JO Hambro Capital Management's John Wood uses the unconstrained approach he developed at Newton on JO Hambro UK Opportunities
JO Hambro Capital Management launched its third onshore Oeic vehicle in November 2005 in the form of John Wood's UK Opportunities fund.
Wood's fund has made bid to bid returns of 9% in the year to 19 March 2007, against the UK All Companies sector average of 7.1%, according to data from Morningstar.
Investing in between 30 and 40 equally weighted names, the portfolio also has the ability to hold up to 10% in overseas stocks though Wood said this facility is used to complement UK ideas rather than simply gain foreign exposure.
JO Hambro UK Opportunities is run with an unconstrained approach that does not follow any particular index.
Wood said he enjoys the added responsibility of having 100% of the portfolio available to exploit his best ideas. Benchmarked against the FTSE All Share Total Return Index, he uses some of the same stocks and a similar investment approach to that which brought him success in his previous job, as manager of Newton's UK Opportunities vehicle.
A personal investment approach is characteristic of the fund. "I conduct in-depth research and am prepared to take a contrarian approach to the markets," he said.
"The portfolio invests across all market caps, with an emphasis on companies with strong business characteristics whose valuations are attractive in an absolute sense."
"My investment universe is predominantly the FTSE 350, though I am happy to look for stocks that have the potential to climb the capitalisation scale. The kind of company I like to invest in is where I have 10% downside and 40% to 50% upside on a two to three-year view.
"In terms of valuation, every stock must be viewed on an absolute rather than relative basis because there is no way of being certain the company is on an accurate valuation. I believe good deals are done at the bottom and bad deals are done at the top when the management tries to disguise problems or profit warnings."
The fund is currently 53% invested in FTSE 100 stocks with the remainder in smaller companies. Wood does not target sectors with overweight positions a consequence of stock selection. "For instance, my 24.79% overweight in industrials is in part due to defence technology, electricals, and business process outsourcing," he added.
The two biggest names in his top-10 list are Prudential, which he has held since inception, and Smith & Nephew - both representing 3.6% of the portfolio.
Instead of retaining the losers and taking profits in the winners, Wood runs with the winners and cuts the losers.
"I tend to sell out of stocks immediately if I no longer find them attractive on a fundamental valuation basis," he said. "I believe the sell side is the most important underestimated skill in fund management. I sell if there is a change in the management strategy, product withdrawal or acquisitions. However, I take a long-term approach to investments, the typical holding period will be between two and four years.
"If you are running an index-constrained approach, you are required to own stocks for benchmark or tracking error risk even though you may think they are overvalued.
"I aim to achieve above-average risk adjusted equity returns by investing long term in quality undervalued companies with no regard to artificial index constraints and I have no portfolio fillers.
"Disregarding the benchmark allows me to take a true conviction approach to investing."
Wood said his biggest mistake was during the tech boom, investing in TMT through communications company Energis.
"I failed to adhere to the valuation models and the company subsequently went bankrupt," he said. "The lesson learnt was to cut losses at the earliest opportunity, take money and reinvest it elsewhere."
Overall, he has sold some financial holdings in recent months because of the top-down concern about opaque risks.
"At ICAP, financial risk to the share price is being compounded by execution risk within the company as it reorientates its growth strategy," he added.