The fund that’ll never have more than 25 stocks
manager Gavin Launder runs a so-called ‘focused’ portfolio for investors, comprising his very best ideas. Just 25 UK stocks, no more and no less. If he buys a new holding, he must jettison another.
It is a brave approach which, when it works, can reap investors rich rewards. So far, so good, although he has not managed to keep up performance-wise with the doyen of ‘focus’-styled funds, the legendary Terry Smith at rival investment house Fundsmith.
Since taking over the helm of investment fund Legal & General Growth in September 2014, Launder has generated returns for investors of some 35 per cent, ahead of the FTSE All Share Index (20 per cent).
Over the same period, Smith’s Fundsmith Equity has delivered in excess of 125 per cent, admittedly helped in part by the fund’s big exposure to the strongly performing US stock market. Currently, Smith’s fund holds 28 stocks.
‘We are looking to hold quality British companies that are enjoying above average earnings growth and generating lots of cash,’ says Launder. ‘Growth that is sustainable with the strong cash flow being employed to invest in capital expenditure, research and development and innovation. A virtuous cycle.’
The choosing of stocks is methodical, drawing upon detailed financial analysis of accounts from the country’s 300 biggest listed companies, analysts’ company research and assessment of the economic background. But at all times, the fund comprises just 25 holdings – and the intention is for each stake to represent as close to four per cent of the portfolio as possible.
In recent weeks, Launder has used the market’s weakness to make a couple of adjustments. Out has gone consumer goods company Reckitt Benckiser, to be replaced by drinks company Fevertree. He has also replaced buildings materials company CRH with retailer JD Sports.
Also this year, Aston Martin, travel company TUI and private equity specialist 3i have replaced defence giant BAE Systems, Prudential and InterContinental Hotels. Some of the switches have not proved immediately successful although Launder is confident they will come up trumps longer term.
For example, Aston Martin’s share price is currently hovering around the £12 level, compared to £18 plus when the shares listed on the London Stock Exchange in October. ‘Of course I am not happy with its share price performance,’ says Launder. ‘But I recently visited its headquarters just outside Leamington Spa in Warwickshire. I came away confident its earnings will recover over the next four to five years.’
While the fund’s portfolio is built from the bottom up – companies first – Launder is keen to ensure the holdings are diverse and not too concentrated in specific business sectors.
On Brexit, Launder says that provided a deal of some sort is done, he believes the UK economy will pull through and confidence will return to the stock market. If a deal is not possible, he fears the economy could spiral into recession with domestic orientated stocks such as banks being hardest hit. None of the 25 fundholdings are banks.
Legal & General Trust is a play on the UK stock market. It is not for income investors – the fund’s dividend is two per cent – but for those who want to buy into a fund with a good chance of outperforming the FTSE AllShare Index over the next five years. It should represent no more than five per cent of any investment portfolio.