How are star fund managers dealing with volatility?

The equity bull market that has been in place since 2009 stumbled at the end of last year. Ben Johnson looks at how some high-profile fund managers are positioned.

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  1. Ben Johnson

Fundsmith Equity’s Terry Smith has built a significant following since he launched this fund in 2010. His no-nonsense approach to global equities has proven very effective – and investors have enjoyed significant outperformance versus the fund’s benchmark, the MSCI World index - although past performance is not a guide to the future.

Smith likes transparent businesses with predictable revenues that have a high degree of control over their own destiny. He and his team will do extensive research on a stock prior to purchase and, once bought, will look to hold on to it for the very long term and allow the company to compound its growth. They favour a concentrated portfolio of 25-30 holdings.

Investors felt the benefit of high conviction positions in companies like Microsoft and PayPal. The manager’s purchase of Facebook stock after the Cambridge Analytica scandal is yet to pay off, as the social media giant participated in the selloff in the technology sector. The choppier market environment is unlikely to change Terry Smith’s uncompromising method of picking stocks. He is keeping faith with a number of his long-term holdings and maintains big exposures to the technology, healthcare and consumer staple sectors.

Woodford Equity Income manager Neil Woodford’s portfolio is a mixture of cash generative UK companies and smaller UK stocks that he believes have exciting growth potential, many of which are
early-stage businesses that sit within the biotechnology sector. He also supplements his holdings with selected overseas stocks. 

The fund has endured a difficult period of performance. A handful of stock mishaps and weakness in the tobacco sector have weighed on medium-term returns, although his longer-term career record remains a good one.

Woodford is positioned very differently from the typical UK equity income portfolio, which tends to be invested heavily in the oil majors and banks. Indeed, Woodford retains a belief that
domestically-focused UK businesses are undervalued due to excessive pessimism from investors, and has been using recent market falls to add to some unloved stocks. Within his portfolio are shares such as Barrett Developments, the housebuilder, and Eddie Stobart Logistics.

Scottish Mortgage is a large investment trust that invests in some of the world’s most dynamic companies, both those listed on the stock market and also some that aren’t yet available to the
average investor. It is run out of Edinburgh by Baillie Gifford, an investment house with a reputation for being supportive and patient long-term investors. The trust’s size is sufficient for it to be a constituent of the FTSE 100.

Scottish Mortgage’s managers gravitate towards companies that are growing quickly and have a large opportunity set to capture. It was an early buyer of Amazon, and has reaped the rewards of
the company’s meteoric rise. It remains among the trust’s largest single-stock exposures. Since the Global Financial Crisis the trust has fully capitalised on favourable conditions for investors in
growth companies, particularly those targeting the technology sector.

More recently, conditions have been difficult for tech stocks and Scottish Mortgage’s share price has fallen back. Its long-term position in Tesla has been characteristically volatile and its stake in
Netflix has fallen in value recently. This won’t faze the trust’s management team; they take a much longer-term view than the typical investor and, like Terry Smith, tend to use periods of volatility to add to their higher-conviction existing ideas.

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