Recent fund gains have been generated by stock selection and sector allocation
Alister Hibbert, a member of BlackRock’s European equity style diversified team, has completed a year and a half as manager of the £112.8m fund, having taken over from Alice Gaskell in March 2008.
Over the year, the vehicle is ranked top by Morningstar, up 35.6% against an average 10% increase.
The fund celebrated its ninth anniversary at the beginning of this month and is ranked second out of 80 vehicles in the IMA Europe excluding UK over five years to 28 September. According to Morningstar the fund has risen 132.7% against an average 64.7% rise.
Over three years, the portfolio is ranked top out of 90 funds returning 39.4% against a 9.3% increase for the sector.
Hibbert says when he took over the running of the fund it was a well-balanced portfolio with high exposure to power utilities, based on the investment firm’s view of the oil price.
“This then morphed into the fund having a very defensive strategy,” which evolved at the end of last year and into the beginning of this year, he says.
Hibbert says in November, with the fund defensively positioned, he was struggling to find any assets which he wanted to buy.
“Even cyclicals had defensive sectors. Although we thought about it we decided to remain fully invested and we would not try and play asset allocation decisions with cash,” he says.
In a three-month period from February to April Hibbert adjusted the fund portfolio significantly.
“During this period there was above average turnover in the fund, as we generated a lot of investment cases, which we simply could not make work in the January period,” he says.
The manager realised he could now quantify a lot of balance sheet risks, particularly within the financials sector, much more than he had been able to do prior to this period.
“It allowed us to generate a lot of really good investment cases, and then we found out, having been underweight financials from about mid-2006 as an investment group, we had become overweight financials,” he says.
He also took out a big overweight position in the industrial sector with the acquisition of a number of specific holdings.
Hibbert employs a stock-by-stock investment approach.
“We are happy to be overweight financials but there was no point at which we decided we needed to be tactically overweight. We just found some very good investment ideas, put those in the funds and it became an overweight,” he says.
Hibbert acknowledges many commentators believe the rally was due to leading indicators showing better news.
However, he says: “I think the reality was the bank balance sheets started to become materially less risky than people thought they were, which triggered a fundamental based market rally from the March low. This has been an area we have been all over this year.”
Although the fund has been overweight in financials for more than six months, it has changed from a stock perspective.
“This will continue to change over time as we find some investments are reaching maturity, and some that were distressed are becoming less distressed, and we can make investment cases,” Hibbert says.
He expects to remain overweight in financials and industrials cyclicals for a “considerable period in the future.”
The manager says recent fund gains have been generated by a combination of stock selection and sector allocation.
Financials have led the way, with key positions in banks and insurance companies contributing significantly.
In particular, high-conviction positions in the banks KBC and Unicredit contributed strong outperformance.
Other strong performers included life insurers Irish Life & Permanent, along with non-life insurer Swiss Re.
Hibbert remains positive on the outlook for financials and despite recent rallies he continues to see significant upside to current share prices.
Hibbert has also retained overweight positions in recovery stocks within industrials and underweight positions in defensive sectors, such as telecoms, healthcare, utilities and oil and gas.
Looking forward, he expects the remainder of 2009 will see gains in industrial names which will benefit from an uptick in production as inventory levels remain depressed.
He says: “We believe there is still cash on the sidelines and a number of investors are yet to return to the equity markets.”
“We would expect market returns to be driven by stock-specific factors over the coming months and we are focusing our fundamental research on companies where there is a likelihood of earnings upgrades.”
The manager is confident the fund will continue to outperform the sector.
“If we go back to first principles internally as a team our job is to build a fund with higher average conviction levels than our competitors do.
“Our portfolio has a great deal of ammunition in it. When I say ammunition I am thinking about the numbers of holdings that still have a significant amount of upside before they reach price targets,” he says.
