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M&G American: solving problems By Rob Griffin
Aled Smith has always enjoyed the challenge of solving problems. "I love puzzles and see investment as one big puzzle," he says. "It's all about sifting through the noise to find the clues that matter." The 38-year-old "We know the type of companies we invest in and have a list of questions which we can ask managements over the phone," he explains. "This makes us very efficient because we don't need to swan around the US trying to find ideas." The overall aim of the £652.5 million fund, which has been awarded the maximum five stars from independent ratings agency Standard & Poor's, is to generate long-term capital growth by investing in North American securities. The portfolio, which consists of around 70 holdings, is constructed purely on the basis of stock selection decisions. No top-down views are imposed on the fund and this means Smith is free to consider companies of all sizes in any sector. "We believe there are four ways to find investment ideas and each one of them focuses on change," he explains. "I'm particularly looking for companies where there's either a new manager or strategy in place that will improve its performance." As well as internal changes, the other areas in which Smith looks for evidence are external events within a company's industry; an upturn in fortunes from research & development programmes and stocks whose efforts have not yet been appreciated. Top holdings A good example of an undervalued stock is Home Depot (HOM.L). Sentiment on the world's largest home improvement store chain has been hit by the downturn in the US housing market which has meant conditions for the company have been pretty tough. However, Smith believes the combination of a sound business model and the prospects of good growth from the company's Home Depot Supply business makes it attractive, which is why it's the fund's largest holding with a 1.8% share of assets. Other prominent names within his top 10 stocks are healthcare group Johnson & Johnson (JNJ), as well as Procter & Gamble (PG), Citigroup (CGP) and Tyco International (TYC). As a result of his choices, non-cyclical consumer goods is the largest sector in the portfolio with a 23.6% share of the assets, followed by financials with 15%, the 13.7% in cyclical services and the 11.3% in resources. Having a strong and talented executive team at the helm is one of the most important attributes for any potential holding. "We're very passionate about company management understanding how to create value for shareholders," he explains. "Only companies creating value - or on the path to doing so - will get our support." The research carried out by Smith and the rest of the M&G equity team provides a constant source of fresh investment ideas. "When we find a new idea we spend time looking for reasons not to invest and if we can find any then we won't buy it," he explains. "In addition we have a one-in, one-out approach so it's a case of looking through the portfolio and seeing what has made us money and is now mature, and where we can sell it to make room." Maverick approach Smith is proud to have what some advisers have termed a maverick approach to investing. "We've been described as off-the-wall but that's fine with me because you have to be different to make money," he says. "You can't follow everyone else." Outsourcing a lot of the research, searching for reasons not to buy a company and even using professional accountants to quiz finance directors to root out accounting errors and frauds are just some of the ways his team differentiates itself. Smith also shuns the idea of forecasting or building investment models as he believes this can make you over-confident about a stock's prospects. "We've got well run companies doing the right thing but people are yet to understand them," he says. The overall goal, he adds, is to deliver returns to clients. "Our job is to exploit inefficiencies in the market and do so with low risk to our clients," he says. "In that way we all get to sleep easy at night." Looking to the future, however, Smith has a clear idea of how he wants to be remembered. While admitting that people take time to understand his approach to investing, he is still keen to leave a lasting legacy. "In 10 years' time I want to have recognition for having done things differently and been on the wave of a new way of thinking about investment," he says. "I want to preach how companies can do a better job with shareholders' money and to help train and mentor the next generation of investment managers."
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