Recovery position helps fund to find its feet

Stephen Whittaker has been manager of the New Star UK Growth fund since July 2002. He joined from Invesco Perpetual, where he was head of UK retail investment and manager of the UK Growth fund from its launch in 1987. He also managed UK special situations and smaller companies income funds at Save & Prosper, and was an institutional fund manager at Rowe & Pitman. He graduated in 1980 from Manchester University with a degree in law.

Q: Do you take a growth or value style approach with your fund?

A: It is a mixture, with a bias towards value. I have always believed that valuation is important, and by that I mean the numbers on companies are important in terms of assessing whether they are good or bad investments.

Q: Do you expect better returns from small, mid or large-caps over the next six months?

A: They will even out. Since last year we have had a big outperformance from mid and small-caps, which addressed undervaluation of the sector. Now they are more in line with large-cap stocks.

Q: What is the weighting in the fund between small, mid and large-caps?

A: It is 50% large-cap and 50% mid and small-caps. I am overweight small and mid-caps because I see better opportunities there.

Q: Are you still exposed to cyclical stocks?

A: The growth outlook is intact, so I am still running that bet. The recovery we have seen so far is going to carry on and that means the shares I am invested in are significantly undervalued.

Q: UK All Companies is a broad church. Who do you see as your real peers?

A: Ed Burke, my former colleague at Invesco Perpetual, has done very well with his Growth fund. And I look to Anthony Bolton with his Special Situations fund. Apart from that there is nobody else I really follow.

Q: In July you were almost exactly in line with the UK All Companies sector performance. Why?

A: That was coincidental more than anything else. Sometimes the fund’s performance is in line, but I have a completely different portfolio to the index.

Q: You were head of UK retail investment at Invesco Perpetual. Do you have staff managerial responsibilities at New Star?

A: No, and that is certainly an advantage. That gives me the freedom to do the job of looking at shares.

Q: Why is your top sector holding construction and building materials?

A: Mainly because the fund has a lot of housebuilders in there. It is a sector that is significantly undervalued.

Q: So you don’t think there will be a property crash?

A: I don’t foresee that. The worst I can foresee is some sort of decline in property prices, but the demographics of this country are very supportive. We have a shortage of houses being built and there is excess demand. Mortgages are still affordable on a monthly basis and are likely to stay that way.

Q: Does the debt situation in the US and the falling dollar worry you?

A: No. The US has run deficits for as long as my career has been going. Now is no more excessive than at any other time. It is trying to grow its way out of this deficit and I think it will succeed.

Q: Is the UK economy looking wobbly?

A: The UK economy looks very robust. Growth will be over 3% this year and close to that next year. There will be a slowdown in consumer spending, but also a pick-up in capital expenditure. Government spending will remain strong, too. The Government will not cut it ahead of an election. Since last November the MPC has raised rates to slow consumers down. That has been successful, but that is over now, except perhaps for another quarter- Q: What is your investment process?

A: I take a top-down and bottom-up approach. The top-down is getting the macroeconomic situation right. I have never seen the point in investing in a market where you think the economy is going to hell in a handcart. What the economy is doing is my starting point – inflation, growth and so on. The next stage is to look at what areas of the economy will do well and which companies and sectors could benefit.

Q: What makes you want to buy a company’s shares?

A: Initially, it is simple things such as low P/E and high yield. I like these criteria. Then I look at the cashflows of a company and see if that dividend is sustainable and growable. I like to see the management and look at the enterprise value to sales to see where it is on its margin cycle.

Q: What is your cash level?

A: I run no cash levels at all. I am paid to invest.

Q: How do you control risk?

A: I do not have any weighting restrictions. I run a fairly diversified list of stocks, with about 80 to 90 holdings.

Q: Do you like to have a low or high turnover in your fund?

A: I am not a trader, particularly. My turnover is quite low. I tend to have stocks that have been there for some time. My turnover is about 30% a year.

Q: What are your favourite stocks?

A: I like UK domestic banks. They look severely undervalued relative to what I think they are worth. They have been derated in the last year or so on fears of bad debt rising. I do not think bad debt will rise to onerous levels. There is also corporate activity in the industry.

Q: What was successful and what not so successful over the past two years?

A: Housebuilders have been very successful for me. But when you have 85 stocks, it never comes from any one thing. What I have got right is the fact there is a recovery going on. I believe it will continue. The consumer and industrial cyclicals base in the fund has helped. The fund did suffer in its first six months, but since I took over it has been a different story.

Q: Are you playing any themes?

A: The basic theme of my fund is to be exposed to the economy. I have a large number of economically sensitive stocks, such as consumer and industrial cyclicals.

Q: What are your biggest underweights?

A: I have nothing in the oil sector or pharmaceuticals. The oil sector has gone up on the back of the oil price, but there is no real shortage of oil. Its price has gone up because US inventories are low, and once they are built up again prices will come down. I have issues with pharmaceuticals because of US pricing. The US pays twice as much as the rest of the world for drugs, and that is unsustainable. There is also increasing competition from generics and it is getting more difficult to get drugs past the Food & Drug Administration.

Q: Do you invest personally in the fund?

A: Yes, I do.

Q: Do you think New Star perhaps has too many UK funds?

A: No. Our funds tend to have very different aspects to them. I think the difficulty from an outsider’s point of view is identifying the different styles. There are as many different styles here as there are managers.