The management of the fund is now team based, and stock selection is bottom
up. The team like to meet the management of every holding prior to purchase, placing heavy emphasis on the quality of a company and its valuation. As such they shy away from richly priced issues whose growth appears unsustainable. As a result the fund missed out on momentum stocks like Tullow Oil and Randgold Resources. Such issues have helped competitors as resources have led the market over the past year, but they are too richly valued to appeal to the team. Instead they have preferred out of favour names like high street music and video retailer HMV. The shares have halved over the last three years as music buyers have moved online, however the group have now improved their own online distribution platform and internet sales have increased. The team also feels that the competitive squeeze being put on high-street music stores will ultimately favour the strongest player, which they believe is HMV.
The fund's results have been mixed in its new guise. It posted a decent 2006, but it flagged badly in 2007's turbulent market. Even so, we think the fund is better than it might look based on those figures: The team's value and quality based approach means it will nearly always underperform in momentum led environments like those seen in 2007. The fund has also been dented by legacy issues over the last two years as the team have come to terms with their inherited portfolio. A number of the stock specific detractors from performance over recent years have come from holdings purchased by Ross. Aviation services company Dart and property services group Erinaceous are prime examples; both have suffered mis-management and have lost 80% and 99% respectively over the last year, but due to liquidity constraints the team were unable to sell out in time. This has now been addressed and the team carry out regular liquidity checks to identify how quickly they will be able to trade out of a holding.
On the whole we are encouraged by the changes that we have seen thus far. The team uses a disciplined, consistently applied strategy that helps limit valuation risk. They have applied the same style to good effect at larger-cap Aberdeen UK Growth, and although there has been a recent change of leadership on the team, with Chou Chong being replaced by James Laing, we do not believe it is to the fund's detriment given the strong emphasis on team and process at the management group. Our main concern here is that small-cap analysis is very different from researching large-caps. The group had really been geared to the former before taking on this offering, and has yet to really prove itself in this environment. This is by no means a bad fund, but until we see more of what Aberdeen's process can do in the small-cap arena, it's not a top choice.
