In addition to focusing on one sector the manager also runs a concentrated portfolio. He looks at an investment universe of about 200—250 companies and tends to hold about 25 of them at any one time. The fund currently stands at the high end with 30 holdings. The combination of these two elements makes this is a riskier-than-normal fund for most UK investors.
Mr Astor say
s that a concentrated focus is something that goes through all of the Hiscox portfolios and they are “happy to take the bet that we can pick the top 20 or 30 names.” In practice the fund’s performance has generally been strong and its returns are significantly less volatile than the category average.
Investors should note that the Finance Sector Equity category is compiled of funds investing in financial companies around the world. Therefore this fund’s typical peer probably invests in more countries and more segments of the financial industry than it does.
Some market environments are likely to hamper this fund’s performance. For example, Mr Astor explains that 1999 was a bad year for the fund because of an outbreak of consolidation among banks in the previous two years. Banks were paying too much for acquisitions and valuations became too high. At the same time many investors were selling banking shares to buy into technology offerings. A strong recession is another environment in which investing in banks is problematic.
However, the manager says rising interest rates in America are likely to be a boon for many of the banks in which he invests. This is because they are closer to the heart of the communities and when the economy picks up loan growth does too.
In addition to the bottom-up investment research the most important macroeconomic work for Mr Astor and his team is to decide what they think of the American economy as it helps drive their investment decisions about where within the US to invest.
Mr Astor values commonsense as the most important sell criteria but three factors will also lead to an investment review: the share price, a nasty surprise from the company and a bid for the company.