Fund strategists focus on focus funds

Neil Ledbrook, senior investment researcher, Sesame Research
“If your view is that returns will be lower and the stockmarket will be trading around a range for the next two years, the only way to make money is to move away from the index. The 30-40 stock concentrated thing, however, is a red herring. Jupiter and Fidelity have demonstrated significant performance without concentrated funds. Active management and stockpicking is the key.

We recommend focus funds on a very fund-specific approach. It depends on the ability of the fund manager. We like Gartmore UK Focus, BWD Aggressive Growth, Isis UK Prime and Schroder UK Alpha Plus.

There are lots of different funds portrayed as focus funds when they’re probably not. It depends on how you define them. We look for a concentrated portfolio, where the manager doesn’t pay attention to the benchmark, and there’s aggressive trading – Ashley Willing at Gartmore UK Focus at one stage said he changed every stock over once a month. Both Schroders and Gartmore have proved they can perform in very different market conditions. But the BWD fund, managed by Mark Hall, is the one to watch. It’s a small company with a smaller fund. It’s more easy to manage and more nimble.

There aren’t any focus funds we wouldn’t touch. Most have reasonable performance. There are some we’re less keen on: JPMF UK Dynamic and Merrill Lynch UK Dynamic funds have a very process-driven approach, with less emphasis on the skill of the fund manager and more of a house process.

Paul Ilott, senior investment adviser, Bates Investment Services “We’re keen proponents of focus-type funds, which steer away from the benchmark. It’s one of the best ways of playing the current market.

But we urge caution. With up to 40 stocks compared with 70-plus in the more mainstream fund, each stock holding plays a more important part and there is more stock-specific risk. If managers get a stock wrong, it has a bigger impact on performance. If you pick an experienced manager, one hopes you will be rewarded with reasonable returns.

We anticipate returns in index-tracking funds will be fairly modest. And a lot of funds have a very small target by which to outperform the benchmark – 1% or 2%. It’s reasonable to expect better returns from more active stockpicking managers, who are prepared to go against the benchmark. Here focus funds come into their own.

We like Richard Buxton’s Schroder UK Alpha Plus fund. As with a lot of funds, it has a relatively short history. But Buxton has 18 years’ investment experience. We also like BWD Aggressive Growth, managed by Mark Hall. Some funds are marketed as aggressive, but probably aren’t. New Star UK Aggressive is a good fund, but isn’t particularly aggressive.

That’s not to say investors should concentrate on focus funds. They should have funds with larger numbers of stocks too, like Fidelity Special Situations, which has 200 stocks and is also a stockpicking fund. People should have a blend.

Jason Evans, partner, Kohn Cougar
“This is a brilliant sector, as long as clients hold the funds alongside mainstream ones. It is a volatile call, with a smaller number of holdings per fund. We like Richard Buxton’s UK Alpha Plus fund at Schroders for the absolute return. He’s going to take a certain amount of risk to do what he does, so there will be times the fund underperforms. I wouldn’t put all the portfolio in there. But it’s good placed alongside core holdings.

Until now we’ve used a lot of investment trusts, and played the discount game. We’ve used zeros where we’ve seen anomalies. Only now have we got into the UK Alpha Plus fund. It’s possible this was a bit too late in hindsight – the market’s done 30%-odd since its March low. Now the markets have had a good run, it’s time to look for funds that deliver performance. Not all have the capability to deliver. These funds are good for when the market treads water and is volatile – where there are lots of peaks and troughs.

The market has had its rise now. Consumers are highly indebted. House prices being what they are, I can’t see the FTSE 100 ahead. Focus funds should do well this year, sitting alongside a more mainstream portfolio.”

Anna Bowes, savings and investments manager, Chase de Vere
“Focus funds – there’s a place for them, a good place. But they’re not for everyone. There’s definitely a higher element of risk. I wouldn’t say these funds are the flavour of the month. Our clients are just getting back into equities. Equity income is still popular, and long may it be so.

People need a more secure core like equity income. Focus funds add extra spice to portfolios, but they’re not a core holding. We like Gartmore UK Focus, Schroder UK Alpha Plus, Merrill Lynch UK Dynamic and Davina Curling’s Isis European Prime.

The key thing about trackers is they’re not low-risk. Active managers are here to stay.”