Bull market wobbles? Five funds for taking a defensive tilt

Minimum investment: Lump sum £1,000, monthly £100

Investment split: 100% in UK companies

Isa link: Yes

Charges: Initial 5%, annual 1.5%

Commission: Initial 3%, renewal 0.5%

Contact: www.edenfinancial.com

Private client firm Eden Financial is developing its asset management business by building a range of funds for private investors, intermediaries and institutional investors. It has unveiled the CF Eden UK Select, its second Oeic, as the first in a range of funds for a wider investment base.

The aim of the new fund is to provide long term total returns, comprising income and growth, by investing mainly in a concentrated portfolio of UK companies. It initially contains around 40 to 60 stocks with a bias towards mid and small cap stocks, but at launch will hold around a third in small, medium and big companies.  It will taregt a yield of 2.66 per cent.

Fund manager Leigh Himsworth prefers under-researched companies that he sees as hidden gems. These stocks can be bought at an attractive valaution relative to their high potential growth.

Putting the fund in to its market context, Hargreaves Lansdown Richard Troue says: “The UK stock market is home to over 1,000 companies, yet the 10 biggest companies account for over 40 per cent of the FTSE All Share Index. Focusing too much on these dominant “megacaps” is a risk, and one which Leigh Himsworth will specifically aim to avoid.”

Troue points out that Himsworth will scour the entire market for opportunities. “I like this unconstrained, or ‘go-anywhere’ approach. Initially he will aim to hold approximately one third of the portfolio respectively in large, medium-sized, and higher-risk smaller companies.”

Troue points out that a company such as Royal Dutch Shell could be covered by up to 30 analysts, but Himsworth prefers companies covered by just three or four analysts, meaning their prospects are less widely known.

“Ultimately, he is looking to create a portfolio of approximately 40 stocks not highly correlated to each other. Again, I like the level of concentration – it is a higher-risk strategy, but a high-conviction approach allows each stock to potentially contribute significantly to returns. There will also be risk controls in place. No one stock will account for more than 5 per cent of the portfolio, for example,” says Troue.

Troue feels that at the heart of this fund is a stock picking portfolio, with a focus on company balance sheets and cash flows; ensuring a company’s debts are manageable and it is generating enough cash to cover running costs.

“Wider economic issues are not ignored though. Himsworth does not try to forecast interest rates or GDP growth, but he believes for every problem there is an opportunity.”

As an example, Troue says that if inflation is a problem Himsworth will look to invest in companies with pricing power as well as those who are better placed to increase prices in line with, or above, inflation.

Turning to the less appealing features of the fund, Troue says: “As far as the investment approach is concerned there really isn’t much I don’t like. Our analysis shows Himsworth built a solid track record while at Gartmore, and before that at Royal London and Rensburg, but I would like to see him settle into his role at Eden Financial and continue to build on his previous track record before considering the fund further.

Discussing funds that could provide the main competition for Eden, Troue says: “The IMA UK All Companies sector is a big and competitive universe, which can make it difficult to stand out. The managers that have impressed me most of late are Anthony Cross and Julian Fosh of Liontrust special situations.”

The Liontrust special situations fund is a UK equity fund that invests in the managers’ best ideas across small, medium and big companies. The managers identify companies with characteristics such as intellectual property, strong distribution channels and significant recurring business These factors are seen as creating an economic advantage, enabling the companies to produce above average profitability for longer than expected. The managers believe this surprises the stockmarket and leads to strong share price appreciation.

Troue notes that Cross and Fosh have built an impressive track record running this concentrated multi-cap portfolio and is positive on the long-term outlook for this fund. “It is currently one of my favourites within the sector and it should provide Leigh Himsworth with some stiff competition.”

BROKER RATINGS

Suitability to market: Good

Investment strategy: Good

Charges: Average

Adviser remuneration: Average