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Vaughan bolsters returns
By Rob Griffin
Dan Vaughan may have only been in charge of Threadneedle's UK Smaller Companies fund since September, but he's still willing to take full responsibility if the stocks in his portfolio fail to deliver the goods. "I've got full ownership now and there aren't any holdings to which I'm not happy putting my name," he insists. "I'm afraid that if it all goes wrong from here then it's my fault - I cannot blame anyone else."
Of course, many of these positions were already familiar as Vaughan had worked closely with his predecessor Bill Barker before the latter left to join Pictet Asset Management, but a number of changes have also been made.
In recent weeks he has halved
his exposure to stocks listed on the Alternative Investment Market (AIM), and trimmed positions in a number of retailers, as he is extremely cautious on the outlook for the UK consumer. "My view on AIM is that the risk-reward outlook isn't very good," he explains. "Lots of these stocks have limited due diligence carried out, are higher risk and often rely on returning to the market to raise more funds."
Only those stocks in which he has total confidence are given a berth. One such name is Kirkland Lake Gold, the Canadian gold mining company that owns and operates the five major gold properties in Kirkland Lake, Ontario. Kirkland's chairman also happens to be Harry Dobson, the Scottish entrepreneur who sold his stake in Manchester United to the Glazer family - a decision which still gives him plenty to talk about with devoted United fan Vaughan.
Small cap surprise
The objective of the £153.9 million fund, which was launched almost 13 years ago, is to achieve capital growth by investing primarily in the equities of smaller UK companies, although these days many of them have interests overseas. However, investors might be surprised by the actual size of these stocks as some have market capitalisations around the £1 billion mark. In fact, almost a third of assets under management are in companies with values greater than £800 million. "We use the Hoare Govett Small Cap Ex Investment Trusts index, as this has a broader definition of what constitutes a small cap company," explains Vaughan. "I am comfortable having a high exposure to stocks in the £400 million to £1 billion area."
So let's have a detailed look at the portfolio.
Well, there are currently 104 stocks, according to the latest published fund fact sheet to 30 September 2007, although Vaughan intends bringing this number down to a more focused 90 over the coming months. The top 10 positions, which account for just under 17% of the fund's total assets under management (16.9%), can be viewed as fairly equally weighted because the holdings range in size from 1.5% and 2.1%.
The largest position goes to Spectris PLC (SXS), which is a supplier of precision instrumentation and controls that employs 6,000 people around the world and was a founding member of techMARK, the LSE's index for technology companies. This company, which is based in Egham, Surrey, reported pre-tax profits were up by a staggering 53% to £56.4 million for the six months ending 30 June 2007, while earnings per share rose 61% to 33.4p.
Other prominent names within the top 10 include: Autonomy Corp (AU-) (software developer); Laird Group (LARD) (electronics); Morgan Sindall (MGNS) (construction); Hiscox (HSX) (insurance) and Babcock International (support services).
Slip in performance
So how is the fund viewed? Well, in a recent report, the independent analysts at Standard & Poor's praised the work that had been carried out to bolster returns, but warned that performance had slipped slightly this year and needed to be rectified.
"Despite outperforming its benchmark in 2007 to July, the fund has underperformed the S&P sector median as a result of holding some poorly performing stocks and having limited exposure to AIM-listed companies," it wrote.
Returns have been recently hit by the poor performances of real estate company Direct Wonen (DIWO); Imprint, the recruitment specialist, whose share prices fell after profit warnings; and Paragon Group (PAG), the mortgage provider, which was affected by the turmoil triggered by Northern Rock (NRK).
Thankfully, strong results from Dignity (DTY), the funeral homes company, and an excellent trading statement from Chloride (CHLD), the manufacturer of power supply equipment helped to redress the balance.
On balance, Standard & Poor's appears satisfied. "Despite Barker's departure, Vaughan has established a credible track record co-managing this fund and a pooled UK smaller companies pension fund," it concluded. "This, together with the unchanged process, continues to support the fund's S&P A rating."
However, Vaughan is under no illusions about the enormity of the task ahead - not least of all because the small cap world is a ferociously competitive arena in which some of the most respected fund managers in the industry operate. "An awful lot of very good managers are all chasing a relatively small amount of money so the key over the medium term is to establish a strong, credible track record," he says Vaughan. "Over the next three years I have to prove it can be a top quartile fund consistently, otherwise who will give me their money?"
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