What a 2012 for Standard Life Investments! Take all 2,883 open-ended investment funds available to UK investors. Rank their performance over one year. Of the top three, two turn out to be from Standard Life.
Top of the tree for 2012 was Standard Life UK Equity Unconstrained, managed by Ed Legget. Second was Fidelity UK Smaller Companies, while a close third was Standard Life UK Equity Recovery.
Normally these end-of-the-year rankings are dominated by funds you have never heard of: funds that have an incredibly exotic investment mandate, which shoot the lights out then dutifully disappear for another decade. So it’s gratifying to see one of the biggest beasts in the investment jungle, Standard Life, giving investors stellar returns.
Neither is the top-ranked fund, UK Equity Unconstrained, a narrowly focused fund with few investors. Legget manages a total of £800m in Equity Unconstrained, with £500m in the retail version and another £300m in an institutional version.
Furthermore, he hasn’t just managed one brilliant year after a string of poor ones. Yes, it’s first out of 286 funds in the IMA UK All Companies sector over one year, with a gain of 44.3 per cent compared with 15.5 per cent for the sector. But he had a similar year in
2009 when the fund saw a 99.2 per cent gain compared with 30 per cent for the sector. Legget is one of the few managers who can safely say he is top decile over every period since he took over running the fund in 2008.
But you’d better get your skates on if you want to share in his success. The fund will soft-close when it reaches £1bn, which, given Legget’s performance figures, can’t be far off.
He follows a unique investment process. The ‘unconstrained’ bit in the title doesn’t mean it is free of any controls; for example, he doesn’t allow any holding to be more than 5 per cent of the fund, so becomes a forced seller when his stocks soar, as they did in 2012.
‘Unconstrained’ refers to the make-up of the UK equity market. The fund’s mandate is to beat an index which comprises all stocks in the FTSE 350, but with each given an equal weighting. So Tesco has as much, and as little, influence on the index’s performance as Ted Baker; BP as much impact as Bunzl. What this index does is tear fund managers away from their often slavish devotion to managing portfolios that deviate little from the performance of the 20 giants that make up most of the UK equity market.
It does, of course, mean that this fund will be riskier and more volatile than a mainstream UK equity fund, but it appears to be a price worth paying. Indeed, Legget points out that in general, the equally weighted index outperforms the market-cap weighted index over the long term.
It means that while most UK equity fund managers working in big investment houses have BP, Shell, Glaxo and HSBC in their top five holdings, they don’t appear anywhere in his top 10.
Legget’s biggest holding in his 50-stock portfolio is DS Smith, which makes cardboard boxes. It has quadrupled in price from 50p in 2009 to above 200p in December. Legget says it typifies the sort of stock he likes most – ones where there are material changes in the company’s competitive landscape, improvements in the balance sheet and renewed management dynamism.
You may not know of DS Smith but you’ll have used its output, such as the boxes and packaging for Flora, Jif, Marmite, Jaffa Cakes and Dorset Cereals. “It’s very big in the UK, France and Poland,” says Legget. “Yet it was until recently a sleepy company and a poor allocator of capital. It has had a new finance director and CEO, and done a number of deals to buy packaging operations in Europe with huge synergies for the business.”
His second-biggest holding is International Personal Finance (IPF), the sister company to short-term credit provider Provident Financial in the UK. “It has been my best performer and clearly has a business model that is pretty resilient. Its share price has gone up and down like a yo-yo, yet it has doubled its profits. I have had to sell them at times during the year as they have breached the 5 per cent limit in the fund, but they are still good value. They are only trading on 11 times 2013 earnings.”
In the final quarter of 2011, IPF shares fell dramatically, dropping to 150p from 350p just a few months earlier. “I decided to buy an awful lot more, doubling the number of shares I held. Today they are around 380p compared to the 230p onwards that I paid for them,” Legget says.
But it’s not all names from the lower end of the FTSE 350 that make up this portfolio. It’s noticeable that Lloyds and Barclays are both in his top five. “The UK banking sector, if it is going to survive, has to be able to make returns above the cost of its capital. They are three- to five-year restructuring stories, where they have been running down and sorting out their non-core loan books and turning themselves into boring ringfenced banks.”
Can Legget repeat his stellar performance in 2013? Any manager faced with this question will say “no”, but Legget remains optimistic. “There are still a lot of opportunities to buy companies on seven to nine times earnings with a 5 per cent yield. If the market holds its rating, I think you’re looking at 10-15 per cent returns in 2013.”
And after 45 per cent in 2012, that would be hugely attractive in anyone’s book.
Patrick Collinson is the Guardian’s personal finance editor