Part 1 of 2: Schroder’s Julie Dean Dares to be different with great success
Investors were shocked by the unexpected departure of Richard Buxton, and his replacement has a hard act to follow. However, although new to investment trusts, her unorthodox style of investing has attracted a loyal following and makes her one of the most interesting new investment trust managers in recent years.
I recently met Julie Dean, who only assumed control of Schroder UK Growth trust (LON:SDU) in July, and found out more about how she manages money. In Part 1 of this 2 part feature we’ll look her investment style and how that will affect her new mandate.
One thing that is clear, and we can get out of the way right away is, however she manages it, if past performance is a guide, she manages it well. The table at the foot of this article compares the performance of Schroder UK Growth investment trust under Richard Buxton with his sector, the wider market and lastly with Julie Dean’s Cazenove unit trust. Over 3, 5 and 10 years (though not over one) she has outperformed all of them. Over 10 years for instance, her fund returned 267% versus Schroder UK Growth’s 173% total return (the growth in the share price plus any dividends paid).
The table below illustrates the performance of Cazenove UK Opportunities fund since 2008. This is an important year for the fund because it was from then that the outperformance began. Though Julie Dean has been running it since 2003, performance for much of this period till 2008 hugged its index. Sometimes it was a wee bit ahead, sometimes it trailed its index. It is important to note however that this period includes two where she was on maternity leave, and importantly the management of the fund was more restricted by having a tight tracking error. Simply this means it had a requirement to more closely replicate its index, the FTSE All-share.
The period of outperformance occurred once Dean was managing the fund by herself following maternity leave, and the relaxation of the policy of hugging the index.
Monica Tepes, an analyst at Cantor Fitzgerald, put together the table below which compares the performance of Dean’s Cazenove UK Opportunities OEIC, with the investment trust UK Growth sector including Schroder UK Growth. Monica notes in her research that the OEIC has higher management charges than the investment trust of 1% as against 0.65%. Also, it is unable to utilise gearing, or borrowing to invest because open ended funds, which is what an OEIC is, are prevented from doing so.
Despite this, Dean’s OEIC beats every investment trust in the UK Growth sector over 3 and 5 years and since the inception of the Investment Trust UK Growth sector. It is beaten in to second place over one year by Fidelity Special Values trust.
Cantor Fitzgerald research also reveals that since 1st March 2003 (when the AIC UK Growth sector commenced) Dean’s Cazenove UK Opportunities unit trust has returned an average of 13% per annum versus the 5.2% per annum the FTSE All Share index has returned.
This achievement is important not just in absolute terms, where it is impressive, but because her target is to beat the return of the FTSE All Share index by 3% per annum. So far, she has managed to trounce it.
Buy and hold – No way
Dean’s style of managing cash is different to how most other managers I have met run money. As, by and large, the investment trust will be managed similarly to the open ended mandate, it is useful to look at the performance of the Cazenove UK Opportunities fund to understand how she might fare with the investment trust.
Dean has honed a method for investing she calls ‘Business Cycle investing’. It’s a kind of timing the market methodology that we’re all warned not to employ, but which she appears to do very well. And, more than that she was also prepared to explain how she does it and what signs she looks for to change tact and realign her portfolio.
It’s a system she’s been using and refining for over 10 years. We’ll take an in-depth look at this in a follow up article, but in brief she seeks to invest in the type of companies most likely to fare well in whichever part of the business cycle we are in.
She mainly invests in FTSE 350 companies, that is, the top 350 companies on the London market. She references PMI data or Purchasing Managers’ Indexes. These are survey of all areas of the private economy that signal expansion or contraction by businesses and are most commonly produced on a monthly basis. As so many of the companies in the London market derive much of their earnings overseas she references PMI data from around the world.
This results in the portfolio turning over its holdings frequently. Whilst many managers take pride in getting their portfolio turnover down and operate a variety of so called buy-and-hold strategies, Dean has at times turned over her portfolio by 140% in one year.
This is done in part to protect investors capital when markets go down. An example she gave was in 2011, whilst the market overall was down, her unit trust made a positive return. This is a harder target to reach for equity only funds that don’t use shorting or hedging strategies.
The Benchmark she uses is the FTSE All-share index, and she has been consistently in the top quartile of the peer group over every period up to 5 years, and importantly they’ve achieved that with a Beta that is less than 1. Simply, that indicates she’s taking less risk than the market (see definition of Beta at the foot of the article). That’s important because it demonstrates that the managers skill is a contributing factor to the funds success and it is not just down to a rising stock market.
She has set the sane aim for the Schroder UK Growth as with the unit trust, to beat the FTSE All-Share index by 3% per year. If she can do this the trust will be top quartile in its group in terms of performance each year.
The trust holds between 35-65 stocks. This is up from the more concentrated 24-40 that Buxton held. The number of stocks changes with the business cycle, so in 2008 her unit trust held around 38 stocks.
Although getting the business cycle right is important to how Dean managing money the key driver to performance she was keen to emphasise though is getting the stock selection right. Dean added “this is what you’d expect from a rather concentrated portfolio, so how I would encourage you should think of this portfolio is as a proper stock pickers on with a very successful macro overlay”.
Note: Look out for part 2 of this article where there is a more comprehensive look in to business cycle investing.
Most-most view of the world
Most of the time Dean expects to get things right, but when they get things wrong she doesn’t want to do too much damage. The slide below shows where they got things right and where they got things wrong and the effect this had. On the downside the effect was meagre, but when they got things right the effect was colossal (Xaar up 85%).
So what does this mean for portfolio construction?
In periods of expansion/recovery portfolio is tilted towards Beta. The beta of a share is a function ultimately of how variable its earnings are. In periods where economic growth is more of an identifiable trend, Dean looks for businesses where there is something specific about the stock, be it valuation of whatever, she tries to tilt the portfolio towards that.
Schroder UK Growth’s reasonably low management fee of 0.65% has been trimmed further as part of the negotiations with the board to 0.60%. for the first six months from 1st July the management fee has been waived, which should cover the cost of repositioning Buxton’s portfolio to Dean’s, a process that is now complete.
Julie Dean has a long and proud record of producing consistent good returns for investors. Whilst past performance is no guarantee to future performance, it is a strong indicator of what to expect.
We like that investing in Schroder UK Growth provides a degree of stock diversity compared to its peers, and most certainly a different style of investing that if she can continue to get right has been shown to produce positive returns in poor investment environments. This is key if like us you subscribe to the view that we are in a low growth environment in much of the Western world for several years to come.
Schroder UK Growth joins our buy list of trusts we like.
For the investment anoraks amongst you, a more in-depth look at Dean’s investment style will follow in Part 2 of this article.
If an investment trust (or share or fund) has a Beta of 1 it means it moves with the market, taking the same amount of risk. A Beta or more than 1 is more risky than the market but might have higher returns also. Less than 1 means that less risk is being taken than the market.
If a trust has a Beta of less than 1 therefore but is making returns that are beating the market it means it is less risky than the marker but providing better returns.
Schroder UK Growth Investment Trust Metrics
|Share Price||178 pence||Dividend Yield||2.25%||5 year dividend growth p.a. = 0.9%|
|Total Assets/Market Cap (Million)||£332m / £286m||Gearing||10%||Managed by Julie Dean since June 2013|
|AIC Sector/Date Founded||UK Growth / 11/03/1994||On-going charge & how much of the charge is the managers fee||0.85% / 0.60%||Managers direct holding:
None but has a ‘substantial’ holding in open ended version
|Discount to NAV||-5.25%||12 Month Average Discount to NAV||-8%||Financial year end: 30/04/2014
|Total Return 1, 3, 5 & 10 years||+46%||+64%||+70%||+173%|
|UK Growth Sector Total Return 1, 3, 5 & 10 years||+42%||+54%||+78%||+233%|
|FTSE All-Share Index Benchmark Total Return 1, 3, 5 & 10 years||+18%||+40%||+49%||+141%|
|Cazenove UK Opportunities Total Return 1, 3, 5 & 10 years||+43%||+92%||142%||+267%|