Standard Life UK Equity Growth R Acc |
| Analyst Report | Analyst Report Archive |
|28/11/2008by Ash Kumar
| Standard Life Investments UK Equity Growth fund is one of the best of its kind. |
Karen Robertson has gained her entire industry experience at Standard Life Investments and, of her 17 years, nearly 13 have been spent running UK equity portfolios. She is backed by a well-resourced team which has worked together at SLI for more than a decade. The average experience of the team is equally impressive at around 16 years. The vast experience of the team helps in efficiently executing the fund's highly research-oriented process, which focuses on change affecting a company's earnings and hence its share price. It uses a style-agnostic, multi-factor screen to target firms where evidence of change is beginning to emerge. Such stocks are identified by value, momentum (price and earnings) and balance sheet-related variables and put through rigorous qualitative research to corroborate the initial, purely quantitative results. The process culminates with a pool of stocks out of which the top 20 are typically held in this portfolio. The remaining 40-50 stocks are selected on the basis of several factors, including the fund's risk-reward profile. The manager also incorporates SLI’s top-down view on key market themes when tilting the portfolio. This process helped Robertson spot the potential for earnings growth in the mining sector early on in the curve. The long-standing overweight here was reduced in July and August 2008 when heavyweights such as Xstrata, BHP Billiton and Anglo American - still in the top 10 until June 2008 - were downsized. The cut-back in key stocks proved timely as the steep decline in the FTSE Mining Index came about in late August by which time the mining majors had been shipped out of the fund's top 10. There is no doubt that the fund has suffered due to this exposure but the damage would have been far greater had Robertson not scaled back her positions when she did. There are other reasons why we think this fund is more than just a resources play. Credit goes to Robertson for avoiding the financials fiasco and consumer-facing sectors' pain via notable underweights initiated in 2005 and early 2006 respectively. These and a timely reduction in mining heavyweights cushioned the huge blow dealt by the US-led credit crisis. Consequently, returns over 12 months to 25 November 2008 are third quartile and have pushed the fund's performance over three years to second quartile in the Morningstar UK Large-Cap Blend Equity category. But, the fund remains a strong top quartile since Robertson took charge in May 2004. Apart from the fund's impressive returns, we also note that Robertson has delivered an even stronger result on another of her charges - UK Equity High Income – which is top quartile over five and ten years to 25 November 2008. An added bonus for investors in the UK Equity Growth fund is its low turnover which, at 50%, should help limit the erosion of returns by trading costs. The fund does take on more risk than the norm and thus isn't the best choice for cautious type or those with shorter time horizons, but for others we believe it is among the better UK equities propositions available. |
| Strategy |
| The process aims to exploit informational inefficiencies in the FTSE 350 and small-cap space. The initial quantitative screen assesses companies on the basis of 10 factors. These are value, momentum (price and earnings) and balance sheet-related variables that attempt to identify improving or deteriorating situations, arguably unrecognised by the market, for managers to exploit. This quantitative screen helps to focus the manager’s efforts on companies worthy of further qualitative analysis. They identify the key drivers for each company under their analytical helm and then evaluate how changes in these will impact their view on the company. In doing so, managers will conduct industry research in areas where the company operates, its products, the key drivers of its revenue and any potential threats to the business. The top 20 ideas in the pool identified by this process are typically held in this portfolio. The remaining 40-50 stocks are selected on the basis of several factors, including the fund's risk-reward profile. The manager also incorporates SLI’s top-down view on key market themes when tilting the portfolio. |
| Management |
| Karen Robertson has 17 years’ experience, all at Standard Life Investments, and nearly 13 of these have been spent managing UK equities. She has run the Standard Life UK Equity High Income fund since January 1996 and UK Equity Growth from May 2004. Managers at SLI double as analysts and she is responsible for gas, water & utilities, electricity, beverages, tobacco, travel & leisure and media. David Cummings heads the UK equities team, of which Robertson is a member. It is well resourced and relatively stable and manages an estimated £32bn across several retail and institutional offerings. Cummings has split the team into large and small-cap specialists. The large-cap specialists have 13 years' average experience and have worked together at SLI for 10 years; the latter have 19 years' average experience and been together for 11 years.
Our view on Standard Life’s compensation policy is mixed. Linking part of the cash bonus to one-year performance does not - in our view - encourage a long-term investment culture. In fact, it could encourage managers to take undue risks to boost short-term returns. Although we are glad to see a portion of the long-term bonus linked to 3-year risk-adjusted returns, there is also a link to the company’s profit growth. This could unduly shift focus towards asset growth, contrary to fund shareholders’ interests. |
| Morningstar Rating™ | |
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| Strengths | |
| The team is relatively stable and highly experienced. |
| Performance since the manager took charge in May 2004 is strong. |
| Portfolio turnover is low. |
| Concerns | |
| Our view of Standard Life Investment's compensation policy is mixed |
| Portfolio Role | |
| Core offering - This fund offers a well-diversified exposure to UK equities. |
