BlackRock UK Income manager discusses how defensive positioning post-Lehman collapse helped land 2010 IW Fund Manager of the Year Award
Nick McLeod-Clarke and Adam Avigdori were named UK Equity Income Manager of the Year for their BlackRock UK Income fund at Investment Week’s 2010 Fund Manager of the Year Awards earlier this month.
Since assuming control of the fund in February 2007, McLeod-Clarke’s flexible and high conviction approach has helped the fund achieve top-quartile performance.
According to Morningstar, the £417m fund is ranked sixth out of 90 funds in the IMA UK Equity Income sector over three years to 12 July, down 4.4% compared to a sector average decline of 17.2%. Over one year the fund is ranked 26th out of 101 vehicles, up 28% compared to a sector average of 25.4%.
Adam Avigdori has been working with McLeod-Clarke as co-manager since November 2009. He joined BlackRock in 2006 following the group’s merger with Merrill Lynch Investment Managers.
Avigdori is also a BlackRock director and covers the real estate and construction sectors. The duo is backed by BlackRock’s 20-strong UK equity team.
What have been the key drivers of fund outperformance?
If we go back post-Lehmans, it was necessary to be defensive and clearly we were able to do this. In early March 2009 it was necessary to recognise things were changing. The market had over-discounted defensive shares and there was a recovery on the way. So we switched and became much more pro-cyclical. We ran this position and added to it with some more growth-oriented shares and as a general theme we continue to run this broad position. So calling those two macro turning points has been quite helpful, and also having the patience to persist with
those calls.
As we moved into this year we recognised we needed to take some of this risk off the table. We also recognised the influence of the growth in China and other emerging economies would – and will – continue to play a very strong role on the UK stock market, because the UK stockmarket is a very international market.
A second theme, and one where we would expect to get most of our performance from, is in our stock selection. In 2009 the fund was approximately 1,000 basis points ahead of the FTSE All Share index, and we had a contribution from a very large number of individual shares. I think about 11 or 12 shares contributed more than 50 basis points of relative outperformance.
We see stock selection and stockpicking over time as being the key contributor to performance in this fund.
What significant changes have you made to the portfolio in recent months?
In recent months we have been looking for what we call ‘forgotten cyclicals’. These are ones where maybe the market has thought about them as being later cycle businesses, where historically they would have been. But because of the influence of places like China, they are actually behaving slightly differently.
Our research has pointed out one or two opportunities where we have been able to do this and make investments. In fact one of those companies, United Business Media (UBM) – which appears in our top ten holdings – is an investment we made in the first quarter of this year.
To expand further on what we mean by forgotten cyclicals, these are businesses where we believe the rebound in the top line would we be stronger than expected.
In the case of UBM we think it is predominantly due to a structural change in what is going on in their industries. UBM has a number of businesses but one of the largest businesses in it is the conference business. What they do is organise conferences for both corporates and government, but predominantly corporates around the world. The number of conferences in emerging markets is obviously increasing as both Western companies look to drive their own revenues in those countries, and also the corporates within those countries look to drive domestic consumer spend as well. UBM is a very good example of a business which has come from a Western focus but now has a small but rapidly growing emerging market business. It is also not particularly expensive. It is on an approximately 10 or 11 times multiple this year, and we expect there to be good earnings growth and good cash generation. It has a premium level of yield, both a capital and income element and also ticks the forgotten cyclical box.
How will the fund develop in the next year?
I think the market is just going through a bit of an adjustment process. If we think about the issues which have been highlighted in Europe, and most notably by Greece, those issues are settling down.
Countries are having to make adjustments and the effect of this is to bring GDP forecasts back a little bit, and the markets are just absorbing this information.
We have taken a bit of risk off the table which seems to be working. I think this process has probably got a little bit further to run but is coming to an end.
The market to us offers very good value, but our broad thought that global growth is healthy and the UK stock market is a very good way to play this still holds true. So we are very enthusiastic about the prospects for most of the rest of this year and going into 2011.
We feel we have got a lot of very strong ideas in the portfolio, and we are very excited about the prospects of the companies in which we are choosing to invest.
