Quality UK exposure with JO Hambro fund

Of course, many other funds claim to be investing only in quality shares. It's a fashionable sales pitch in a turbulent era. But often, their returns do not bear the claim out. Indeed, just trying to define what quality actually means is tricky. Adrian Lowcock, senior investment adviser at Bestinvest, has attempted to do just this, and examine which funs are invested in such companies (read more on this). JO Hambro UK Opportunities came out near the top of his list.

"Fund manager John Wood's quality criteria are so strict that just 60 to 70 stocks meet them. These are whittled down to around 35 in his final portfolio," says Mr Lowcock.

This sifting process has resulted in strong returns - the fund is among the top 10 performers out of well in excess of 200 funds over one and five years, and still comfortably within the top 25 per cent of them over three. Although it is not specifically an income fund it offers an attractive yield of more than 3.5 per cent.

JOHCM UK Opportunities mostly invests in UK large and medium-sized companies, with the concentrated portfolio representing Mr Wood's strongest investment ideas. He invests in companies because of their individual attributes and depending on whether they are involved in what he considers to be promising investment themes.

He tries to identify long-term trends and then find undervalued, high-quality companies that should benefit from this, as he believes the market persistently underestimates the value created by well managed companies in growth areas which re-invest wisely.

"Our focus continues to be on identifying companies that can generate above-average returns over the long term through compounding growth," says Mr Wood. "These can be companies producing volume growth in a world of negligible gross domestic product (GDP) growth, or those companies creating value growth in industries where there is no volume growth."

The research is not dependent on profit or profit growth - the quality of franchise, plentiful free cash flow and solid balance sheets marked by low levels of debt are all as important. "High-return investments are scarce in the low return environment now facing us, but we believe we can achieve attractive long-term returns through the patient process of holding stocks that regularly compound their growth over time."

He does not seek to emulate any benchmark when constructing the portfolio and his returns-based absolute valuation approach seeks to avoids momentum and relative valuation pitfalls. Mr Wood believes the main risk is holding bad shares rather than missing out on good ones.

While the fund has made good returns it can experience periods of volatility, so ideally you should have a long-term investment horizon when investing in it. The fund also levies a fee of 15 per cent on the outperformance of its benchmark, with any underperformance carried forward. Despite this, its ongoing charge is still a very modest 1.35 per cent, lower that the typical 1.5 to 1.6 per cent for an open-ended fund and very modest in view of its strong performance and attractive yield. Buy.

Source: Morningstar & *JO Hambro Capital Management

Performance data as at 23 July 2012

Top 10 holdings as at 30 June 2012

Sector breakdown