F&C fund launch turns attention to stockpicking

Phil Doel, newly-joined fund manager at Foreign & Colonial Asset Management, says expected lower equity returns over the next 20 years will be a major driver of stockpicking strategies again coming to the fore in asset management.

Explaining the thinking behind F&C's UK Opportunities fund launch Doel suggests stockpicking is likely to see renewed momentum over the coming years, as the ability to generate sufficient returns by closely following an index of stocks will not be enough in a period where equities are expected to return 5.3% on average.

Doel says this makes stockpicking “critical”, compared with recent focus on asset allocation.

F&C’s calculations suggest equity returned on average 9.4% in the 1984-2004 period – even including the worst bear market since the mid-1970s.

Although admitting a strategy of holding a concentrated portfolio of 25 stocks at any time - alongside cash of 1% to 2% - might not be to everybody’s tastes, Doel says for those seeking exposure to equities issues of risk and asset allocation will take on a different meaning over coming years.

Doel believes focused funds will have to remain relatively small in terms of funds under management (FUM) – the F&C UK Opportunities fund is likely to close to additional investors when it reaches some £250m to £300m in FUM – but considering the flexibility within such funds they should still prove to be a popular addition to the mix, he suggests.

“We can invest in FTSE, FTSE 250 and Aim stocks. It doesn’t matter if most of their business is overseas – what is BP these days anyway? – or if they are actually foreign companies, because as long as they are listed here we can take positions. We will also look at collectives such as investment trusts, and we will look at Reits if property companies decide to go down that route.”

Doel admits taking a robust position in favour of stockpicking and holding a small number of stocks is contrary to most thinking, but he defends the ability to generate wealth this way.

Even where a typical core fund portfolio consists of some 70 stocks, for example, most of the performance in absolute terms will come from the top 10 holdings he argues.

With a focused fund “I get 25 shots at outperformance”, he says.

Adopting this approach does require discipline, however, in order to maintain a grip on risk elements.

Doel’s fund splits investments into four types: ‘backbone’ buy and hold stocks, long-term and short-term investments, as well as ‘trading opportunities’ – typically stock actions driven by price changes or events,such as IPOs. The fund would typically hold a relatively similair number of stocks of each type.

Focus funds will also have to ensure a strict buy and sell policy to ensure the best profits are realised on such a concentrated portfolio, Doel says.

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