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JO Hambro UK Dynamic Fund research update

Charlie Huggins | Tue 30 July 2013

We wrote last year about the impressive performance of the JO Hambro UK Dynamic Fund, managed by Alex Savvides. The fund has now passed its 5th anniversary, and performance has gone from strength to strength. We recently met the manager for an update.

The key philosophy behind the fund is that companies are dynamic and constantly evolving. Alex Savvides believes this creates an opportunity for investors who are willing to look past a company’s short-term problems and focus on positive change - a new management team for example, or an improvement in industry dynamics.

The fund's holdings can be split into three types:

  • Early-stage investments (c.20% of the portfolio). Companies undergoing considerable change that have been purchased within the last 12 months. Aviva, for example, falls into this category. The company has suffered years of poor performance but has recently appointed a new CEO who aims to restructure operations and improve cash flows and efficiency.
  • Early to mid-stage investments (c.57% of the portfolio). These companies have typically been held in the fund for 1-3 years and have yet to deliver their full potential. Tesco would fall in to this category. The company has suffered declining like-for-like sales in its UK business and management are implementing a turnaround strategy which has yet to have the desired effect.
  • Mid to late-stage investments (c.21% of the portfolio). Companies that have been held for 2 ½ -5 years and have delivered on their turnaround potential. Examples include Standard Life and house builder Taylor Wimpey, which have both so far been excellent performers for the fund.

According to our analysis the fund’s strong performance over the last year, and since launch, have been driven by a combination of shrewd sector allocation decisions and individual stock selection. Underweight positions in the basic materials and oil and gas sectors, and an overweight in financials, have helped recent performance. The fund has also had its fair share of stock-specific successes. Support services company WS Atkins, for example, was first purchased in November 2011. It has undergone a restructuring over the last few years – low margin divisions have been sold or closed and management has refocused on cash generation and capital discipline. These changes have started to bear fruit and Alex Savvides believes the strong recovery in the share price has further to go. The fund currently has a concentrated portfolio of around 50 stocks, which allows each holding to have a significant impact on performance but this does increase risk.

An unusual feature of the fund is that all companies held must pay a dividend. Alex Savvides believes companies that generate enough cash to pay a dividend are likely to adopt a stricter capital discipline and have a better chance of prospering again. Indeed the fund’s dividend has grown impressively since launch and the current yield is an attractive 3.14% (variable and not guaranteed).

There is no doubt that Alex Savvides has got off to a strong start to his fund management career. Since launch in June 2008 the fund has risen by 79.3%, compared with 35.9% for the FTSE All Share index, although past performance is not a guide to future returns. On a more negative note the fund charges a performance fee of 15% of any outperformance of the FTSE All Share (full details can be found in the Key Investor Information Document), meaning the fund’s charges have typically been considerably higher than many of its peers.

% Growth 01/07/2008 to 01/07/2009 % Growth 01/07/2009 to 01/07/2010 % Growth 01/07/2010 to 01/07/2011 % Growth 01/07/2011 to 02/07/2012 % Growth 02/07/2012 to 01/07/2013
JO Hambro UK Dynamic Fund -3.99 19.03 31.88 -5.15 33.01
FTSE All-Share TR -16.73 16.01 29.53 -2.67 18.23

Past performance is not a guide to future returns. Source: Lipper

While we believe Alex Savvides is an exciting prospect his track record is relatively short compared to other fund managers in the sector. We would like to monitor the fund for longer before considering it for the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund’s charges are taken from capital, which increases the yield but reduces the potential for capital growth.

Please read the key features / key investor information document in addition to the information above.

The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.

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