Sanford Deland’s Andrew Vaughan has added three names to the Free Spirit portfolio during the coronavirus-led market sell off as the fund’s cash position neared the 20% limit in place for Oeics.
Inflows in January and February, coupled with Vaughan’s reluctance to pay high prices for assets, resulted in the fund’s cash position hitting 19.7% at the end of February. According to Investment Association sector rules, funds are not permitted to hold more than 20% in cash.
Vaughan (pictured) has subsequently reduced the cash position to 17.5%, as at 31 March, after selling two positions and adding three to the portfolio. The changes are a mark of Vaughan stamping his authority on the portfolio since he took over the fund on 1 July 2019 from Rosemary Banyard.
The need for liquidity in volatile Covid-19-driven markets was part of the reason, but Vaughan told Portfolio Adviser he favours holding a high cash buffer regardless of market conditions. He had let the cash position build up to near 20% from its low of 6% last summer.
“There’s going to be quite a long drawn out challenge for all businesses and I also always prioritise that the fund has good liquidity,” he said. “I want to be able to meet any redemptions without having to sell anything.”
He added: “I hope that events are showing that actually there’s very good reasons for it.”
Names sold since Covid-19 hit markets
On the first trading day in March Vaughan sold SSP Group, which operates food outlets at railway stations and airports, when the likely effect of the coronavirus on travel restrictions became clearer.
He said the timing was fortunate given he sold the stock at around £5 a share before it dropped to £1.50, leading the firm to carry out a £216m equity raise and new bank financing. The stock had been one of the five worst performers in the portfolio in 2019, returning -22%.
“It’s an example, I hope, of responding quickly if the world has changed and I have to recognise that,” he said.
More recently, at the end of March, Vaughan sold S&U which provides hire purchase finance for buyers of used cars and bridging finance for property purchases. He said the company had been affected by the spread of Covid-19, given areas such as auto finance have been hard hit as consumers’ ability to repay loans has been hampered, but disposing of the stock was also partly a portfolio management exercise because it had been the smallest holding in the fund.
“It’s also by its very nature a leveraged business, there’s a lot of financial gearing,” he added. “That sort of balance sheet is quite unusual in Free Spirit because I tend to steer away from leverage and tend to favour cash-rich companies.”
Vaughan adds stocks from across the market-cap spectrum
Vaughan added Intertek, YouGov and Elecosoft to the portfolio as markets began to sell off in February.
Intertek is a FTSE 100 listed company with a 130-year heritage that provides assurance, testing, inspection and certification of products, operations and supply chains to businesses globally.
“That’s the kind of business that it certainly will be suffering in the short run,” said Vaughan. “But it’s been around so long and it’s so integral to all businesses.”
Aim-listed YouGov specialises in public surveys and consumer behaviour data. Vaughan likes the fact the company applies data science to help companies better target their advertising spend.
“It’s been a huge beneficiary of GDPR legislation because it has a panel of consumers who have expressly given permission for their data to be used. Anything that comes out of that panel can be used for commercial purposes.
“It’s a completely debt free business and because it’s data based, it doesn’t need physical people on the ground to make it work. And it can scale without having to add headcount.”
Elecosoft produces specialist software for the construction industry which Vaughan said is sticky because it becomes embedded in companies’ workflow and is difficult to switch out of. Companies continue to use the product despite the volatile backdrop, he added.
Stocks to benefit from the Covid-19 outbreak
Vaughan also highlighted two long-term holdings that have benefited from the Covid-19 outbreak. One is Tristel which specialises in disinfection and decontamination. “Obviously investors have flocked to it because of the industry it’s in. And it seems likely hospitals are going to be spending more money on disinfection in the future.”
Tristel was one of the fund’s top five performers throughout last year with a return of 47%.
The second is EKS Diagnostics which has picked up some contract manufacturing of components for Covid-19 testing kits. “The company has a manufacturing facility in Germany that has obtained special approval from the German state to keep operating when other factories are locked down,” said Vaughan.
Fund performance since Banyard’s departure
At the fund’s February year end, 16.1% of the portfolio was exposed to FTSE 100 companies, 23.5% to FTSE 250, 40.8% to FTSE Small Cap, Fledgling and Aim companies and 19.7% was in cash.
Free Spirit experienced outflows following Banyard’s departure, going from £15m in April 2019 to a low of £6m on 11 December 2019. It now has £6.3m in AUM, according to FE Fundinfo.
Performance of Free Spirit versus FTSE All Share and sector
| 1m | 3m | 6m | 1yr | 3yr | |
| CFP SDL Free Spirit Acc GBP in GB | -10.20 | -16.35 | -2.66 | -1.36 | 22.06 |
| FTSE All Share TR in GB | -12.83 | -24.65 | -18.58 | -19.74 | -12.04 |
| IA UK All Companies TR in GB | -15.02 | -26.47 | -18.99 | -19.88 | -13.51 |
Source: FE Fundinfo
Since Vaughan has managed the fund it has delivered a total return of -6.6%, compared with the IA UK All Companies sector’s -21.4% and the FTSE All Share’s -21.1%, according to FE Fundinfo. It is top quartile over one and three years.
Last month Portfolio Adviser revealed Banyard had joined Downing Fund Managers to launch an unconstrained all-cap equity fund.
