UK small and mid-cap boutique Chelverton Asset Management (CAM) is set to launch a new growth fund on 20 October.
The Chelverton UK Equity Growth Fund will be co-managed by James Baker, who joined the firm in June, and David Taylor, co-manager of the Chelverton UK Equity Income Fund.
Baker has more than 30 years’ equity market experience, buy side and sell side, and has always worked in UK small and mid-cap stock selection. He spent 11 years from 1999 to 2011 as part of the ABN AMRO small and mid-cap sales team, and prior to Chelverton served as assistant fund manager on the Rathbone UK Recovery Fund.
Taylor started in fund management in 1987 and has been managing small cap assets for almost two decades. He joined Chelverton in 2006 after a career managing assets for the Merchant Navy Officers Pension Fund, Gartmore, LGT and HSBC Asset Management.
The new fund, which is seeking to deliver long-term capital growth, will invest solely in UK small and mid-cap stocks, which can grow faster than GDP; are cash generative and able to fund their own growth over the investment cycle; generate high margins as a result of having a sustainable competitive advantage; and have management teams which do not dilute shareholder returns.
“We are looking to invest in companies that can grow faster than the market and which convert a substantial part of their profits into cash,” says Baker. “History shows that UK small and mid caps perform relatively well when the UK economy is demonstrating growth. We feel it is a good time to launch the Fund given the domestic economic back-drop and we are currently seeing plenty of attractive investment opportunities on sensible valuations.”
The fund will employ a disciplined three stage investment process.
• Chelverton has developed a formal quantitative screen, which will filter the universe of circa 1,000 small and mid-cap stocks. High levels of cash conversion, above average sales growth, high margins, strong balance sheets and a low working capital requirement is fundamental to the process.
• The managers then undertake their own qualitative assessment of the companies that may be suitable, analysing the predictability of sales, growth prospects, the sustainability of margins, and the management team’s consistency in delivering a sensible shareholder friendly strategy, to end up with an investable universe of about 140 shares.
• Finally the managers will apply their valuation methodology, which is based on a business’s Economic Value (EV) to Sales ratio in relation to its’ sustainable margins and EV to taxed normalised operating profit (NOPAT) ratio in relation to its growth rate, to arrive at a portfolio of around 45 core holdings.
In total the fund will hold between 50 and 60 stocks. A minimum 80 per cent of the portfolio, the ‘core’, will be invested for the longer term in solid, sensible cash generative growth stocks. Up to 20 per cent of the fund can be invested at any point in time in stocks which do not lend themselves to the screening process. This will enable the team to invest part of the fund in large FTSE sectors like oils and financials and up to five per cent of the fund (at cost) in concept stocks, which the managers believe can provide a significant boost to returns.