Making money out of rising revenues

Gil Knight joined Gartmore in December 2003 from MTB Investment Advisers, where he was managing director and senior portfolio manager. He has over 35 years of investment experience. Prior to MTB he served as vice president of the Equity Group at ASB Capital Management.

Knight is a graduate of Dartmouth College and gained an MBA from the Bernard Baruch School of Business, City College of New York.

Q: How is the forthcoming US election affecting markets?

A: The fact that opinion polls are going back and forth is making people uncertain, and as a result the market has been slightly unsteady. However, markets are more concerned with the current high price of oil than with the election.

>From an equity point of view, I am not sure it really matters who wins the presidential race. If Kerry wins, he will try to do away with the tax breaks created by Bush and lower the tax rules on capital gains and dividends. However, if he does get elected it will be under a Republican congress, so the changes will be voted down.

Q: Is the election a theme affecting your portfolio?

A: I am not running any holdings in the fund that are based on the outcome of next month’s vote. In terms of how it would affect sectors, a Kerry victory would be less favourable for pharmaceuticals than a Bush win because of the Democrat’s plans to get lower drug prices through government bulk-buying.

Q: What are your views on the current price of oil?

A: If the price continues to rise, economists will have to begin readjusting their global GDP forecasts downwards. I am not sure whether the price will continue to increase, though. A lot of the demand for oil is currently coming from Asia, and in particular China, so if the Chinese economy slows even moderately so will the demand for oil, and the price will come down.

Q: What then is your portfolio’s current exposure to this sector?

A: We are modestly overweight in oil, with it representing 9% of the portfolio’s assets compared with the S&P 500 benchmark weighting of 7.5%. This is something I have increased in the last few months and if stock prices come down, I may look to invest even further, such is the global need for oil.

Stocks I own include the natural gas company Burlington Resources and Schlumberger, which is a wire- line stock. This is a company that puts wires in the ground to conduct seismic graphings of the amount of oil in that space.

Q: You were strongly overweight in defence companies before the war with Iraq. Is this still the case?

A: US defence stocks are still an important theme in my portfolio.

Spending on defence will still be strong in 2007 whoever gets elected next month. I have been overweight in the sector now for the past six months through holding electronics surveillance and home defence companies. One of my big holdings is L-3 Communications, which manufacturers machines that check bags in airports.

Q: How would you describe your investment process?

A: My process is based on trying to find growth stocks that will experience an increase in their revenues and earnings over the next 12 months.

Q: Has this process changed at all since moving to Gartmore from MTB Investment Advisers after the fund changed hands from Govett?

A: I have not made any changes to my process. The big difference is that Gartmore has a bigger and more experienced research department, which is more focused on performance. I now have nine analysts and 10 managers to draw ideas from, compared with the five managers I worked with at MTB.

Q: What do you look for in stocks?

A: I am looking for a good net income, companies that can make money out of revenue growth and a return on equity of at least 15%. I do not like companies that have more than 20% debt as a percentage of their balance sheet.

I also buy some special situations stocks for the portfolio. These are companies that are undergoing a change that should deliver positive performance for investors for the next six months. Such changes would include mergers and acquisitions, legal rulings, new products launched, a change in a company’s management, or a
restructure.

In the past, I have had up to 15% of the fund’s assets in such companies; however, currently, they represent just 5% of the
portfolio.

Q: What sectors of the market are you underweight in?

A: It’s my view and the group’s view that the US should have a good fourth quarter this year, and as a result I am underweight in consumer staples stocks; that is, the defensive areas of the market.

Q: How concentrated is your portfolio?

A: I run a fund of 65 to 85 stocks. However, at present, such is the condition of markets that I have 90 in the portfolio. This number of stocks enables the portfolio to be diversified, giving me the flexibility to overweight and underweight the sectors we like and dislike.

Q: What is your attitude to risk?

A: I try not to put too many handcuffs on the way I manage the portfolio, but I won’t put more than 5% of its assets in any one holding. The normal size of a position in the fund is 1.5-2%, as I want liquidity in the shares I buy.

Q: Do you invest across all market caps?

A: I manage the fund on a multi-cap basis. Currently, some 66.4% of the portfolio is invested in stocks that have a market cap of above £5bn; 13.9% is held in companies that are between £3bn and £5bn in size; and 10.5% is owned in holdings of between £1bn and £3bn.

Q: Do you actively manage cash?

A: I had to do so from time to time in the bear market and at one stage the level of cash in the portfolio rose to 10%; however, this was a rare occurrence. Cash represents 2.5% of the fund. We are equity managers and it is not my job to try to time the market with large cash positions; as a result, cash in the portfolio is usually there as a result of selling stocks.

Q: How would you describe your selling discipline?

A: I will sell stock whenever I see a deterioration in its top-line revenue growth or in its outlook for corporate earnings. On earnings, while I expect them to be lower in 2005 than they have been this year, we think this has already been priced into the market.

Q: How important is it for a US fund to have its manager based in America compared with running a US fund from the UK?

A: Being based in the US is better than the UK from a communications point of view. As I run a multi-cap fund, being based in the US makes it easier for me to conduct research on the small and medium-sized companies than it would be for a manager based in the UK, as I have closer access to them.