First 50 Funds Interview: Old Mutual UK Mid Cap Richard Watts

4 July 2018
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Moneywise’s Helen Knapman meets Richard Watts, the manager of Old Mutual UK Mid Cap, a First 50 fund for beginner investors

What is the fund?

We invest in FTSE 250 companies, excluding investment trusts, as well as companies that are FTSE 250 size but are not listed on the FTSE 250 stock exchange – they could be listed on AIM, for example.

We have an active share [the percentage of the fund that differs from the FTSE 250 benchmark] of 80% to 85%. Our basic proposition is investing in companies with strong earnings growth. Over a long period of time, the FTSE 250 has delivered the fastest rate of UK earnings growth – faster than the FTSE 100 and small-cap [small companies] markets.

So it’s a very attractive proposition: fast earnings growth but with risk characteristics more akin to established large caps [larger companies].

How do you pick stocks for the fund?

We try to take advantage of under-researched stocks and find anomalies within our investment universe.

Key criteria we look for are positive earnings surprise – companies that will beat consensus market forecasts – and valuation re-rating potential.

The idea is you need to get at least 51% of your stock picks right and then drive that win rate as high as possible and keep it there consistently year after year.

But you can’t just be a great stock-picker; you need to get your portfolio construction right. We run high active positions in conviction ideas – I’m not frightened to have a 4%, 5% or 6% unit in a stock.

The top 10 stocks in the fund typically count towards 40% to 50% of the fund, while the top 30 typically count towards 80% to 85%. We currently hold about 40 stocks. We’re custodians of people’s money, but people don’t give me their money to base it on a benchmark-hugging fund.

How often do you buy and sell?

We don’t automatically sell when share prices rise or fall; sometimes in these scenarios we buy more shares. We typically sell if we think the investment thesis is breaking down, or we’ve extracted the value and it’s time to move on.

The stock turnover is about 20%.

“We look for positive earnings surprise”

How do you manage risk?

Lots of people try to time the market. But my view is that this is a very difficult thing to get right consistently, so why bother? Instead, I manage the fund with a low turnover – the average hold is three to four years – and a high-conviction approach.

Some 80% of what we do is stock picking, and 20% is top-down investing [an approach that looks at the overall economic picture]. So if you think you’re coming into economic recovery, don’t be too defensive in your position and have exposure to economically sensitive stocks. Likewise, if you come into a difficult economic environment or a recession, become more defensive.

What have you recently bought?

Indivior, a drugs company that produces a treatment for opioid addiction. It has two products – a film, like a dissolvable tablet, and a monthly injection, and we think the injection is a game-changing solution which will grow the market. Last summer, the share price was £3; there have been a few ups and downs since then, but the share price is now hitting highs of £4.85.

GVC, a sports betting and gaming business, as it looks as if the US gaming market will open up following the Supreme Court decision earlier this year to allow sports betting.

What have you recently sold?

In terms of things that haven’t worked, in the past 12 to 18 months we have reduced our holding in the retailer Pets at Home and completely sold out of software company Micro Focus, which put out a profit warning earlier this year.

What’s been your best investment decision on the fund?

Some examples are: Ashtead, an equipment rental company I bought in 2009 for certainly less than £2; now it’s £24. That’s been in the fund for nine years now and it’s been a great performer. Once these stocks get going, they can perform for long periods of time.

Boohoo.com. The online fashion retailer IPO’d [when shares are sold to the public for the first time] at 50p at the end of 2014 and fell to 25p, but now it’s about £2.10.

Fever-Tree. I couldn’t buy the drinks producer initially as it was a small-cap stock. But it got to the market cap size consistent with a FTSE 250 stock on AIM, and I bought it for about £7.20. I was late to it, but it’s now £30.

SSP. The food and drinks operator IPO’d at £2.10 about two to two and a half years ago. The share price is now about £6.50.

What’s your top tip for a beginner investor?

Do your research and try to understand what you’re buying.

Old Mutual UK Mid Cap: Key stats

  • Launched: February 2002 (i)
  • Fund size: £3,720.5 million (ii)
  • OCF: 0.85% (iii)
  • Yield: 0.98%

Notes: (i) Source: Old Mutual UK Mid Cap Key Investor Information. (ii) As at 8 June 2018. (iii) As at 28 February 2018. Source: FE, 11 June 2018.

The man behind the fund

Richard Watts joined Old Mutual in 2002 as an analyst on the UK mid and small-cap team before assuming full portfolio management responsibilities in 2009. He joined from Orbis Investment Advisory, before which he was at PriceWaterhouseCoopers. Richard has a degree in mathematical sciences from the University of Oxford and is a CFA charterholder.

Sector breakdown
Five-year discrete performance of Old Mutual UK Mid Cap Fund
Year20132014201520162017
Old Mutual UK Mid Cap R Acc GBP38.388.1424.7210.0127.99
Benchmark (i)34.942.7912.045.0818.24
(i) FTSE 250, ex investment trust in GB. Source: FE, 11 June 2018.

Top 10 holdings

In reply to by anonymous_stub (not verified)

How do I buy

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