New fund launches can provide interesting investment opportunities. In particular, those that offer the chance to back a proven manager with a small and flexible fund. In our opinion Polar Capital UK Value Opportunities Fund could be a prime example.
Fund manager Georgina Hamilton scours all corners of the UK equity market for underappreciated shares using a “value” approach that has delivered strong performance historically, notably when she was co-manager of the CF Miton UK Value Opportunities Fund from March 2013 to June 2016. Her fellow manager at Miton Group, George Godber, will join her in April, as per his contractual agreement
Small and nimble
In this new fund Ms Hamilton starts with a blank canvass and the freedom to cherry pick what she sees as the best opportunities from scratch. Importantly, the small size of the fund at launch should allow her scope to build meaningful positions in less widely researched smaller companies, an area where she has added value in the past. It could also mean she can react quickly to opportunities in the market as they emerge, for example during periods of volatility.
Price is what you pay, value is what you get
Ms Hamilton is keen to point out that the fund adopts a different approach to most other UK funds. Simply put, a value strategy means buying into companies that are worth materially less than the value of their assets. Obviously cheap companies valued at less than the “sum of their parts” can be lucrative but are often hard to find; plus concentrating on these alone might lead to an imbalanced portfolio biased to certain sectors. Therefore, Ms Hamilton also seeks out what she calls “value creators”, companies whose ability to grow through their own efforts is underappreciated by the market.
Shopping for bargains – but with a safety check
Being cheap, however, is not enough. If a company is bought for its asset base Ms Hamilton insists this must be sustainable and not at significant risk of a sudden depreciation; and if value creation over time is the reason for purchase then the returns the company generates must be sufficiently robust so that it can reliably implement its business plans. Finally, all potential fund holdings must pass a “safety check” to ensure they are not overly-reliant on debt, or burdened with other liabilities such as pension scheme funding.
The fund is therefore significantly different to a pure “recovery” fund that buys into distressed businesses in the hope things can be turned around. It may mean missing out on shares in companies that appreciate rapidly as they come back from the brink, but it should mean avoiding costly “value traps”;: companies that appear cheap but are actually in terminal decline with no chance of perceived value being realised.
A differentiated approach
There are relatively few UK funds using this kind of approach, and performance could deviate significantly from many of its peers, as well as the market itself. It could therefore complement more mainstream funds focused on good-quality (but usually more expensive) companies such as the widely held Lindsell Train UK Equity or Liontrust Special Situations. These would likely contain very few of the same holdings.
While a value approach has generally lagged in recent years as investors increasingly pursued strong, defensive companies with ultra-reliable earnings, this trend seems to have broken decisively during 2016. Value-based funds had a strong year, and with the political and economic environment remaining uncertain we believe there is a strong case for the approach going forward. With this clear strategy and a focussed, stock picking approach we believe the fund could be well equipped to outperform.
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