Fund of the Fortnight: TM Sanditon European

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Written by: Victoria Chernykh
05/05/2015
A review of the new European equity fund run by former Cazenove manager, Chris Rice.

TM Sanditon European launched in September last year and since then has benefitted from the expertise of its manager Chris Rice. We know Rice from his time at HSBC which he joined in 1997 to manage European equity funds, and then Cazenove, where he moved in 2002 with the same mandate. Rice was rated four-stars by us at both houses. We continue to have conviction in him as a skillful stock picker at Sanditon; a boutique investment management firm that Rice set up in 2014 with three other partners following his departure from Cazenove in July 2013, shortly after Cazenove’s acquisition by Schroders was announced in March that year.

The process that Rice and the team originally adopted was transferred first from HSBC to Cazenove, where it was further polished, and then to Sanditon. The manager adopts a long-only strategy in management of the fund, applying the firm’s Business Cycle Approach.

The TM Sanditon European fund’s universe consists of all stocks listed on European exchanges with a market cap above €200m, though in practice the bulk of investments are large and mid-sized companies. The manager pursues a pragmatic approach known as business cycle investing; setting sector and style exposures based on macro-economic views which are determined by the investment team. Stocks are classified into seven types; Commodity Cyclicals, Consumer Cyclicals, Industrial Cyclicals, Financials/Interest Rate Sensitives, Growth Defensives and Value Defensive. The portfolio is tilted towards stock types the manager believes will benefit in the next stage of the business cycle – for instance, defensive stocks during a recession.

In practice, since the fund’s launch, Rice has preferred consumer-orientated stocks to producers, believing that lower prices in Europe in general would prompt more consumption, giving a boost to consumer stocks. The fund’s positions in domestically focused media, telecom and services companies have been the key contributors to returns since the oil prices started falling in the middle of last year. Amid remaining challenges, the fund manager believes these companies continue to look comparatively undervalued and oversold relative to the market, suggesting potential for future relative outperformance.

One of the current largest overweight positions is a Spanish TV stock, Atresmedia, and the European car manufacturing giant Peugeot has been one of the biggest performance contributors to date.

In spite of the oil price more than halving since August last year, the Euro currency weakening considerably against both US dollar and British pound, and the German yields falling almost towards zero, Rice is cautiously upbeat about the European economic future. He expects yields bottoming out around where they are now and the Euro and oil price to stabilize in the summer, prompting bank stocks to benefit. Hence the manager tipped his toes deeper into banking stocks, bringing the fund’s position in this sector from underweight to neutral.

We note that this constant rebalancing of the portfolio does not mean it is being churned and the manager typically holds on to selected companies in the portfolio of 30 – 60 stocks until the cycle turns, topping and tailing accordingly, as their share prices move.

The process also includes rigorous bottom-up analysis, with stocks being screened on both quantitative and qualitative bases before being researched in more depth. The importance attached to top-down and bottom-up analysis varies according to the stage in the cycle – “inflection points” in the business cycle are catalysts for portfolio changes.

The forward looking business cycle approach could position the fund contrarian to the market at any present moment. Consequently, this could lead to periods of underperformance of up to two-three years, until the market corrects itself, so the positioning assumed by the fund benefits performance. The long-term track record remains very strong, and the manager’s experience, coupled with his unique and consistently applied process to capture the market direction correctly, is second to none. Therefore we believe it is best to invest in this fund for a period of over five years.

As always, following the manager, not the fund, we believe Rice is a highly competent manager of the European and UK equities with over 20 years of investment experience and a strong track record.

Victoria Chernykh is senior research analyst at Tilney Bestinvest

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