the manager of dresdner UK growth and mid cap portfolios shuns biotechs in favour of health and retail stocks
Trevor Green has stepped out from the shadows of his previous colleague Bill Mott at Credit Suisse but is faced with turning around one of the worst-performing funds in the UK All Companies sector, the £173.1m Dresdner RCM UK Growth Oeic.
Green, who joined Dresdner in February this year, has now restructured the portfolio, focusing on fundamentals and selling out of the 'hope' stocks in which the fund was heavily weighted.
The fund was ranked 299 out of 316 and gave a negative return of 8.3% over the three months to 10 June 2002 compared with a sector average of -4.2% on a bid-to-bid basis.
Over the year to date the fund performed -28.7% against a sector average of -18.6%, on an offer-to-bid basis and ranked 282 out of 291. Green, who also manages the Dresdner UK Mid Cap fund, said investors need to give him time for his stock picks to come through. 'Over time things will come through, the mid cap fund has already turned around and hopefully we will start to see the growth fund do the same,' he said.
Did you implement significant changes when you took over the UK Growth fund?
We've done virtually all the changes we have wanted to but it has taken a couple of months.
The market going steadily down hasn't helped. One of the key things was the fund was very aggressively orientated, for example in terms of a very high weighting in biotechs. We had to move away from what I call hope stocks to more reality stocks and get back to those companies with track records and real earnings.
There were also some sector anomalies in terms of zero weightings in quite large sectors. There was no weighting in food producing, healthcare, beverages and virtually no general retailing. We've kept the beverage weighting light, food producing has moved from nothing up to 3%, healthcare has gone overweight to the benchmark and general retail is still underweight but not as much as it was.
Have you made other structural changes?
The growth fund had about 45 stocks when I arrived but I feel more comfortable with around 65 so the number of holdings went up. In terms of the weighting between FTSE and mid-cap that didn't change much. The fund was already overweight mid-cap with about 20% of the fund in those stocks, which is consistent with what I did at Credit Suisse.
You mentioned altering sector positions. Could you expand on that?
I moved the oil sector to quite heavily overweight to reflect the earnings momentum there. The fund was overweight pharmaceuticals mainly because of the biotech weighting, which has been removed, so we have reduced the pharmaceutical weighting and increased the health care weighting.
We had no weighting in BT and we have now gone overweight. We reduced a heavy weighting in MM 02 and Vodafone to neutral.
Finally in banks we have gone neutral weighting on the sector, but very underweight Far Eastern banks, we have no exposure to Standard Chartered and are underweight HSBC so to keep neutral on the sector we are overweight UK constituents, in particular RBS.
Where are you looking for and finding growth opportunities?
I am looking at companies in any sector that can grow earnings faster than inflation or the market. Hopefully those companies reinvest the growing earnings back into the business in order to compound the growth rate of the company.
Pricing power is paramount in a low inflation, low growth market.
Rather than look at utilities as defensive plays with high yields, I look at them rather as companies in monopolistic situations. I like the pure UK ones like Scottish and Southern ' that's a big weighting in the fund. It's not doing big expansion like Scottish Power in the US, it is pure utility with good pricing power and a conservative business model.
Another example is Rexam, packaging and bottling, there are very few market participants, they've already got one pricing increase through at the beginning of this year and potentially we'll get another this year.
What is the investment philosophy of the fund?
My philosophy is a growth orientated, bottom-up approach which leads to stock selection. There is so much inconsistency coming out in terms of economic indicators at the moment that you have to go with what companies are saying at their level. It is very much earnings momentum, which is rewarding those companies which have delivered in the past.
What is your view on telecoms and technology stocks?
Technology is such a small part of the All-Share, just under 1% and my weighting is bang on 1%. Unfortunately half of it is played through In Technology, an illiquid company I inherited and can't get out of. I like Torex, which supplies software to the healthcare sector, so one's not involved in the woes of the state of the economies or state of telecoms budgets.
Is a market bounce on the horizon?
My concern on the market is that the speed with which the market has fallen makes me feel we have to consolidate at a level before we move back up. I'm not a believer in equity markets being in a quick V shape down and back up again.
In terms of valuation in the UK market I think it's fair value now but markets have a great ability to over-react on the positive then the negative so I see us staying in the doldrums.
Is their much crossover between the UK Growth and mid cap funds?
Overweighted mid caps are generally in the growth fund. The growth fund is looking to add value outside the FTSE 100 when it puts mid 250 stocks in. But any mid 250 stock held in the growth fund is also held in the mid cap fund.
What small caps are you currently holding?
The small cap weighting is 4%-5% at the moment. Half of that is illiquid things we are still trying to get out of. Also there are still plenty of good opportunities in mid caps ' I don't feel I have to go down to small caps.
What in your view will drive the market?
For share prices to really move you need a catalyst. The best catalysts are those companies doing corporate activities, strategy developments, etc those are the ones you want to see.
It is the self-help approach, when the market's going nowhere the companies which come in and say we are doing something, not those that just come in, shrug their shoulders and say 'the weather's bad we won't be able to do anything.' That's just not good enough.