TM Sanditon UK (GB00BXRTP273), the fund launched last year by renowned former Cazenove and Schroder UK Opportunities (GB0007218398) manager Julie Dean, is lagging its benchmark. But has Ms Dean spotted a downturn coming which will leave other funds exposed?
Investors and analysts have been watching Ms Dean's new venture with bated breath to see if she can replicate her stellar performance managing Cazenove, latterly Schroders', UK Opportunities fund. She returned 338 per cent compared with just 174.5 per cent for the FTSE All-Share between December 2002 and her shock resignation from Schroders in September 2014 just one year after its Cazenove acquisition. But in the last year of her tenure, the fund's performance slipped to fourth quartile.
Ms Dean is known for her business-cycle approach, which means shifting between stocks and sectors depending on what point of the economic cycle we are in. That performance was attributed by some to the size of the fund, which had swelled to £2.8bn at its peak in 2014 from £165m in 2011, making it harder to move nimbly between stocks. Many advocated following Ms Dean currently manages £135m, but has so far made a slow start, returning just under 9 per cent in the year to date against the FTSE All-Share's 13.7 per cent.
The manager denies that size was an issue for her at Schroders, saying: "The business cycle approach means you are shifting things ahead of time. The speed at which the fund grew was maybe more difficult to manage [than its size], but it shouldn't really matter whether you are running £10m or £1bn, it's about being able to make the right decision at the right time. Stock selection will always be the key driver."
She says: "We had a tricky start (at Sanditon) because the market fell as soon as we launched the fund. We were buying commodity stocks which we thought had grown too cheap, and were a bit early on that call. But that turned out to be exactly the right thing to be doing because all of those stocks have done phenomenally well." Between July and September, she sold down those mining positions and took profits too soon, but is reluctant to chase the sector now, which is trading at a 12-month relative high.
Ms Dean believes that the UK markets is "definitely in the slowdown phase of the economic cycle," heading towards a potential 2017 recession triggered by either Chinese deflation or a US rate rise. "We are at the end of the second longest bull market ever," she says, gesturing to a "frightening" chart demonstrating a "high increase in asset price value but on the basis of incredibly weak demand".
As a result, she currently holds 6 per cent in cash and is shunning banks - she sold HSBC (HSBA) before the last meeting of the US Federal Reserve. But with bond yields rising and interest rates in the US set to rise too, banks could be beneficiaries and were the best-performing global sector last month.
She admits "I don't own any bank so a huge rally in banks and other high beta risk assets would mean I would underperform. I'm not positioned for another meaningful move up in the market and when I look at what could drive that, it would really have to come from banks.
She is holding defensive stocks instead, several of which were major winners from the dramatic slump in sterling, which followed the UK's decision to leave the EU, which are not cheap.
"I held AstraZeneca (AZN) anyway (before Brexit) because it looked relatively undervalued relative to stocks with defensive earnings streams which have been aggressively re-rated by the market because they're seen as bond proxies.
"The same thing happened with Shire (SHP) and GlaxoSmithKline (GSK). I didn't buy them because there was a vote to leave and I thought sterling would weaken."
But she acknowledges that "traditionally, very defensive assets that might preserve your capital are expensive", making it hard to make money.
To combat that, she takes large, punchy positions in cheap stocks "where both their earning and multiplies can expand". As a result, she has a 5.6 per cent position in engineering support group Babcock (BAB), which is currently trading on 12 times earnings. "It is trading on a big discount to the market for what is a relatively secure earnings stream," she says.
She also likes Man Group (EMG), a 4. 1 per cent stake, has also weighed on performance. "It has been a shocker, it has been one of the worst performers in the market this year," says Ms Dean.
The stock has been hurt as highly correlated asset prices triggered by central bank monetary easing programmes have made it tough for hedge funds. But that could change if the market does shift. "It could be another two or three quarters before the macro picture starts to change, but when it does the shares won't be on 8.5 times earnings. I could see why it could go to 12 times earnings, but it might not happen tomorrow."
What of the pressure to perform at her new home? "It feels like an incredible relief (to have started at Sanditon)," she says. "There is space to think here. If you are busy the whole time you can end up being a busy fool. Sometimes being distant from the noise is really good, it all comes back to keeping your own counsel."
Julie Dean CV Julie Dean left Schroders in 2014 to join Sanditon Asset Management. She ran the Schroder UK Opportunities Fund between 2002 and 2014. In her previous role at Cazenove, she took charge of the UK Equity and UK Dynamic funds and before that managed the HSBC British and HSBC UK Growth funds, as well as institutional portfolios. |
