While the two products already show a large degree of overlap, in advance of any move to integrate the two funds, for better continuity of investment performance Tillett would be required to bring down any deviation between the two portfolios, effectively running them “in tandem” to avoid any potential client detriment.
Both funds sit in the IMA UK All Companies sector and while the UK Unconstrained fund is only £12m in size, it has outperformed the £52m UK Growth fund by a significant margin. Unconstrained has a 20% cash limit while UK Growth has 10%.
According to FE data over three years, the unconstrained vehicle has returned 46.6% against the growth fund’s 30%. The IMA sector delivered 32.7% over the same period.
Minimal disruption
The group is currently engaged in discussions to agree the best way forward – whether to bring the smaller fund into the larger or vice versa, to ensure minimal disruption to unitholders. Client permission will be sought in advance of any changes, at the appropriate time yet AGI has set no firm timeframe to effect these changes.
Tillett, seen as something of a rising star at the group, took over from Jeremy Thomas as UK Unconstrained lead manager about a year ago having been co-manager since July 2010.
He runs the fund with a UK small and mid-cap bias, and while he takes advantage of the 20% non-UK permissions, said this tends to be for stock-specific opportunities rather than for reasons of liquidity, as per some larger funds, more constrained by benchmarks and yield targets.
Tillett said his stock selection falls into three buckets – franchise, classic value and special situations – and he seeks an ‘investment edge’. He applies this to understanding why market mis-pricings have occurred – usually when there is some disconnect between the fundamentals and the expectations – adding that ‘edge’ can be either behavioural or analytical.
“I look for common historical patterns of when mis-pricing might have occurred, and then use our research process to either confirm or reject that idea. The stock market is generally pretty efficient most of the time.”
While not AUM is nowhere near target at the moment, Tillett said he would look to cap the fund once its assets grew beyond around £250m, although stemming of flows would need to be agreed between him, AGI and shareholders, whose agendas differ slightly.
Holding an average of 30 stocks for reasons of conviction and familiarity capability, he said a smaller fund can better take advantage of market movement.
Mothercare, Baron de Ley strong stock stories
He cites Mothercare as a recent example of a ‘franchised’ holding that featured in the portfolio a couple of years ago and then saw a significant downward movement in share price – at which point he added to the position – before a trading statement this week saw the share price correct by 15-20%.
Elsewhere he cited Ashmore as an example of “how an asset management business should be run”, praising management for their remuneration structure, long-term performance, industry-leading profit margins and a solid balance sheet boasting a cash surplus.
Spanish wine producer Baron de Ley was another stock which exemplified his ‘franchise’ book.
With around a 3% position in the Rioja winery, he said the manager did not pay out dividends but preferred buyback, in which he chose not to participate.
With a low cost of grapes, given the Spanish economy and local demand but international demand still high – growing at low single digits and now comprising around 50% of revenue – the business margin grew significantly, posting a 40% EBIDTA.
Tillett said he listened to the macro headwinds in terms of which sectors to avoid rather than hold.
Improved UK data suggested the recovery was starting but he is cautious over its sustainability, citing the PPI fallout as a potential headwind, with its true impact yet to unwind, and the future of manufacturing production still in doubt.
On the option to merge funds, an AGI spokesperson added: "No decision has been made to merge our UK Growth and UK Unconstrained funds, nor is a decision close. Both funds share a successful fund manager, are enjoying strong performance and overlap to some extent in their investment objectives. We always look to ensure we have exactly the right balance of products and strategies to meet our clients’ need, but any consolidation of our funds would only happen after regulatory approval and significant consultation with investors."
