December 2007

A unique view

Tell me about the history of the fund?

The fund was launched in March 2000 and was worth £4.5million. As of 31 October 2007 it is worth £36.5million and has 12 clients. I have managed it throughout that time though the fund has changed its name three times because it has been taken over on several occasions. It initially launched as the Ely Pensions Managed Fund. However, Ely was then taken over by Dexia and it was then called the Dexia Managed Pension Fund. Then in April 2006 Rathbones acquired the Dexia business so it's now called the Rathbone UK Managed Pension Fund.

What have been the main challenges in managing the fund?

The greatest challenge is getting the performance but that's an everyday thing. I think a major challenge for us has actually been a marketing issue. Because the fund has changed its name so many times it's difficult to raise awareness and that's why I think the fund's performance success hasn't been followed by the growth in funds that you would perhaps expect.

How will you address this issue going forward?

We are actively looking at this now. We think there are two main markets for us - the occupational pension scheme market is one but we are never going to be given a local authority fund for instance because our fund is too small. We should aim towards the 0-30 million pound funds either as their sole manager or one of two or three. The most attractive market for us though is the SIPP market and we should aim the fund at clients with portfolios from a couple of hundred thousand right through to two or three million. Of the twelve clients we currently have then three are occupational pension schemes and the rest are SIPPs.

What are the benefits of investing in this fund?

It is a unit trust and investors will get diversification through a pooled vehicle. If you only have a pension of £200,000 then it's more difficult to manage on a standalone basis as it is difficult to get the diversification. However, by investing in the fund investors automatically get diversification because we invest in UK equities, overseas equities, bonds etc. Hopefully they get the performance too and to some extent they can't go the route of specialist fund managers because it is too expensive for them. It's a cost effective way of getting good exposure to the investment markets.

The fund outperformed the Russell/Mellon CAPS Balanced Fund median by +5.6% over three years and by +5.3% over five, keeping it in the top decile of the sector over each one-year period throughout the last seven years, to 30 September this year.

Tell me about your investment approach?

I would be described as a conviction manager - I will back my judgement. A lot of people who say they are active managers aren't that far off their benchmarks but if you look at our fund you will see that we are a bit different to everyone else. At the moment we have 22% in emerging markets whereas the average fund in the CAPS survey probably has around 4%.

Going back to the third and fourth quarters of 2002 we started to think that global growth would be strong and this was the time to invest in the equity market. By the end of that year we had about 89% of the fund invested in global equities. The average fund in the CAPS universe had around 78.5% so we were more than 10% overweight in equities by the end of 2002. That was a hard time - the third quarter of 2002 was awful as the fund fell by 19% versus about 15.5% for the average fund. We were early by a couple of quarters because the bull market didn't really begin until March 2003 but once we were positioned and it took off we really benefited.

We've been broadly speaking 9-10% overweight in equities versus the average fund manager for the whole four and a half years since. Back in December 2002 we had 10.5% in emerging markets versus only 1% for the average fund manager so we held that position as well and it's grown. It hasn't always been a smooth ride upwards. For instance there was a market setback in Q2 of 2006 where world markets dropped by 7-8% and then we've had the blip in July-August this year which saw the FTSE fall 13% over the month. We've ridden those storms out because we still believe in our view whereas other people may have been tempted to cut their positions. It's having the conviction to stay with your view. Obviously you have to analyse it to make sure your judgement is correct. I've also been really keen on mining shares as part of the global growth story and the weighting in the FTSE All Share index mining stocks is 9%. We've had twice that rating - I don't think you will see any other fund manager who has 19% of their fund in mining shares. It is a case of taking a view that other fund managers either aren't prepared to take or can't take.

What are the key mistakes that fund managers make - is this lack of conviction one of them?

To some extent they are looking at what their main competitors are doing more so than perhaps I am. I'm not competing with the big guys. They have similar risk controls to me but maybe they don't use them to their full extent. I've seen other manager's UK equity portfolios and to be frank if they are more than 1% overweight in a particular equity then that's quite high. I'm not saying they are indexers but they aren't taking big views and I think that's the difference - I do take big views and I am going to go with them.

There are a lot of managers with a similar outperformance target to us of plus 1% to the median but I looked in the CAPS survey to the end of August and of the 50-odd managers only nine have outperformed the median by more than 1% over rolling three and five-year periods. Maybe it's the fear of taking the risk, getting it wrong and losing clients that puts them off.

Karen McCusker
Investment Director
Rathbones Investment Management