M&G UK Growth split into core and satellite portfolios, with the latter picked to reflect market themes such as commodities and self-help stories
Simon Murphy celebrated three years at the helm of M&G's UK Growth fund this month, in a tenure that has seen the fund return 72.4% against the FTSE All Share's 64.4%.
The manager attributes the fund's success to his pragmatic investment approach. Holdings are split into so-called core and satellite stocks, the latter picked to reflect contemporary market themes and held for a six to 12-month period. Core stocks are high-quality companies that Murphy predicts will perform well over a three to five-year period.
Murphy aims to keep the fund diversified so that no sectors are particularly favoured across the 60 to 80 stocks in the portfolio. However, he is currently focusing on commodity stocks as a theme within his satellite holdings, including platinum producer Lonmin, one of the biggest global firms of its kind, gold producer Peter Hambro Mining, and First Quantum Minerals.
In a separate theme, the manager has recently been buying into companies that have demonstrated a self-help element, that is, those that are undergoing internal restructuring. Clothing retailer Next is one example.
Murphy said: "Next had lost its way in terms of fashion but it has since undergone a correction and has stopped its store expansion programme, focusing instead on refurbishing its existing stores. It has also developed a better clothing range, and like-for-like sales are now improving."
Food retailer WM Morrison is another of Murphy's success stories. He said: "We bought into Morrison's early in its recovery period last year when shares were at around £2. The market was pessimistic at the time, but now shares are up to £3.20 and everyone loves it."
On the downside, if Murphy feels core stocks are underperforming, he will revisit the initial assumptions that were made to see if they are still applicable. If he still feels confident in the stock's long-term prospects, he will buy more rather than sell out of it, in the conviction that performance will improve.
With satellite stocks, Murphy takes a different approach. He said: "I am not very patient with satellite stocks and will cut them quickly if they underperform. With car hire firm Avis Europe, for example, we expected strong European demand, which did happen, and due to widespread industry consolidation we also expected to see more competitive pricing, which did not."
The majority of the fund's holdings, around 75%, are FTSE 100 stocks, with the remaining 25% invested in mid caps and 5% in small caps. This bias is due to the fact that large caps are Murphy's area of expertise. The fund's small caps tend to be the best ideas taken from his colleagues at M&G. "We are starting to see more bid speculation and venture capital, so opportunities are good for the bigger cap stocks," he added.
Murphy describes his investment approach as cautiously optimistic, and feels that this caution enabled him to defend the fund against the worst of the recent equity market jitters. He felt it was inevitable global growth would slow, as the last four years boasted the strongest growth since the 1990s.
He sold out of industrial engineering firms, which tend to be very exposed to global market fluctuations, in preparation for the slowdown.
He has also been underweight the oil sector for the past six months, as part of a move away from cyclical stocks. The manager is looking more towards larger FTSE 100 companies that have the potential to grow irrespective of the economic environment.
He said: "In general, I think equity valuations, although not screamingly cheap, are reasonable. We may start to see an increase in the number of profit warnings, but I am fairly optimistic about equities. I think they are still attractive relative to bonds and property. There are pockets of value in the UK market, but managers need to be selective."