Secret squirrel cracks mid-cap nut

Ashton Bradbury of Old Mutual is one of that small band of investment managers whose every share purchase and sale seems to get reported in the national newspapers.

A quick search of the newspaper archives finds his name popping up time and again in the Sunday Times’ “market mole” column, the Mail on Sunday’s “secret dealings” section and the Evening Standard’s nightly market report.

And for good reason too. People are watching him because he has become the biggest retail expert in the mid-cap field, with his UK Select Mid Cap fund pulling in £160m since its launch in February 2002. The performance figures are superb. In the year to date, the fund is up 10.2% compared with a sector average of 2.6%, while since launch it is up 36.3% compared with a sector average of just 0.1%.

But Bradbury does not come across as a prima donna manager, nor has he sought out column inches in the press. “Frankly, those ‘secret dealing’ things can be a bit of a nuisance. They can often send out completely the wrong sort of message about what we are doing,” he says.

Indeed, what marks out Bradbury is less his secret- squirrel stockpicking than his emphasis on the importance of a top-down overlay. Take the classic turning point of March 2003. “No matter how brilliant a stockpicker you were, if you were in defensive stocks at the time and you didn’t shift your portfolio, you would have been left for dead,” says Bradbury. “There are crucial points in the market when you have to make a top-down call and then run with the momentum.”

Right now his view is defensive. “It’s going to be a pretty flat three to six months. We need to see the top of the interest-rate cycle,” he says, although he’s confident this cycle will be shallow, with one or two small rate rises to come.

“Our strategy through the first half of 2004 has been to reduce exposure to cyclical areas that have performed well over the last 18 months and now look fully priced. We expect near-term market uncertainty and therefore intend to maintain our relatively defensive stance for the time being.”

Bradbury has been buying utilities such as Kelda, Pennon (one of his 10 largest holdings), International Power and Northern Ireland’s Viridian. Transport has been another area where he has increased his holdings, buying into Stagecoach and Go-Ahead. He has maintained his biggest overweight bet – support services – which he sees as continuing to benefit from long-term structural growth through outsourcing.

The fund’s “late cycle” bets are strongest in aerospace, in anticipation of a civil aviation recovery in 2005. Bradbury thinks valuations in the sector are reasonable and profits will surprise on the upside. But he says the two great sectors that have been the mainstay of small and mid-cap funds for the past couple of years – housebuilders and motor distributors – are on the wane.

Getting the call right on building and construction is essential in the mid-cap field. Construction is 15% of the mid-cap sector, while the housebuilders make up another 7.5%. Bradbury went neutral a while back and is now underweight. However, you’ll see stocks such as Bellway – the single largest holding at 2.8% – and Balfour Beatty, at 2.5%, featuring strongly in his top 10 stocks.

Note that a portfolio share of 2.8% is his largest single holding; Bradbury is not a man to take very big active bets with this fund. He aims to reward investors with the index plus 3%, which he has more than comfortably achieved so far.

He believes that if you are selling a collective investment vehicle to the public, it should be made up of a reasonably broad spread of stocks (the fund has around 70 holdings), without too many big positions in individual shares.

One problem I have with the mid-cap sector is that it has neither the excitement of high-growth small-caps nor the solidity of the FTSE 100. The sector – which has only around 215 stocks to choose from – can be the ladder through which soaraway stocks such as Cairn can climb up on the way to the FTSE 100, but can just as well be death’s waiting room for dinosaur stocks such as Courtaulds.

Bradbury makes the point that Old Mutual did not launch the Mid Cap fund because it believed there was an innately superb investment story to tell, but because it was a sector that was under-represented in investors’ portfolios. He adds that many of the “dinosaurs” can stage impressive recoveries. Look at steelmaker Corus, which collapsed at one stage to a share price of just 4p – it is now knocking on the door of the FTSE 100 again.

Marconi is perhaps the classic stock that crashed out of the FTSE 100. Bradbury bought into it after the refinancing deal, although it hasn’t done that well of late. It is his main exposure to the technology sector – an area where he is underweight. The other mid-cap tech stocks now look expensive, he says, and he sees slower growth in 2005.

If investors are going to make mistakes over the next six months, it will be in general retailers and leisure. Interest-rate rises have hit the consumer, and companies in the sector face a difficult operating environment. It is the same story for speciality financials, such as the consumer credit and buy-to-let companies, says Bradbury.

He doesn’t have any “no-go areas”, but he does think it is crunch time for food manufacturers. They are in a double bind, facing higher input costs precisely when the big supermarkets are exerting tougher margin pressure than ever.

As one of the more highly rated managers to have emerged in recent years, one wonders just how long Bradbury will stay at Old Mutual. But he appears settled: Old Mutual has given him extraordinary flexibility, allowing him to work half the week at his home 15 miles outside Cardiff. It allows him investment autonomy and he enjoys a “competitive” pay package.

Old Mutual has also allowed him to run a long-short hedge fund, which he launched in March 2003. The launch timing made running short positions rather tough going, but at £60m the fund is meeting its targets. One gets the feeling that Bradbury is the sort of person not to mess up for long, whatever the market conditions.

PATRICK COLLINSON
The Guardian Personal Finance Editor