Fund in Focus: Jones puts forward a compelling case

Published on Friday 2 January 2009 21:47

IN THE United States, few managers have managed to deliver consistent above-average performance over a sustained period. There are some exceptions, however. Enter Schroders' New York-based US Small and Mid Cap fund manager Jenny Jones, who six years ago took the helm of the US Smaller Companies fund.

Jones employs a bottom-up stock-picking approach, with the objective of uncovering companies with compelling business models and strong management teams.

Prospective holdings in her portfolio must still display attractive valuation characteristics, however.

The small-cap portfolios consist of between 100 and 150 stocks. Jones selects from three categories of company she refers to as "mispriced growth", "steady eddies" and "turnarounds".

Mispriced growth companies typically make up between 50 and 60 per cent of the portfolios and are defined as companies growing their bottom line by 15 per cent or more over a two or three-year time horizon.

"Hedge funds generally work on a one-year time horizon or less, so this produces buying opportunities for the longer-term investor when they sell," Jones explains.

The fund tends to out- perform in down markets, due to the "steady eddies", which are intended to provide predictable results with low variability in earnings as a result of strong, free cash-flows.

"Turnarounds", the last category, accounts for companies that are out of favour and possibly going through a re-structuring. "These always take longer to recover than you initially think," Jones admits. "You need to wait until a lot of pain has been felt."

Most managers purport to have strong stock-picking skills. Less common, however, is the ability to exit a holding at the right time. Jones employs a strict sell discipline with four catalysts for offloading a company including, refreshingly, the admission that the purchase was a mistake, or that a better opportunity has arisen.

The Smaller Companies fund has a target market comprising companies with a market cap of $500 million (345m) to $2 billion.

The degree of forced selling by hedge funds and others has meant the stock prices of what used to be mid- and even large-caps have been hit so hard this year that Jones concedes: "I'm getting to look at companies that I haven't seen on my radar for years."

She continues: "Going into (2008], I tried to ensure that the companies in the portfolio had a level of debt reasonable for their business model.

"Anything with large debts has been pummelled this year, which is presenting us with opportunities as the market is not discriminating between quality companies with sustainable competitive advantages and their weaker counterparts."

For more information on the Schroder US Smaller Companies fund call 0800 718 777.

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