At first glance, this fund looks very attractive: Indeed, its returns rank in the top-decile of its Morningstar UK Large-Cap Blend category and top-quartile of its IMA UK All Companies sector over the past three years. However the fund has had a bit of a rocky past and has only recently begun t
o turn a corner.
Since Murphy resumed control of the fund in April 2004, though, he has kept the portfolio’s strategy consistent. He uses a 50/50 core and satellite model where half of the fund is in lower-risk, blue-chip firms that he intends to hold for between two and five years, with the other 50% dedicated to riskier fare that he often holds for six months or less (e.g. leisure firm Luminar and AIM-listed New Star Asset Management). In order to moderate risk, he tries to keep individual stock weights within +/- 3 percentage points of the FTSE All-Share and sector weights within +/-10 percentage points of that index. At the same time, he caps his positions in his riskier satellite holdings to 2%, while putting up to 5% in core stocks. The resulting portfolio of between 60 and 80 stocks is a well-diversified mix of firms across market-caps and both value and growth styles. Because of Murphy’s satellite strategy (which tends to focus on smaller-cap firms), the fund has more of a mid- and small-cap emphasis than the average category peer, with about 28% and 10% there, respectively, as of December 2006. Though half of the portfolio is anchored in blue-chips by mandate, it’s still lighter in giant- and large-caps than category peers (Murphy has held about six and five percentage points less in each, respectively, since taking over the fund in April 2004).
While the fast-moving, mid- and small-cap focused satellite portion of the fund has largely been responsible for pushing the fund up to its top-decile levels, it’s also the area of the portfolio most susceptible to risk. Murphy’s strategy in this part of the portfolio is essentially momentum-based, and it’s not statistically easy to consistently make accurate, short-term bets on factors like psychology or macroeconomic trends, as he tries to do. Granted, he has done very well for investors in this vein so far, and with reasonable volatility at that (the fund’s three-year standard deviation is only one percentage point above the fund’s category average). But, there are reasons to remain sceptical: three years is too short a period to depend on exclusively and Murphy’s prior record with the fund is inconclusive. He ran the fund during a volatile bear market where he was in the top half of his category in 2000 but sank to the bottom decile by 2001.
We believe Murphy is putting this fund back on the right track, but funds with more proven histories of success offer more compelling alternatives at this time.
