Tilney applies European model to running of UK fund

Tilney Investment Management has changed the way its UK Equity fund is run. Nick Sheridan, manager of European Growth since February 2002, took over the management of the portfolio last week.

Philip Okell, its former manager, remains with the firm and will continue to manage segregated portfolios.

As a result of the change, the 50m UK Equity fund is now managed with the same quantitatively-driven investment model used for the European portfolio.

Sheridan has developed this model, originally used to generate a recommended list for private clients during his time at Rensburg, over the past 14 years.

As proof of its success, he points to strong performance from European Growth. “We switched the European fund to the model 18 months ago and since then it has been 10% ahead of the market,” he says. “Overall, the model works 70% of the time.

“You could say it is not the most exciting way of running money. We will not be investing in stocks that double overnight and there are no sexy stories in the portfolio.”

Data from Standard & Poor’s appears to support Sheridan’s claims. European Growth has comfortably beaten the Investment Management Association’s Europe ex UK sector average over six month, one-year, three-year and five-year periods to April 17.

The portfolio is ranked second out of 95 funds over six months and no worse than 15th over the longer timeframes.

According to Tilney, the model is essentially a net present value calculation of estimated future stock returns, based on current financing, return on invested capital and achievable growth.

Stocks held in the portfolio are those at the biggest discount to the theoretical target value the model ascribes to them. “There is no qualitative input,” says Sheridan.

“We don’t visit companies and we don’t pay attention to brokers. There are no new issues and we only invest in liquid stocks.”

European Growth holds 30-40 stocks, which are rebalanced every month. This is based on Tilney’s belief that the attraction of a concentrated portfolio starts to be lost above 40 stocks, while the risks associated with a lack of diversification are too great below 30.

UK Equity will hold about 40 companies once Sheridan has fully realigned the portfolio, towards the end of this month.

Stocks will be taken from the FTSE 350 to ensure liquidity but Sheridan is unwilling to reveal details of the fund’s top holdings until the realignment is completed.

Tilney will hope Sheridan’s model has the same impact on UK Equity as it did on European Growth. The British fund has underperformed the UK All Companies sector average over six month, one-year, three-year and five-year periods.