Fund Update – SLI UK Equity Unconstrained Fund

he was a given a blank canvas to deliver a high conviction fund.

The SLI UK Equity Unconstrained Fund has delivered excellent returns for investors under the stewardship of Ed Leggett. Ed took on the management of the fund in 2008 and in June he announced that he was leaving the firm and moving to Artemis to manage one of their flagship UK Funds. SLI appointed Wesley (Wes) McCoy as his replacement.

We recently met Wes to help investors decide whether they should remain invested in the fund, or consider an alternative option.

Q: Please provide some background to your career to date and your involvement with the fund?

Wes started by explaining that he originally joined Standard Life in 1999. He worked his way up from analyst to managing funds after completing his Chartered Financial Analyst Qualification. He described the initial funds he managed as funds with stabilisers. He went onto explain that the process was very controlled. As his experience grew he was given the reigns of the Growth and Income Fund.

In 2005 he was asked to set up the SLI UK Equity Unconstrained Fund with a mandate to be benchmark agnostic but risk aware. Effectively he was a given a blank canvas to deliver a high conviction fund.

He ran the fund for 2½ years delivering significant outperformance before leaving SLI and handing over the fund to Ed. He left SLI not to pursue another fund management role but to support his wife who wanted to work in Africa. Whilst in Africa Wes worked on various rural finance projects. When they started a family it seemed a natural thing to move back to the UK.

At the time Wes felt he wanted to work in a smaller niche environment and found work with Odey. After a year he felt drawn back to SLI and contacted them. They offered him a route back and he returned to SLI in 2012. Initially his role was with the global equity team but four months ago he moved across to the UK team.

It seemed natural that when Ed left, Wes would take back the reigns of the fund he had set up and run successfully for nearly three years. As he explained in 2008 he had handed over the fund to Ed and now Ed was handing it back. The design and framework remains, but obviously the stock picking skills of Ed have gone.

Q: With Ed gone how can you continue where he has left off?

Wes started by talking about the process and how this remains. The framework is called focus on change. They are looking for those companies that are in a process of change. This can be significant or almost insignificant. DS Smith and Sage are companies where significant change is happening but Prudential is more subtle.

He also explained that the fund is also size agnostic so it can invest in a small cap company like St Ives or a large cap like Royal Dutch but what glues them together is change. Over time those that get it right can give shareholders significant upside value.

Importantly the fund is made up of the best ideas from a team of analysts and fund managers so it was not just Ed’s ideas. That team is still there but it will be down to Wes to pick the holdings. Since he has taken on the fund he hasn’t altered what is happening in the fund.

Importantly Wes explained that his aim is to meet all the companies which he holds in the fund. The only one he hasn’t met is Pets at Home and he is due to meet them shortly. Having knowledge of the companies is important. When Ed left his pending trends were placed on hold which Wes reviewed before they went through.

Q: Ed always highlighted that he was risk aware, has anything changed with you coming in?

Wes explained that the style has not changed they are looking for strong companies with strong fundamentals where the downside is somewhat protected. The level of risk is assessed and then weighted accordingly. Those with less downside risk will have the highest allocation (up to a maximum of 5%), those with more risk will have a maximum weighting of 1.5% and those between the two up to 3%.

He also explained that the top 20 makes up between 50 and 60% of the fund so he makes it his job to know those companies well, as well as all the holdings in the fund.

Wes used two examples Sage and DS Smith. DS Smith is a company he knows well first analysing them back in early 2000. In 2010 / 11 they took on a new management team who quickly understood that they were never going to win in a low cost environment. They then worked on the idea that packaging was as important as the product.

Working with different companies the company has reversed its decline and has now moved into a new stage of its development sponsored by the companies it works with. On the downside if it went back to what it was doing it would likely still be there. So the downside protection is there.

Another example was Sage who built up accounting software franchise with SMEs across the UK, South Africa and parts of Europe. If they do nothing then the repeat subscriptions are fine but the company is using technology to sell other digital solutions so again bringing change into a sleepy company but with downside protection.

And as Wes pointed out change doesn’t have to be as dramatic, Prudential is exposed to demographic changes which will play out over many years.

Conclusion

As the meeting drew to a close, two things which we felt were important for investors. Firstly Wes left his money invested in the fund when he left in 2008 and continues to hold his money in the fund so his actions are aligned to investors. Secondly by investing in companies he sees the fund as part owners of those firms so they want them to do well, again it is about alignment.

SLI have seen very little money move out of the fund and in part that could be because Wes was the original manager. On the plus side the process remains unchanged and was designed by Wes, the feedback from analysts and across the UK and global teams remains unchanged and you have a manager who when in charge delivered excellent returns (although the future is not guaranteed).

On the flip side some may argue that Ed was the brains, although he had the input he was the stock picker. This is the first time Wes has managed a fund since 2008 and can he repeat what he did before. To some extent this will play out over time, but equally can Ed repeat what he has done or was he reliant on the team?

Investors in the fund need to decide whether to trust Wes as the new steward of the fund or look elsewhere, there is no definite answer to this.

The source of information in this note has been provided by SLI and is correct as at July 2015. These are notes from meeting the fund manager and should not be seen as a recommendation to purchase any fund mentioned. Any reference to shares is not a recommendation to buy or sell. Should you wish to make a decision based on these notes we cannot take responsibility for this and you should carry out your own research before making a decision. You should note that past performance is not a reliable indicator of future returns and the value of your investments can fall as well rise.

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