Aegon’s high conviction UK Opportunities portfolio has outperformed UK All Companies sector since launch with focus on fundamental analysis
Aegon UK Opportunities was launched three years ago as a high conviction portfolio to group the best ideas selected by the UK equity team.
Since then, the £40.8m fund has returned top-quartile figures and has outperformed the UK All Companies sector by 12.45% since launch, according to Morningstar.
It was launched with Audrey Ryan as lead manager after she produced successful numbers on the Ethical Equity fund. Peter Shaw supported until he was made co-manager in July.
Team and process
There are 11 members of the UK equity team, including Ryan and Shaw, and Peter Adams, manager of the UK Equity fund, who each have sector responsibilities. This team has been in place unchanged since April 2004. Together they research and evaluate stocks using the same investment process regardless of market condition.
The investment philosophy is based on the belief share prices are driven by fundamentals, valuations and technicals.
Fundamental analysis includes assessing the macro-economic conditions, how the company operates within its own industry, examining company balance sheets, financials and management. Ultimately, the team is looking for stocks where these fundamentals will improve.
Valuations are looked at in terms of re-rating opportunities, price-to-earnings ratios and yields, while the technical factor of the research involves looking at earnings and price momentum and past deals done by the directors of the firm.
Shaw says: “At the moment, we are placing emphasis upon fundamentals and technicals for this point in the cycle. We believe cash-funded M&A activity and the scarcity of earnings growth suggest valuations in the market can widen.”
Research
UK Opportunities holds between 45 and 55 of the best ideas uncovered by the team’s research.
The fund is an all-cap vehicle with the ability to move up and down the cap spectrum, including the Aim market. Currently, it is overweight mid caps and underweight large caps with exposure to smaller companies and Aim.
“One of the key things about our team is our small- and mid-cap specialists are fully integrated within the UK equity team.”
There is no set time horizon to buy or sell stocks, and some have been in the portfolio since launch, while others are only held for a short time. However, there are five key selling triggers that will cause the managers to re-evaluate a position.
If the reason for owning a company has changed, for example, if they turn negative on a particular area of the market, they will want to assess the stocks they hold in this sector. If new information emerges, this would also cause them to re-evaluate a company.
Also, if there is a change in the valuation, such as a re-rating or de-rating, or if earnings have progressed, selling might be a consideration, while they also weigh up how the stock has contributed to overall fund performance.
Current themes
Shaw says the strategy on the fund has been steady recently with no major changes. One of the themes they have been keen to follow is international earnings growth, particularly in the emerging markets. They aim to benefit from this with overweight positions in mining, resources and oil equipment.
Another theme that has been followed for some time is M&A activity, and a number of the top-performing stocks in the portfolio have been subject to bid activity. SSL International, a global consumer company with brands such as Durex and Scholl on its books, was recently bid for by Reckitt Benckiser, while News Corp made a bid for another of the portfolio’s holdings, British Sky Broadcasting.
Shaw and Ryan also prefer companies involved in business spending as opposed to consumer or public sector spending, due to the recent emergency Budget cuts and strains on household expenditure. They hold BA and Millennium & Copthorne Hotels to play this theme.
“We also have a preference for growth stocks over earlier cycle stocks and are cautious on the UK domestic economy. Therefore, we are underweight general retailers and consumer goods,” adds Shaw.
Bank aversion
The duo are maintaining their underweight financials stance, driven by a dislike for banks. However, most recently they have moved into RBS, which is now one of the key overweight positions on the fund.
“We believe RBS to be one of the cheapest UK domestic banks, so the valuation is attractive. We think it has a strong management team, which has been conservative in setting targets and we also think it will deliver on its 2011 forecasts.”
Stocks that have dragged on performance recently include a few miners – Aquarius Platinum, which has had problems with mines in South Africa, and First Quantum Minerals. Both positions have been reduced but remain in the fund.
Chemring, a supplier to the military, has been “dogged by a lack of government spending”, says Shaw, and therefore has not performed as they had anticipated, while being underweight the mega-cap stock Vodafone has also been costly to performance.
Double-dip unlikely
Shaw says the UK equity team “does not subscribe to the double-dip theory”. He adds:
“Corporate balance sheets are strong, inventory-to-sales ratios are low and household savings are a bit more robust. We believe the double-dip scenario to be unlikely.”
He forecasts gentle growth, continued relatively low interest rates, and suggests M&A activity will persist in the UK.
