the income performance which, to put it mildly, had been mediocre. I head up the UK retail fund management team in the large cap area, where we have a team of three, although we also work closely with our small-cap and institutional teams."
Gartmore, the fund management subsidiary of NatWest Bank, has a distinctive approach to fund management, running specialist large- and small-cap teams rather than a more general sector approach. This means that, while the trusts it manages will often have similar characteristics, Mr Gregory's trusts may have rather different portfolios to other income funds. He has specific responsibility for the pounds 200m Gartmore UK Growth & Income Fund as well as its main equity income fund, Gartmore UK Income.
"We have our own discrete house model portfolio in the UK area and all funds are run as closely as is applicable to that model, whether they are managed for income or growth," he says. "The income funds tend to hold corporate convertible bonds (under 11 per cent of the UK Income portfolio), but the core of the portfolio is very much to the model. For example, the UK Growth and Income Fund owns 87 per cent of the stocks in the model portfolio.
"I am a growth manager running an income fund and the key to successful fund management is the same - running the winners and getting rid of the losers. To manage an income fund despite having a growth bias means you have to use quite a significant bond content in the portfolio. This allows you to be where you want to be on the yield curve while still enabling you to buy the stocks you want to buy with worrying too much about what you are yielding."
This can lead to some unusual holdings for an income fund. Mr Gregory says: "At one point, the biggest position in our income funds was Vodafone, despite the fact that it was yielding less than 1 per cent. At present, bonds account for 21 per cent of the Income Fund portfolio and, together with cash, around 10 per cent of Growth & Income, and these proportions are at the lower end of the typical range. For example, last year, during the Asian crisis, the Income Fund had 35 per cent in bonds and Income & Growth 15 per cent in bonds and cash." Vodafone is still the second largest holding in the UK Income Fund, accounting for 6.5 per cent of the portfolio. Other major holdings represent the other "usual suspects" for a UK equity fund with a large-cap focus - British Telecom (5.3 per cent), HSBC Holdings (4.5 per cent), Lloyds TSB and Glaxo Wellcome (3.4 per cent each), with the largest holding being BP Amoco (7.3 per cent).
But there is a healthy diversity of sectors, with financials accounting for 19.4 per cent, largely due to the presence of its major bank holdings, but the remainder of the equity portfolio spread across the market.
The mix of equity and fixed interest holdings in the funds adds an extra set of fund management choices which Mr Gregory admits he does not always get right. "Although last year's increase in bond weightings was a prudent decision, the bond holdings we had meant we underperformed the competition. Basically, we had the wrong bond content. We were holding corporate bonds, where the spreads went out significantly, when, with hindsight, we should have been holding government bonds. That was a mistake for which the blame is entirely mine."
The yield on the Gartmore UK Income Fund is 2.48 per cent, which might appear modest, but is still some 9 per cent above that of the All Share Index and 12 per cent ahead of the FTSE 100. Indeed, the only Gartmore funds with higher yields are those exclusively invested in bonds or cash, and Mr Gregory stresses the importance for the manager of an equity-based fund to maintain a balance between short- term and long-term considerations.
Mr Gregory says: "We try to maintain our stance in conjunction with our view of the relative attractions of the equity and bond markets. You have to be careful in managing an income fund because if you have, say, 80 per cent in bonds, you are going to generate an unsustainable level of income relative to future years, so a balance has to be struck."
Tim Gregory's basic philosophy of fund management is refreshingly simple. "We try to invest in good companies which are well managed and with strong cashflows. We have been tilting towards industrial stocks recently, because they have been benefiting from economic circumstances, and this has been done to some extent at the expense of the core elements, such as telecoms, which haven't been doing so well. But I regard 1999 as an unusual year, where we have run with a lower level of conviction than would normally be the case.
"In the long term, we are concentrating on what we regard as the secular growth areas of the global economy. This means things such as telecoms, despite their recent underperformance, but we are also looking for themes related to the continuing outsourcing of support services, by investing in companies including Compass in contract catering, or Serco in facilities management, or Ocean Green in freight forwarding, plus a whole range of IT stocks. Despite the huge boom in IT provision, 76 per cent of all IT activity is still carried out by companies in-house, so there is still considerable scope in that business."
The other element that is important to Mr Gregory's stock selection is branding. "I am very much focused on companies with a strong business franchise, rather than apparently cheap-looking stocks, because that is where genuine growth and earnings surprises on the upside will come.
"For the first time in a long time Marks & Spencer is back on our radar. It has had immense problems but still has a strong brand and strong market position. Consequently, we can see the potential for a very strong recovery there."
Fund Manager: Tim Gregory
Fund: Gartmore UK Income
Size of Fund: pounds 160.8m
Fund Launched: March 1975
Manager of Fund: Since April 1997
Current Yield: 2.48%
Initial Charge: 5.25%
Annual Charge: 1.5%
Current Bid/Offer Spread: 6.11%
Minimum Investment: pounds 1,000 (subsequently pounds 500)
Minimum Monthly Savings: pounds 50
Standard & Poors' Micropal Rating (maximum KKKKK): KKKKK
Fund performance to 9 August 1999 (offer-to-bid, with net income reinvested):
One Year 4.00%
Two Years 29.24%
Three Years 55.85%
Five Years 76.23%
Seven Years 156.53%
Ten Years 118.49%
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