Skipping ahead of standard

Roxane McMeeken reports on Schroders’ fledgling fund, which stresses a stock selection strategy.

A new product in Schroders’ International Selection Fund (SISF) range has attracted the attention of our panel of fund-picking experts (see pages 52-53). The SISF European Equity Alpha fund was launched in January with the idea – gaining considerable currency in current market conditions – of paying little attention to the index. Last month we saw that another favourite of the expert panel, the Nordea I North America Value Fund, is run with similar disregard for the benchmark. The Schroders vehicle is under the watchful eye of fund manager and director Zafar Ahmadullah. He has a respectable track record as manager of the SISF Euro Equity fund (see Table 2), which he has managed since launch and which Schroders claims has notched up consistent top quartile returns. Mr Ahmadullah explains that the fledgling fund has a value bias and aims to beat the MSCI Europe index on a rolling three-year basis by five per cent. So far the fund has returned 13.85 since launch, against the benchmark’s return of 12.73 for the same period, according to Standard & Poor’s. The 5 per cent will be achieved, says Mr Ahmadullah, “largely through stock selection.” “The fund is designed for investors looking for long-term, subtle outperformance and looking to move further away from the benchmark.” The fund is split into 50 per cent large-cap stocks and 50 per cent small to mid caps. It is run exclusively by Mr Ahmadullah. But on the large-cap side he consults 27 in-house analysts, as well as external research. Mr Ahmadullah reveals the elements that he looks for in a large-cap stock:

• Strong business franchise
• Hidden growth potential
• Trading at discount to potential value
• Opportunity to turn around the business
• Industry anomalies – when a business is valued cheaper than its peers, suggesting it may increase in value. Business drivers With small and mid caps the process is less cut and dried. Mr Ahmadullah says he does the research himself, although he meets regularly with Schroders’ team of small and mid-cap company analysts. “We first try to understand the business as fast and as well as possible. We find out what the drivers of the business are and what its strategy is. We’ll look at the sectors it’s in very closely and then we’ll look at the valuation.” He stresses that while sectors are taken into account, “we choose stocks first”. But there are restrictions: “We won’t allow more than a 10 per cent tracking error to come from one stock.”

Sample holdings

• OPAP (Greek Organisation of Football Prognosis): This Greek gambling group is trading at a discount, according to Schroders. The firm believes OPAP has a strong business model, including a “monopolistic position in the Greek gambling market and good cash flows”.
• Anglo Irish Bank: A specialist in lending to small and medium sized companies, Schroders feels that this bank has excellent management, offers above average earnings per share growth and a high return on equity.
• Kingfisher: Europe’s largest retailer. Schroders claim that the group has an above average growth profile and will see “synergy benefits” in 2004 following its recent acquisition of Castorama and the sale of non-core assets.

Fund facts

• Currency: Euro
• Minimum investment: E1000 for A, A1 and B shares, E500,000 for C shares
• Annual management fee: 1.5 % for A, A1 and B shares, 1.0% for C shares
• Annual distribution fee: A and C shares = nil
• A1 shares: 0.5%
• B shares: 0.6%
• Performance fee: 15% of the fund’s outperformance of the MSCI Europe, subject to high watermark

‘It is designed for investors looking for long-term, subtle outperformance’
Zafar Ahmadullah, Schroders