Standard Life European Equity Growth
The new manager holds promise but it’s too early to give him our full endorsement.
SLI’s stock selection process is bottom-up driven but macro aware. It is based on the premise that changes in expectations, especially earnings, drive a company's performance and the analysts seek to identify that change early on. In doing so, they can end up with a slight bias to mid caps as these are often less researched compared with large caps. The team uses a multi-factor model as an initial screen to create a shorter list of stocks which are then put through further qualitative checks. The top 20 ideas in the pool identified on this basis form the bedrock of this fund.
Still, good stock selection is only one factor in achieving success in a fund; portfolio construction and management skills play an equally important role. Unlike his predecessor who owned 70-110 stocks, Martin prefers to run 60-70 holdings. Increased portfolio concentration can have advantages; with fewer stocks to top and tail and investments limited to companies where confidence is highest, for example, turnover should drop. Martin is also placing greater emphasis on the analysts’ top 20 ideas and we draw some comfort from the support of this team. Still, whilst not excessive, running a tighter portfolio puts added pressure on Martin's portfolio construction and management skills, which in our opinion are still developing.
Martin has acquitted himself reasonably well thus far and is making good use of the team's expertise outside the top 20 picks. Although returns are third quartile in the Morningstar category over a year to 21 December 2008, it is not a bad result given that he took over almost at the point of inflection. The manager made some good moves last year which helped the fund steer clear of any serious trouble. The reduction in commodities, which began in November 2007 and continued throughout the first half of 2008, helped shield the fund from the huge declines seen in the commodity space recently. Similarly, he almost doubled the pharmaceuticals' exposure between November 2007 and May 2008, which helped counterbalance some of the weakness emanating from Martin's bargain hunting in financials wherein the manager has increased most of the positions steadily since November 2007. We are encouraged by these early results and think highly of Standard Life and the supporting cast here. However, given the strength of other options in this fund's peer group, it doesn't yet stand as a compelling choice.
