Cazenove manager takes sole charge of group’s Absolute UK Dynamic and Absolute Return funds after partner Neil Pegrum moves to Soros
Last week Cazenove saw the departure of star manager Neil Pegrum, who left for Soros Fund Management after five years with the group. Pegrum and his co-manager Paul Marriage ran more than £500m of assets together, and Marriage has now taken on sole responsibility for Cazenove’s Absolute UK Dynamic fund and Cayman-domiciled Cazenove UK Dynamic Absolute Return fund.
Marriage has been lead manager on the firm’s £30m UK Smaller Companies fund since 2006. Under his tenure, the fund has consistently generated top-quartile returns.
It is ranked seventh out of 46 vehicles in the IMA UK Smaller Companies sector over five years to 19 April, up 47.5% compared to an average increase of 24,7%, according to Morningstar.
Over three years it is ranked 11th out of 54, down 9.6% compared to a sector decline of 17.4%. On a one-year view the fund is ranked 7th out of 61 vehicles, up 58.9% against an average gain of 47.7%.
You have taken over sole responsibility for the long/short funds. How will this affect your day-to-day job?
It will not affect it enormously. We have been running circa £550m across our long/short and long-only products together over the last five years. During that time I have worked across the long/short and my small-cap fund, so in terms of the amount of time I spend on those it is going to be broadly the same.
Clearly, in the next few weeks there will be a bit more to do on the long/short funds. That does not mean things will be changing in terms of what we hold because I am very happy with this and have been involved in building that portfolio. It is more in terms of dealing with clients, which will take a bit more of my time. But I do not envisage a massive change in the way I do things or my time.
Someone made an interesting comment about my small-cap fund six or seven months ago. They said: ‘Why do you spend more than eight minutes an hour on your small-cap fund because of its size relative to what else you do?’ I replied my small-cap fund generates lots of ideas for the long/short and my small-cap fund might only be £30m but it has scope to be a lot bigger. I run it as if it is a much bigger fund.
I do not see a big change in the short term. It is a big personal change for me in terms of having worked with Neil Pegrum for a long time, but in terms of what I do it is not a big change.
Will you look to change the portfolios in any way?
I will not change them. Obviously we will have to adjust them for any cashflows we get, but beyond this, it will be the same stocks doing the sort of things I want to carry on doing.
What has been the feedback from investors so far?
Investors have been very positive. Most people have met me over the year on the long/short product, and I think most of them are pretty pleased with what they have seen from the long/short and the long product over the years.
There are not many clients who will not have met me. Most people are disappointed to see a great manager like Neil leave us, but are pleased we have been working together and there is a smooth handover.
What is your investment strategy?
My strategy has always been relatively simple in that I pick stocks and I do not pick too many of them.
On the UK Smaller Companies fund I tend to pick 40 stocks. I do not pick sectors and I look for companies to fulfill two criteria. The majority of the portfolio will be those companies I think exhibit long-term small-cap growth potential. I generally describe these as P3M stock. These are companies that have a differentiated product. They have market leadership of their niche, the ability to generate cash and grow their margin, plus management who own the stock and understand shareholder value.
For me, this encapsulates a lot of where we can make money in the UK small-cap space. There are a lot of top-quality small and medium-sized businesses quoted in the UK, often with leadership positions in small global niches. These are businesses that generally grow earnings strongly, have good balance sheets and allow you to benefit from M&A because if the market does not realise their value, a competitor or consolidator will realise that value. This theme represents around 70% of the portfolio.
The other 30% is what I call value opportunities. These are companies with great opportunities for us to invest because the share price is wrong at any one time. We can see value from trading in those shares by buying them when they are unloved, selling them when they become more loved, making some money in between.
These are generally companies the market has seriously fallen out of love with. But we know the market is not completely efficient, particularly in small caps. When the market falls out of love with something it often de-rates it to an unrealistically low level.
We made a lot of money with Trinity Mirror last year on the basis that when we saw the company in Q1 2009, we knew no-one was buying papers. It had too much debt and a big pension deficit. But the management knew this too. They knew there was too much debt so they were paying the debt down. They knew the pension was a mess so they were in talks with the trustees. But at least the rates of decline of newspaper sales had stabilised. So for us it was a value opportunity. It was trading on one and a half times earnings when we bought it and we sold a reasonable chunk of the position on high single multiples.
What are the reasons for such strong performance of the UK Smaller Companies fund since you took over?
Good stockpicking. I am a stockpicking fund manager and I pick the right stocks that perform well. I have a concentrated portfolio – I only focus on 40 stocks; I do not get distracted by a long tail.
My starting position is always going to be over 1%. If I like a stock and it is better than the 40th stock in my portfolio, it goes in and number 40 goes out. When it goes in, it goes in at 1%. If it doubles it is immediately making a contribution. I do not do anything esoteric – no oil and gas or mining. I take sensible-sized positions and put it in companies with real potential
Performance on Absolute UK Dynamic has been flat since launch. Are you happy with this record for an absolute return fund?
It is disappointing but it is important to remember in the first three months of the fund’s life we were in the investment phase. We were very carefully building this fund up to make sure we were buying stocks at the right prices. We could have chased short-term performance to get us off to a great start and it would have left us with a very imbalanced portfolio.
What shifts have you made to holdings in recent months?
Some of our relatively dull long-term positions in both funds have performed a bit better. They had a very dull start to the year when some of the more aggressive cyclical global growth stocks – some of which we think are too expensive and we are short on – had a very good time.
If you look at our portfolio positioning, it has always been long FTSE 100, long FTSE small cap with a big FTSE small-cap bias, and short FTSE 250. If you look at what has performed this year, the FTSE 250 has been amazing, the small caps have underperformed a lot and the FTSE 100 has been a bit dull.
This has been the wrong positioning for this year as a fund, and now we are beginning to see this come through. We have not had a lot of portfolio changes. We have had some good IPOs, which have helped. One or two of our shorts have performed a bit better as well. It is evolution – I am very comfortable with all the stocks I own in both portfolios.
