Formed to much fanfare by chief executive officer Rupert Tyer and ex-Cazenove fund managers Tim Russell and Chris Rice in 2013, their real coup was hiring excolleague Julie Dean from Schroders last year.
“The train of thought that you have as a fund manager stays with you – it was also right to think this way as we structured the fund we launched at the end of June. It was clear we needed a defensive portfolio from the start.”
Towards the end of cycles, Dean argues, investors should have more in defensive businesses in which the volatility of cashflows are lower and earnings are more predictable.
At the time of going to press, the 46-stock portfolio was split by 25 stocks in the FTSE 100, 18 in the FTSE 250 and three small-cap holdings.
It rankles Dean that some investors may still regard her as a manager with a mid-cap focus. She says: “People’s perceptions of you are perhaps a function of when they first looked at your portfolio.
“In 2007 and 2008, when I ran the Cazenove UK Opportunities Fund, I had 35 stocks and was 99% invested in the FTSE 100, and we had no banks and no mining. By March 2009, we had a very different-looking portfolio with substantially more in the FTSE 250 and in small cap, and we did then have some banks and mining stocks.
“In this industry, you gain a lot of attention when you are performing well and have a lot of assets under management, but the point about the Business Cycle and how we manage assetsin that process means we are pragmatic and flexible about the shape of the portfolios we have.”
Current defensive stocks in the portfolio include Reed, Compass, Babcock, Pearson, Serco, Smith & Nephew and Capita.
Recognising that Business Cycle investing is not about being contrarian for the sake of it, Dean aims to judge what is likely to happen over the next three to nine months, asking what current share prices are discounting.
Fund management, she sums up, is a very simple business that is difficult to do well consistently.
“I strongly believe a concentrated approach is more likely to give you superior returns over the medium term – there is absolutely no point being close to the benchmark or doing what everybody else is doing because, as John Templeton said, you’ll get the same returns as everybody else.”
Dean adds: “Sometimes fund management can be a little bit lonely if you are taking a view that isn’t mainstream.
We are usually a bit early. “Investors can be fixated by what is working now and, as a result, miss some higher return opportunities because they perceive the risks to be high, but in fact the risks are often lowest and the returns highest when people are fearful and vice versa when they are complacent.”
Mining for opportunities
Since June, Dean has started buying mining shares, although the fund is still underweight this sector. This includes BHP Billiton, Anglo American, Ophir Energy and Tullow Oil.
She explains: “We felt there was some value beginning to build in this part of the market with mining businesses having been in a bear market for five years. They are the only part of this bull market that is anti-correlated with it.
“What quantitative easing has done in this cycle is to push up all asset prices – equities, bonds, property – and the only thing that hasn’t gone up is commodities. It seems to us that commodity prices cannot keep going down without thinking that growth prospects elsewhere are overstated.”
