A new fund that breaks with the norm

Marmite pot and toast © Unilever
These fund managers, at least, hate it

Investors looking for a UK equity fund that offers something different to its peer group should take a look at the Mirabaud UK Equity High Alpha Fund, which launched at the beginning of this month. This is a high-conviction, concentrated portfolio of the best ideas from the UK equities team at Mirabaud Asset Management, part of one of Switzerland’s oldest private banks.

Although the fund is new, the team has an established record for this strategy, having managed portfolios for institutional investors since 2013. The managers, Jeremy Hewlett and David Kneale, look for firms that have a secure business franchise, a sensible balance sheet, a persistent cash flow and profits, and management with proven ability.

It’s tricky to put this fund in a traditional style box, such as value or growth. The team’s holdings in their existing portfolios include some stocks on quite high valuation multiples, either where the earnings are expected to grow quickly or perhaps because the earnings have been subject to a temporary dip.

However, they rarely hold deep-value companies – which I would usually classify as stocks that look cheap, but show some signs of serious stress. They are particularly keen on stocks that have some form of optionality (ie, have substantial potential upside under certain circumstances) that the market hasn’t yet recognised.

The variability of earnings among the portfolio companies has changed over time, but the managers favour firms with low leverage. This should give investors an element of comfort the next time that trouble surfaces.

The strategy follows an unconstrained approach to sector allocation (in other words, they can invest in whatever they like). For example, the managers hold four UK housebuilders, making up 14% of the portfolio. By contrast, the sector accounts for about 1.5% of the FTSE All Share index.

There is an element here of holding a basket of stocks to get exposure to a theme: the most significant underlying reason in this example appears to be the structural undersupply of housing and the fact that government and central-bank policy is likely to remain supportive of the mortgage market. But there should always be a stock-specific reason to hold each company as well.

The strategy has a very different risk profile to the FTSE All Share index. One measure of this is its tracking error (see page 10), which historically has been above 8%. This is at the higher end of the spectrum of UK equity funds. Perhaps equally important in understanding how it might perform in future is to consider what it is avoiding.

For example, the consumer staples sector – which includes firms such as Reckitt Benckiser and Unilever – is a significant portion of the UK market, but the strategy now has no holdings in this sector. The managers believe that many of these stocks are expensive on free cash-flow measures, and also no longer have the levers (such as pricing power, cost-cutting options and increasing financial leverage) to drive returns that they enjoyed in the past.

Therefore these traditionally defensive stocks may not behave as expected during a downturn, which could make coping with the next market sell off more complicated. It’s this out-of-consensus positioning that I believe could be most valuable for investors looking for a new fund to diversify their portfolios.

Activist watch

Proxy adviser Institutional Shareholder Services has urged shareholders in Procter & Gamble (P&G) to vote activist investor Nelson Peltz on to its board, reports Reuters. Peltz’s Trian Partners announced earlier this year that it holds a $3.5bn (1.5%) stake in P&G, and its nomination of Peltz to the board set off a “bitter proxy battle” with the consumer goods giant.

P&G has argued that Peltz’s plans to boost shareholder value by organising the company into three largely autonomous business units would lead to higher costs, lower profits and another restructuring that could break up the company. Glass Lewis, another proxy adviser, also recently recommended that shareholders vote Peltz in.

Funds news round-up

• Asset manager Fidelity International is going to change the way it charges investors, cutting the annual management fee and introducing a variable management fee that will be linked to fund performance, reports the Financial Times. Investors will have to pay the additional variable fee (subject to both a floor and a cap) only if a fund beats its benchmark index. If the fund underperforms, the variable part of the fee will be returned to investors.

This charging structure will apply to a new range of funds that will be launched in January next year, but the exact percentages involved have not yet been confirmed – it may be that investors end up paying more than before if performance is especially good. Fidelity also said that it will pass the cost of research – under new EU rules known as Mifid II – on to clients, unlike the majority of its competitors, who’ve pledged to absorb these costs themselves.

• Individual investors put a net £3.6bn into funds in August, making it the highest-selling August on record, according to the latest data from the Investment Association, the industry’s trade body. Equity funds were the best-selling asset class over the month, seeing inflows of £1.1bn. The top-selling sectors were funds that invest in Europe, excluding the UK, and those that invest in global equities. So far this year UK-focused funds have seen a net outflow of £1.4bn.