Launching an active US equity fund two months after the collapse of Lehman Brothers in September 2008 was never going to be easy.
However, on the third anniversary of the launch of the UBS US Growth fund, the fund has beaten both its benchmark (Russell 1000 Growth index) and the S&P 500 three years straight.
During this time period the £50m fund has had to negotiate both rising and falling stockmarket conditions. Grant Bughman, the client portfolio manager of the fund, attributes the fund’s outperformance to investing across three types of company; classic, elite, and cyclical growth.
According to Lipper, since launch on November 10, 2008 to October 31, 2011, the fund is up 62.8%, versus the Russell 1000’s gain of 58.3% and the S&P 500, which is up 40.1%, all in sterling terms. While team-based, the fund’s portfolio manager is Lawrence Kemp, the head of large cap growth equity at UBS.
The classic growth companies – which includes names such as McDonald’s and CVS Caremark – represent the core of the fund. On average between 40-70% of the fund invests in these so-called stable earnings companies, with the current allocation being 43%.
“These stocks do well during periods of market volatility but the fund cannot outperform the S&P [consistently] by just owing them,” says Bughman.
As such the portfolio in effect adopts a barbell approach, adding two more sources of alpha from elite and cyclical growth stocks.The biggest source of alpha, says Bughman, is from the elite companies, which includes names such as Apple and Google.
Elite growth companies typically constitute 25-50% of the portfolio, and at present are at the high end of the historical range at 48% after Bughman added to his holdings in Visa and Priceline.
“The volatility during summer created opportunities for the fund,” he says.
“Consumer discreationaries are the big overweight in the fund as secular growth in these industries is unabated. These companies tend to benefit from the spending patterns of educated, above-average median income consumers.
“We expect that the discretionary consumer spending of affluent consumers will remain more resilient if there is a downturn.”
The third leg of the fund, the cyclical growth companies – names such as Schlumberger – range between 4% and 18% of the portfolio. During the third quarter of this year these holdings were trimmed back to 5% given their correlation to economic growth, but Bughman has since increased it back to 9% as valuations have “become more compelling”.
“By having these three types of companies we can create a portfolio based on core stable growers, and then outperform the benchmark using elite and cyclical names,” he says.
While the onshore fund has only been going three years, its portfolio is based on the model of a Luxembourg Sicav, which was launched in 2004.
As for the timing of being launched after the collapse of Lehmans, Bughman says: “It helped performance from an absolute standpoint owing to the rich opportunities it created and the fund outperformed dramatically in 2009 as many of the companies we like were sold off. However, it was a tough initial period.”