Fund in focus: Alpha male who concentrates on small firms with growth prospects

Published on Friday 31 July 2009 19:22

MANAGERS who generate alpha – the additional return over the market attributable to their skill – are rare in the investment world. However, Richard Penny, manager of the Legal & General UK Alpha fund, has a constant reminder of this objective in the title of his fund.

The fund has a very concentrated number of holdings, with typically 25 to 35 stocks of the 2,000 or so available in the UK, ranging from mega caps right down to micro caps.

Notionally, the fund's holdings are equally weighted, but inevitably this is unrealistic to maintain. "I usually start trimming a holding when it gets to 5-5.5 per cent," he explained. "We have price targets for every holding. This could be as short term as 30 per cent growth over 12 months, but typically we're looking for a stock to grow by 100 per cent over three years."

Owning such a small group of companies does mean that the performance of the fund varies quite considerably when compared to rival funds or versus its benchmark, the FTSE All-Share index.

The manager aims to provide the target return of 5 per cent above the index by using two distinctly different styles in tandem. Penny believes that buying "deep value" stocks – very cheap stocks with hidden quality, as well as companies with strong growth characteristics – enables him to achieve this.

Penny explained that the fund has a significant proportion of its holdings in the Alternative Investment Market (Aim). "The number of Aim stocks is deliberate," he said.

"There is a general revulsion to this market due to the perceived risk and rightly so in some cases, but if you take a stock like OPG, the Indian power generator, it had cash of 56 million on its balance sheet when the market cap was 60 million, so it wasn't going bust. I would argue that this represented a lower risk than buying a UK bank."

Like Legal & General's other actively managed funds, this fund is relatively small in size at around 35 million, possibly due to the fact that Legal & General is better known for its passive index tracking funds.

For more information on the Legal & General UK Alpha fund, call L&G on 0800 027 7169 or visit www.legalandgeneral.com

&#149 Barry O'Neill is a chartered financial planner and director with Thomson Shepherd Ltd (incorporating Coggans Wood).