The Fund Manager: Why a small, bullish portfolio may give us many happy returns

Peter Seabrook, manager of the SocGen UK Growth Fund, was part of the team that launched Société Générale Asset Management in 1997 as the UK-based investment management subsidiary of the major French financial group. "I was at Flemings for 12 years, ending as chief investment officer. I came here in June 1997, when Nicola Horlick (ex-Morgan Grenfell) and John Richards (ex-Mercury) were setting up a new fund-management company. We got our Imro licence in December 1997 and the UK Growth fund was the first we launched the following Feb- ruary," he says.

"There had been a lot of publicity about index-tracking funds and we set out our stall firmly as active managers. So, for example, the target of the UK Growth fund is to outperform the All Share by 2 per cent which, with a 1.5 per cent management fee, means we have to look for a gross outperformance of 3.5 per cent per year. In fact we have a tracking error of 4 to 6 per cent.

"We started with a clean sheet and we spent many weeks thrashing out our investment process, which is the most important asset in the management. We examined the processes that had worked for us at other houses, but aimed to leave out the weak bits. We all felt investment management processes were becoming over-complicated, with approaches such as 'growth' or 'value' or 'momentum' management all very dependent on market conditions. So we decided to keep our investment process as clear and simple as possible.

"We have a team of 14, with diverse personalities and experience. We do our own research, including the basic macro-economic stuff you would expect any management house to do. But we don't feel we can add much value at the macro level, so that accounts for only 30 per cent of the portfolio risk. Seventy per cent of our time is spent on stock selection.

"It helps to be a relatively small fund, as it is difficult to change style if you are running billions of pounds. The big stocks are such an important part of the index that we can turn this to our advantage while trying to outperform. For example, we are underweight in BP Amoco since we are overweight in Shell and Enterprise Oil." Indeed, BP Amoco is the fund's biggest underweight position relative to the index (-6.6 per cent). Other significant underweights are HSBC and the Royal Bank of Scotland, and the pharmaceutical giants GlaxoSmithKline and AstraZeneca. The fund's major overweight positions are in FirstGroup, Legal & General, SIG, Mowlem and Enterprise Oil.

"The first question you have to ask yourself is, 'How much do you want to overweight or underweight the big stocks?' Hopefully, I am doing something much more exciting than simply holding BP or HSBC. Vodafone is another key stock because it is such a big component of the index we are trying to beat. In reality, the All Share is a better indicator of the health of the UK market, because the FTSE 100 is now skewed towards half-a-dozen big stocks. If these six big stocks perform well or badly they are not, in themselves, a good indicator of the performance of the UK market. Vodafone remains the fund's biggest single holding, but below its index weighting, at 5.7 per cent.

"It is a very concentrated portfolio, of only 40 to 50 stocks. We set ourselves relative price targets, because this means we have to re-examine our self-discipline, but these days you can hit those price targets quickly. And, if you have identified value in a company but the market has now priced that value into the stock, then it is time to sell and move on to the next idea. The fund has to have strong risk controls because it is actively managed. Turnover has been in the region of 70 to 80 per cent, largely because of market volatility. This also provides us with more opportunities. "

The SocGen UK Growth fund's return of just under 10 per cent since its launch may appear unimpressive, but the fund is still among the top-rated in its sector. "The UK market is down 5.5 per cent over the 43 months we have been running the fund and the market is still dodgy. Sentiment is terrible but we are moving the portfolio to a slightly more bullish outlook. The picture looks brighter for 2002, although the market still needs to work out the excesses of the TMT bubble. We need to see another sharp sell-off in that area before things can improve.

"I have been moving away from defensive stocks. Four months ago, tobacco stocks were the biggest component of the portfolio. Now we own none. We are moving into cyclical and growth stocks. It is going to be a tough year, but we are confident this type of stock will start to show through in the fourth quarter and into the first quarter of next year.

"Inflation at 2.5 per cent and growth in the UK of 2 to 2.5 per cent is attractive compared to the rest of the world. The market will become more stock specific, focusing where the visibility of earnings growth or recovery is greatest. We remain positive for equities overall and intend to benefit from the opportunities provided by price volatility."

FUNDAMENTAL FACTS

Fund manager: Peter Seabrook

Age: 47

Fund: SocGen UK Growth Unit Trust

Size of fund: £113m

Fund launched: February 1998

Manager of fund: Since launch

Current yield: 0.70 %

Initial charge: 5.25 %

Annual charge: 1.50 %

Current bid/offer spread: 6.00 %

Minimum investment: £1,000 (subsequently £250)

Minimum monthly savings: £50

Standard & Poor's Rating (maximum *****): ****

Fund performance (to 3 September 2001)

(Offer-to-bid, with net income reinvested)

One year: -22.13 %

Two years: -7.47 %

Three years: 18.84 %

Since launch: 3.80 %

Source: Standard & Poor's