New Model Adviser – Asset Allocation
27 October 2009
Our UK Opportunities Fund employs a Core & Satellite approach to portfolio construction. The last year has been both the best and worst of times for such an approach.
In the core portfolio, we are seeking out long-term winning franchises. Typically, these stocks exhibit long track records of consistent over-delivery versus market expectations, in addition to management teams who have proven their ability not only to execute well but also to make sound strategic decisions for the development of their enterprises. Capita's continued UK focus is not some historic accident but perhaps the best decision its management has made. Many companies with half Capita's rating would have been tempted into an overseas - and most likely unsuccessful - acquisition. Leading constituents of the core portfolio include Serco, Easyjet and Ultra Electronics. By focusing upon names that are better than the average index constituent, the core portfolio should offer the potential to beat the market (albeit only slightly), consistently over time.
In contrast to the strategic long-term approach of the core, the satellite portfolio takes a nearer term, tactical stance, trying to capture the moment - the steepest phase of appreciation in a given share price chart and the most productive moment of ownership. Unlike the intrinsic market beta of the core, the satellite is all about stock specific risk. Management change (ie Psion) is a typical agenda - whether the new team succeed or fail in their attempt to rejuvenate an enterprise will be only partially contingent on external market factors - it is more about self-help, own backyard stuff - and to this extent it is, at least partially, an index uncorrelated bet. At the extreme, one could consider a biotech company working on a particular type of cancer (i.e. Ark Therapeutics). If drug approval is achieved, such stocks have the scope to double even when the broader market is falling – and are thus almost totally asymmetric.
The V shape of the market over the past 18 months has been supremely challenging. On the down slope of the credit crunch, the two portfolio strands became highly correlated and to this extent the satellite did not fulfil its typical purpose. On the upslope, both strands have added return - with the satellite enjoying an especially rich vein of opportunity. Just as importantly, the satellite element is once more compressing market volatility.
Looking to the future, as markets normalise somewhat, we believe this approach can generate superior risk-adjusted returns for investors.
Caspar Trenchard, Manager of Standard Life Investments’ UK Opportunities Fund.
This article was first published on Citywire on 3rd November 2009.
