Keeping an eye on your assets to boost returns

Gervais Williams, manager of the Gartmore Growth Opportunities investment trust, talks to Adam Lewis.

Gervais Williams joined Gartmore in 1993 and heads the Smaller Companies team. He has more than 18 years’ fund management experience in smaller companies. As well as the Gartmore Growth Opportunities investment trust, Williams also manages the Gartmore Irish Growth investment trust, and the UK & Irish Smaller Companies unit trust. Prior to joining Gartmore he spent three years at Thornton Investment Management and was previously a director at Throgmorton Asset Management.

Q: What changes were made in the trust’s reconstruction last month?

A: We have introduced a facility where shareholders have the opportunity on a quarterly basis to ask the board to liquidate their portion of the portfolio and be repaid their underlying asset value. While being charged an exit fee of 2%, investors who decide to do this should receive a price close to a premium of the current share price. Indeed, between each of the quarterly redemption points the trust can repurchase its own shares at an attractive discount. We can then offer these shares to new investors to allow them to gain access to the trust and the small-cap sector.

Q: What was the reason behind doing this?

A: Over both of the last two years, and overall in the last 10 or 20 years, the British small-cap sector has made good money. However, despite these good returns investors have found it difficult to book these gains, because a number of UK small-cap mandated investment trusts have been trading on high discounts to net asset value. This is partly because the pricing mechanism of investment trusts is inefficient. The quarterly redemption facility we have added allows shareholders to redeem their holdings at a price closer to the trust’s underlying asset value. As a result, we have made the pricing mechanism more efficient, which is much better for investors.

Q: How has this improved the discount of the trust?

A: The discount has progressively narrowed since we announced our intention to do this in April. The trust today (July 21) trades on a discount to NAV of 7.8%, whereas in the past it has been as high as 20%. This narrowing has been helped by the positive news created by the reconstruction and also by performance.

Q: Has the mandate of the trust changed following the reconstruction?

A: The mandate of investing in UK smaller companies has not changed, but we have made some changes to our investment approach. The fund remains focused on making returns from UK smaller companies. However, in 2002 and 2003 the market fell sharply. In the past the trust has only been allowed to hold a maximum of 10% of its assets in cash, but following last month’s change I can now hold a bigger percentage in cash in anticipation of equity weakness. This capability will allow me to preserve assets in falling markets.

I also now have the ability to short the small-cap index, and we are more actively using the company’s subsidiary account to generate short-term trading profits.

Q: What are the main differences between managing a closed-ended investment trust and an open-ended fund?

A: An investment trust has two main advantages over an open-ended fund. Firstly, as a fund manager you have a much greater opportunity to borrow money – that is to gear the fund – allowing you to over-invest in underlying assets when markets are rising in order to enhance returns. Secondly, because of the corporate structure of investment trusts you can buy equities at a discount to NAV, which again enhances asset returns.

In the past investors have opted to hold unit trusts over investment trusts because they have been worried that the discounts that trusts trade on will offset any of their benefits. Our new pricing mechanism should offset these worries.

Q: What growth opportunities are you identifying at present?

A: There are investment opportunities across a number of areas. While the oil price remains strong there is a particular opportunity in the refineries, as there is a shortage of these. I currently hold a position in a British consultancy company called KBC, which works on improving the efficiency of oil refinery companies.

The Olympics in London is another opportunity. As well as the necessary building of stadiums, there is a lot of public work taking place, like the building of hospitals and schools. This is all leading to a high demand for structural steel work. I own Severfield Rowan, which is one of the leading UK structural steel businesses.

Q: Over the past 12 months smaller companies have begun to underperform their larger counterparts. What is your outlook for the sector?

A: Smaller companies still look attractive. The economic outlook is benign, meaning growth should be sustained. The main risk is that growth will disappoint. However, Britain has much greater scope than the rest of the world to reduce interest rates sharply. I suspect economic growth will be sustained and interest rates will be cut. I also expect plenty of takeover activity within the small companies sector, which reflects the fact that valuations are too low. So this is a good environment for investment opportunities.

Q: Which sectors of the market do you currently most favour?

A: We have a significant weighting in oil and the trust is also overweight in the IT sector. In IT we have seen a number of good trading statements and there has been a lot of activity. We have also seen a lot of activity in the aerospace sector and we are overweight there as well.

Q: Where are you underweight?

A: The trust is very underweight in the retail-exposed sectors, including general retailers and housebuilders and construction. This is not because we think everyone is suddenly going to start saving. People have been increasing their debt and, while they won’t pay it off tomorrow, they will stop taking on more, which will lead to a reduction in consumer spending.

Q: How many companies do you hold in the portfolio?

A: We tend to have long lists of holdings. At present there are about 240 stocks in the portfolio. We don’t tend to hold more than 1% in any single position.

Q: How would you describe your investment philosophy?

A: I look for a company with an unremarkable history, but with more exciting prospects. When this comes through it should surprise investors on the upside. To find these companies we have several face-to-face meetings. Last year the team attended 1,100 company meetings and this year the number is likely to rise to 1,200.

Q: What is the most important lesson you have learned so far in fund management?

A: Never to forget that, while making money is the prime objective, at times preserving assets can be just as valuable as a way of generating returns.