Reaching capacity on the strategy which has defined your business might be considered one of the good kinds of problems. But as Chelverton’s flagship mid cap UK Equity Income fund approached its upward limit in 2013 it nonetheless faced a dilemma: enter a holding pattern, or diversify.
Unsurprisingly it opted for the latter, tapping up James Baker (pictured), who had for many years previously been the firm’s contact at its broker ABN Amro, to join the buy side as the head of his own portfolio.
The fund has been picking up cash consistently since launch. But it is only really as the fund approaches its third birthday that this has reached an unignorably exponential point, with assets more than doubling to £76 million between July 2016 and June this year.
‘We have received a pretty steady stream,’ of contributions,’ said Baker, ahead of what the firm hopes will ‘ideally’ be a tick upward on its third anniversary in the autumn.
While the fund is not mature enough to be on any buy lists yet, it has received support from smaller wealth managers with greater discretion in what they can buy. It has also been recognised by several adviser panels.
There have also been periodic surges in private investor interest via Hargreaves Lansdown, following several spells at the top of the shorter term All Companies league tables.
However, he estimates around 70% of fund assets remain intermediated.
‘Private client managers obviously generally like to pick FTSE 100 stocks themselves, but then are happy to buy in an outside strategy for anything below that,’ Baker added.
As well as being a well-known face among fund managers due to his long career in brokerage, the fund’s performance has done much of the marketing heavy lifting. The portfolio is currently fifth of the 50 funds in its peer group on 12 month total returns, and has regularly topped its weight class.
Stock selection starts with a universe of approximately 1,000 small and mid cap stocks. These are fed through a quantitative filter screening for profitability, margin, and capital intensity characteristics, to produce a potential buy list of circa 250 stocks, and 75 core holdings at any one time.
The core portfolio of profitable enterprises receives a ‘sprinkle of fairy dust’ in the form of a long tail of smaller, more speculative businesses.
The process, which weighs heavily to sustainable profitability and capital efficiency, steers the portfolio toward businesses with reliably recurring earnings, such as subscription media and event companies, software-as-a-service providers, and companies with strong intellectual property.
‘[They] produce the kinds of goods that are designed into a product and are then an essential part of it through the 10 or 20 year lifetime of however long it remains in use,’ Baker said. ‘We like the highly predictable.’
For similar reasons he holds Liontrust just outside of his top 10 due to the stability of its earnings and the growth potential of its strong franchise.
Cloud-hosted fund administration and compliance business StatPro is the current largest holding, while Baker was also an enthusiastic backer of the recent £87 million IPO of wealth manager and back office business Tatton Asset Management.
‘Tatton has a low cost model, which means it is well set up. The platform [side of the business] is adding assets at a rate of between £80 million to £100 million a month.’