Kitchen spices up a dull portfolio

Threadneedle UK Select Growth is almost the worst fund in its sector over one year - lucky for it, then, that it is now being managed by a Guardian-reading alumnus of Invesco Perpetual.

The figures for Threadneedle UK Select Growth are probably some of the least attractive around. It’s ranked 290th out of 292 funds in its sector over one year, and over three years it is also bumping along the bottom. So why should you give this fund a second glance, unless you are thinking about redeeming?

The answer is Graham Kitchen. He runs the fund, but is not responsible for its history. He took over in March, recruited from Invesco Perpetual to turn around Threadneedle’s dreadful UK figures. Given his track record, it should give despairing investors in this 180m fund some hope. And as the new broom at Threadneedle he’s quite happy to talk about the dirt.

“Firstly, the fund just got it wrong in things such as stockpicking. Secondly, one or two funds did not have enough risk and were too institutionally benchmarked,” he says.

Threadneedle, given that half of the 60bn it manages comes from the old Eagle Star and Allied Dunbar funds, has a natural bias towards benchmarking, so Kitchen has his work cut out. It was excessive risk aversion that led the company into a too-bearish position in British equities in early 2003, from which its performance figures have yet to recover.

“In 2003 we were too bearish and defensive. When the equity yield crossed the gilt yield, either you believed everything was about to collapse, or you started buying aggressively.”

Hindsight is, of course, a wonderful thing, and Kitchen does have sympathy for the decisions taken at the time. “It seems so different today, but you’ve got to remember that back at the beginning of 2003 the life companies were effectively bust and there was about to be a war in the Middle East. You can understand why some people thought we might be heading back to the 1930s.”

Last week’s terrorist attacks on London are a reminder of how fragile confidence is. The market had been enjoying one of its best patches in years, only to dive 4% in early trading, though it recovered much of those losses later in the day.

Past crises have been largely averted by massive injections of liquidity, although so far there is little reason for serious action to be taken by the authorities. The Bank of England, the European Central Bank and the Federal Reserve all agree that markets are working efficiently and that no emergency injections are required.

But there is, nonetheless, a flight to safety, and while there is unlikely to be a major economic effect from the blasts, it is yet another element of downside risk.

The high street was already suffering before the London explosions, and now shoppers will think twice before venturing out. Recent reports from the high street suggest that consumer confidence is at least as fragile as it was in autumn 2001, with gloomy trading updates from a host of retailers.

Speaking to Kitchen before the blasts, he was already very nervous about retail stocks. “I’m very bearish on the consumer. If people think that cutting rates is going to bail them out, they’re wrong. House prices are simply too high, and we could see the start of quite a downturn.

“I find it difficult to believe that after an 11-year boom you can have an 11-week recession. The analysts haven’t thought through how severe things could get.”

The mandate for UK Select is quite aggressive – Kitchen can roam across all market capitalisations and sectors and runs a concentrated portfolio. Right now he is very defensive: “We don’t have any retailers, domestic banks or housebuilders. What we do have is lots of special situations.”

He still likes oils, with BP his single largest holding at 8.9% of the fund, and Shell at 4.7%. It is an indication of how aggressively Kitchen has changed the portfolio of UK Select since taking over in March that back then neither of the two UK oil giants featured in the fund’s top 10 holdings. Now they are both in the top five.

He has also downgraded the fund’s former positions in Royal Bank of Scotland and Lloyds TSB, instead topping up HSBC and Standard Chartered. On oils, he is convinced the analysts have got it wrong. “All the analysts have oil in their long-term forecasts at a price of $35-40. Yet there is a severe long-term imbalance between supply and demand. I can’t see why the price would fall back to $35-40.”

However, it is worth noting how the oil price behaved after the London attacks. While gold soared, oil slumped, falling from an all-time high of $62.10 (as traders fretted about potential disruption to supply from hurricanes in the Gulf of Mexico) to as low as $57.20. The market’s view is that a re-acceleration of al-Qaida activity could lead to a global slowdown, bringing oil prices down in its wake.

But what about the “special situation” stocks? One that he has been buying vigorously in recent weeks is Collins Stewart. “Everybody hates it,” he says, referring to the battles that its boss, Terry Smith, has had with the Financial Times and others. What impresses Kitchen is how Smith has managed to pivot the company’s source of profits away from institutional brokerage across to money broking. It is also on a significant price/earnings discount to ICAP.

Like many other fund managers, Kitchen is mystified as to why so many have bought into Party Poker. He has completely avoided it, and worries that it is raising cash from the stockmarket even though it doesn’t need finance to pay for expansion. “The function of the market is to provide capital for companies to grow. That’s not the case with Party Poker.”

Perhaps because of his background at Invesco Perpetual, Kitchen is the kind of individual who wants to talk stocks rather than top-down economics. But he is also head of the UK desk at Threadneedle, and manages an 18-strong team. He is probably an excellent team manager; most fund managers have a tendency towards egotism, but not Kitchen. Indeed, interviewing him it is tough to keep him on his subject – instead he wants to hear about your business.

Perhaps it is because in my case I work on The Guardian and Kitchen is that rare creature in the City, an avid reader of a left-of-centre paper. “Every day I read the FT and the Guardian. It’s the perfect combination.” Evidently Kitchen has brilliant taste and insight, and there can be no better reason to recommend his fund. Buy it now. And The Guardian.