Fund of the week: why small is beautiful

published 21 June 2007

It's only been running a year, but the performance of the Melchior UK Opportunities Fund "speaks for itself", says James Davies, research manager for Bath-based Chartwell Investment Management. Its manager, Glen Pratt, returned 32.4% over the 12 months to the end of April, against 12.67% for the average manager in the sector.

This splendid performance may in part reflect Pratt's long experience: the 13 years of his pre-Melchior career were spent at big-name fund houses, such as Fidelity and Newton. His shift away from these firms to Melchior, a much smaller boutique firm, has also played a part, says Hargreaves Lansdown. Why? Because he is no longer constrained by "liquidity issues": funds at the likes of Fidelity are so big that it can take several days to buy enough shares to build up a position in a new stock. Pratt can now trade more quickly, one of "the key factors behind his surge up the performance table", says Hargreaves Lansdown. This also allows him to employ a "rigorous sell discipline if he believes the upside potential of a stock fails to compensate for the risk".

Pratt looks for potential turnaround stocks that would benefit from either a change in sentiment or fundamentals and "won't invest unless he expects a return of 25% over a two-year period", says his colleague, Magnus Spence, on Trustnet.co.uk. BT is an example of one such stock, which Pratt bought cheap when it was out of favour. It has since jumped 40% in value. "It has been investing in a new-wave business and is no longer just a telecoms firm", Pratt tells Citywire. "The firm was cheap relative to its intrinsic value and the market had to reassess what it was about."

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Melchior UK Opportunities Fund top ten holdings