Investment Companies News

Gearing has dented the performance of the SVM UK Active fund in the recent market downturn, but manager Colin McLean’s resources theme has buoyed fund performance over the longer-term.

The £83m fund has also suffered from its overweight position in small cap stocks, but McLean remains positive on the market outlook and is unlikely to change the investment strategy.

Resources remain the most important overweight position in the fund. McLean believes commodity prices will continue to benefit from rising global demand, fuelled by the growth of China and other Asian economies.

The sector currently represents 44% of the portfolio, split between oil and gas at 19.4% and basic materials at 25.2%. McLean has recently reduced the exposure to exploration and production companies, but likes mining/metals, particularly precious metals.

The other main theme in the fund is ‘misunderstood’ shares. These are companies that are out of favour with the market, but retain longer-term growth prospects. Current holdings include Compass, Novae and Cable & Wireless.

The fund can take short positions of up to 15% of the total portfolio. However, it remains net long 113% (through long investments equivalent to 129%, offset by short positions of 17%). There were 14 short positions at the end of July.

McLean is currently using three themes for his short portfolio: companies suffering a cyclical downturn such as Wagon and John Service Group; companies with weak balance sheets such as Proteome Sciences and iSoft; and companies exposed to the dollar such as Rexam and Signet.

The short positions have generally been positive for performance. Last year, McLean generated additional returns from short positions in the gaming industry. The fund is underweight consumer goods, healthcare and property, though McLean is not currently short in these areas.

Although a number of the top ten holdings are FTSE 100 stocks – BG, BT and BP, for example - the fund is mostly underweight the large caps. It is 34.7% underweight compared to the FTSE All Share.

The fund is still ahead of its FTSE All Share benchmark for the past 12 months, despite recent setbacks. Although its long-term returns are erratic, it has performed well since the market turned in 2003 and should be well-placed to benefit from any rise once the current market turmoil comes to an end.

House broker WINS believes the fund’s emphasis on absolute rather than relative returns matches the aims of most investors, making it a good vehicle for private client groups. Investors should not expect a FTSE All-Share proxy as the sector positions are very different.

The short portfolio should help protect the fund in a market downturn, though that will depend on the net position of the fund and it hasn’t happened in the recent setbacks. The fund generally trades on a discount to net asset value, though the discount has narrowed steadily over the past four years.