Five forces to find the key to renewed growth

Crispin Finn, manager of the Credit Suisse Alpha Growth fund, is questioned by Helen Burnett.

Crispin Finn is a director and manager of the Alpha Growth fund and UK Mid 250 fund at Credit Suisse Asset Management. Before joining SLC Asset Management in July 1999 (acquired by CSAM in 2001) he was employed by Capel-Cure Myers, which he joined in 1988, becoming a director responsible for smaller company funds. Prior to this he spent a year with Sun Alliance, joining Phillips and Drew in 1985 as an assistant fund manager.

Q: How does the Alpha Growth fund work?

A: The fund tries to take the best growth ideas and put them into a single portfolio. Currently, the fund has a shortlist of 35 stocks and invests across all five types [of growth stock] in the British market.

Q: How would you describe your investment process?

A: Essentially it is a growth-stock-driven process. We use all the research at our disposal including internal and external research, as well as company meetings. We then run these through a growth filter.

We do two main things: we look for five kinds of growth stocks, which are secular growth stocks, cyclical growth stocks, opportunistic growth stocks, explosive, and stepped growth stocks. When we are looking at companies, we try to assign them to one of these categories that best fits their attributes. Our view is that most people just look at secular growth stocks but we think that there are additional opportunities available.

We also use Porter’s Five Forces approach [rivalry, the threat of substitutes, buyer power, supplier power and barriers to entry]. Essentially it is a way of saying that we see growth in different ways rather than just where a traditional growth investor might look.

Q: How do you research potential investment opportunities for the Alpha Growth fund?

A: We take a mixed approach. For the larger companies, we use our large in-house research department. For the mid-sized companies we rely on our UK portfolio managers and for smaller companies I work with our small-cap managers. Broadly we look for interesting theme areas and take a view of where we think the economy is going. Within those sectors, we look for attractive investments.

Q: What impact has your move from lead manager to a deputy role on the Credit Suisse Smaller Companies fund last month had on the other funds you run?

A: A limited impact. My move to deputy was a promotion of Stuart Harris to the role of lead fund manager, given that he has shown considerable ability. I still have an involvement in running small-cap portfolios. If anything, it has freed up a little bit of time to run the other portfolios but really it is about giving Stuart a role where he can fulfil his true potential.

Q: Do you invest across all market capitalisations with this fund?

A: Yes we do.

Q: Do you take an aggressive approach to the fund?

A: To a degree; it depends how you describe aggressive. This is not a very active trading fund and turnover is on the low side but it does seek to take strong positions in good growth companies and hold them for a long period of time. The returns come from the companies thriving rather than just the stockmarket, so to do that we need to be invested for a significant amount of time. The idea is very much to back our judgments.

Q: How do you manage risk?

A: We have an internal product control department that is separate from the fund managers and they keep an eye on the technical elements. From my own perspective, I try to manage risk with a stepwise approach. If I find a company that I think is an attractive investment, I will make a 1% investment in the business. Over time, I will increase this if I have confidence in the business. To a degree, it is time and experience that drive the elements of risk control.

Q: Do you think growth is coming back into favour?

A: Yes I do. I think we have seen five years where value has done well and may well have overshot. I think with the economy probably going into a phase of slower growth, people will give greater weight to companies rising under their own steam, rather than just rising with a growing economy.

Q: Do you manage this fund in a similar way to your UK Mid 250 fund?

A: This fund is more aggressive and picks stocks from the whole market rather than just from the mid-sized companies. In this respect it is different. In terms of favouring high-quality growth companies and balanced risk and return, the whole investment process is similar.

Q: What is your outlook for the British market for the rest of the year?

A: I think we will probably end the year higher than we currently are but not enormously so. I think we will have to contend with difficult consumer returns and a difficult housing market, but underlying this, equities are still cheap, so I think the market will continue to rise.

Q: Which sectors do you favour as a result?

A: At the moment in the Alpha Growth fund we are overweight in the software sector, where we think there is scope for companies to grow and where valuations are reasonable. We are overweight in the telecoms sector, where we think the growth prospects are undervalued by the market. We are also overweight the chemicals sector.

Q: Why do you favour a fairly concentrated portfolio of 35 stocks with the Alpha Growth fund?

A: This means the portfolio is focused on what we believe are our best ideas. If over the long term we are right, we will generate better returns from our best ideas than from a more diversified portfolio.

Q: What is the level of turnover for this fund?

A: Turnover in the Alpha Growth fund is relatively low compared with similar types of funds, at 45% over the last 12 months. Just to put this into context, over the last 12 months we bought nine new stocks and sold 14 stocks.

Q: What are your top three holdings at the moment?

A: The top three holdings by the weight in the portfolio are Glaxo SmithKline, Vodafone and HSBC.

Q: Do you invest in the funds you manage?

A: Not at present.

Q: In which sectors are you underweight at the moment?

A: The main sectors that I am underweight in are the mining, life assurance and the beverage sectors. To a degree, I have found better opportunities elsewhere. Most of the investment opportunities in this fund are made on positive aspects. In the mining sector I am not convinced of the sustainability of the profits growth aspect of these companies, as they are driven by commodity price growth.