Head-to-head: Chris Rice and Jeff Taylor
Which Elite-rated European equity fund manager is the one for you?
When picking a core European equity fund, UK investors have plenty to choose from, but there is no shortage of manager mediocrity. So how do investors choose the right offering without digging deep and beyond mere performance figures? Our Qualitative ratings can help you whittle this universe down to find the fund that best suits your needs.
Chris Rice at Cazenove European and Jeff Taylor at Invesco Perpetual European Equity, have earned Morningstar’s Elite rating. But they differ in a number of ways that impact their appeal to different types of investors.
People: London vs. Henley
Each manager has over 20 years’ experience under his belt, giving them an extensive knowledge of the European equities universe, acquired throughout different stages of the market cycle. Although they work at fund houses of very different sizes, neither house hosts a central research team. However, this has not been an issue for either one of them. Each manager works closely with other highly experienced European equity managers on their teams. Rice is based in London and heads the Europe ex-UK team at Cazenove; research responsibilities are split between him, two fund managers and two dedicated analysts. Collectively the team averages 16 years’ experience. Taylor’s team in Henley is slightly bigger. He works closely with five other managers, two of which are focused on smaller companies. We don’t feel their location is a disadvantage and indeed it has worked for them so far. Together they boast an average experience of 15 years. In addition, both Rice and Taylor make use of long-established networks of external analysts to complement their internal research.
Parent: Big vs. Small
Invesco’s asset pool was nearly 20 times the size of Cazenove’s as at the end of December 2009; this can be both a help and a hindrance. For example, Taylor alone runs around £1.4 billion and his team has more than £4.3 billion in its coffers overall. This gives Taylor and his team excellent access to company executives, and they will visit them in their offices at Henley. On the other hand, the European team at Cazenove has just £1.6 billion in assets under management, which means they can be much more nimble when manoeuvring the fund; this also eases the pressure of competing trades internally. Despite the difference in assets under management, Rice’s portfolio typically lands further up the cap scale as this is where he feels he is able to add most value: the average market cap is around £20 billion. Taylor’s fund sits slightly lower than Rice’s in the Morningstar Style Box and has a much lower average market cap of £10.3 billion.
Process: Top-down vs. bottom-up
Despite the similarities in their team structure, Rice and Taylor apply very different processes. Taylor is a true bottom-up stock picker who typically pays little attention to top-down factors. The cornerstone of his process is limiting losses and he maintains a knife-edge focus on valuations, which helps to control price risk. Conversely, Rice runs a top-down strategy and blends this with company analysis. His aim is to select companies that he believes will benefit the most given his team’s views on where we are in the market cycle. His approach is more dynamic and this reflects in his portfolio turnover rate of around 150%. Taylor has a structural advantage as his lower turnover of typically around 50% means he can save more on trading costs. Rice’s approach also leads him to hold around 80 stocks and spread risk across a larger number of holdings. Taylor prefers running a tighter portfolio of some 50 stocks.
Performance: Unanimously strong and smooth
Given the managers’ different approaches, investors will see the funds behave differently in the short term. For example, although they both lagged their average Morningstar Europe ex-UK category peer in 2009, it was for very different reasons. As cyclical stocks rallied sharply from their March lows, defensives became an attractive hunting ground for Taylor as these were dumped irrationally by investors seeking higher-risk fare. As a result, his fund ended 2009 three percentage points behind its category norm. Rice’s slight underperformance was more down to human error. He was a little late in entering the rally in cyclicals and took profits a little too early, given his team’s views that a double-dip was imminent.
Both managers have rewarded their investors well by showing the courage of their convictions. A recent example is 2008 when they both protected investors’ capital better than their peers. This was thanks to their decision to invest heavily in defensive sectors, such as healthcare, early on in the year, which positioned them well to weather the difficult markets. They have also delivered impressive outperformance through time. During their overlapping tenures (January 2003-January 2010), Rice and Taylor delivered 14.3% and 12.5% annualised, respectively, while their average Morningstar category peer posted a lower 10.3% return.
Both Rice and Taylor have managed to protect capital well on the downside while still producing above-average returns in up-markets. Taylor’s compact portfolio and his tendency to dip down the cap ladder into racier issues has led his fund to exhibit slightly higher volatility than Cazenove European, but it’s still in keeping with its category norm.
Price: Excellent value for money
The fact that investors can access these managers’ talent at rock-bottom prices is then the cherry on the cake. Cazenove European’s TER is a bargain 1.11%, although its minimum investment is £25,000. If this is out of your league, an alternative retail share class is available with a £1,000 minimum investment, but its TER is higher at 1.59%. Investors seeking direct access into IP European Equity will find that its no-trail shares offer an excellent deal at 1.2%. Its adviser-sold share class has a higher TER though of 1.7%, which exceeds its Morningstar category median of 1.59% and will eat further into investors’ returns.
Which fund is right for you?
We hold both managers in high regard and think their funds are worthy holders of Morningstar’s Elite rating. But which fund should you choose?
Ultimately, it’s a question of preference. For those wanting a traditional bottom-up stockpicker, Taylor’s your man. If you’re more inclined to have a manager taking macro bets in his fund throughout an economic cycle, Rice has shown rare talent in that regard.
