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Merrill Lynch UK Dynamic is five-star By Rob Griffin
Mark Lyttleton is one of fund management's golden boys. Feted by financial advisers for his success in taking advantage of market trends, he has proved himself to be one of the most consistent performers in the business. His Merrill Lynch UK Dynamic fund has delivered a return of more than 90% over the past three years, according to Morningstar, which has awarded the portfolio its maximum five-star rating. The freedom to tilt the fund in different directions has been a main driver of its performance, claims Lyttleton. The absence of any sector or market capitalisation constraints means it is only exposed to the most attractive areas. "As well as varying the size of the companies in which we invest, we can also switch between being growth and value investors," he explains. "This gives us a tremendous degree of flexibility and makes it a fund for all seasons." When the market is heading for a choppy period, for example, the portfolio can be packed with defensive, cautious companies that are capable of producing income. At other times it will be biased towards higher risk, higher return growth stocks. "We're currently underweight banks, house builders and retailers, but there have been periods in the past when these areas have been booming," explains Lyttleton. "People don't have to play these market cycles because we can do it for them." The aim: Long-term capital growth The £1.3 billion UK Dynamic fund, which was launched in October 2000, targeted long-term capital growth by investing, primarily, in companies that are incorporated or listed in the UK. The concentrated 30-50 stock portfolio is put together by analysing thousands of individual firms, and taking into account the house's view on how key economic issues are likely to play out around the world. "We're constantly weighing up things up such as the predicted movement of UK interest rates, the outlook for the US housing market and the rate of GDP growth in China," explains Lyttleton. "Our time horizon is usually 12-24 months." The ability to know and understand how different pieces of information will impact upon stocks is vital. "It's all about disseminating everything to find the few useful points that might affect a company's profit or share price," he says. "I get 500 emails every day and knowing what's important comes down to experience." On a stock specific level, Lyttleton is very clear on what is wanted. "We're looking for companies with strong market positions and the ability to have a degree of control over their pricing," he says. "A good management team with a coherent strategy to steer their companies in a competitive world is also important." At present, two thirds of the names in the fund hail from the FTSE 100. "I'm just finding decent investment opportunities among the larger caps," explains Lyttleton. "There is a great opportunity to make lots of money from them at the moment." One such holding that fits the bill is Man Group (EMG.L). Although its share price rose 50% last year, it is still one of the biggest holdings in UK Dynamic with a 4.4% share of the overall portfolio. "It is the world's largest hedge fund manager and this is a growing area of business," he explains. "The company has a strong balance sheet, its valuation doesn't look excessive and we also expect it to continue growing." There will also need to be evidence of a catalyst that will eventually cause the share price to perform. "This can include a new product in the pipeline, a change of management or a merger/acquisition," adds Lyttleton. Play on global growth Alongside an enthusiasm for large-cap stocks, other investments themes in the fund include a positive stance being taken on commodities, as well as increasing exposure to the aerospace and pharmaceutical sectors. "One of the joys of investing in the UK market is that it's a play on global growth and not very sensitive to the UK economy," he says. "Valuations are currently attractive, there's a lot of M&A activity going on and companies have strong balance sheets." Although he describes the global outlook for the coming year as "okay", he believes investors should steel themselves for a rocky ride, with the economic slowdown in the US and monetary tightening in the UK playing a part. "We're going to make decent money over the next 12-18 months but there will be periods of volatility," he adds. Lyttleton, however, is confident that UK Dynamic's flexibility will enable him to make the necessary changes to generate the right level of performance for his investors - whatever happens across global markets and economies. "We've got a good long-term track record, a strong process that people understand and we invest in high quality companies," he says. "It's a fund that investors can buy and hold through stockmarket and economic cycles."
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