‘I find managing money much more exciting than managing people – that’s what gets me out of bed in the morning,’ said AAA-rated Legget, explaining why after nearly 14 years at SLI he decided to up sticks and move across town.
‘I’d reached a stage in my career where I thought my development had plateaued. To progress further in a big organisation like Standard Life you are increasingly managing more people and resources.
‘Because it is a smaller firm, Artemis doesn’t need some of the formal structures that you find in bigger organisations, and it provides a platform where a specialist in running money can have an influence on the organisation.
‘While I wasn’t actively looking to leave, I was thinking about what I was going to do for the next five to 10 years of my life, and the stars aligned.’
Swapping SLI’s opulent George Street office for Artemis’ unassuming base less than a mile away in Edinburgh’s Georgian New Town, Legget now shares a fund house with renowned names including the ‘two Adrians’ – AA-rated pair Adrian Frost and Adrian Gosden.
Being surrounded by this sort of financial pedigree, in addition to the pressure that comes with inheriting a fund from one of the UK’s best known stockpickers in AAA-rated Tim Steer, might be enough to cow even the most ambitious of young managers.
But for 38-year-old Legget, the switch was all about setting a high bar against which he could measure his own progression.
‘At Artemis there is a sort of specialism. The distribution of the company is very focused around a niche – wholesale equities – which it has been very successful in. There is a large resource and people who have been at Artemis for a long time. There are always things to learn, and the longer you do the job, the more knowledge of markets you gain.’
When the appointment was announced, the FTSE 100 index was still hovering just below the all-time high of 7,103.98 points recorded two months earlier. By the time Legget took the reins of Artemis UK Growth on 4 January, it had plunged 11% in six months.
With markets continuing to look uncertain and the next 12 months widely expected to be another year of violent swings and diminishing returns, it would seem that Legget’s passion for money management is set to be tested.
‘The market looks less interesting than it did this time last year,’ he said. ‘Maybe we will muddle through picking up yield and modest earnings growth, but there are some obvious tail risks out there, which the market is clearly starting to get worried about.’
One pertinent by-product of this managerial switch is a change in investment strategy, with Legget looking to replace Steer’s ‘growth’ outlook with a more ‘contrarian-style’ approach. To reflect this, from 19 February, Artemis UK Growth will be renamed Artemis UK Select.
Having spent a two-week transitional period working alongside Steer in December before taking full control of the fund on 4 January, Legget now has a well-formed idea of how he will be putting his personal stamp on the portfolio.
While he says the majority of the holdings – circa 60% – are stocks he previously owned when managing the SLI UK Equity Unconstrained fund and therefore knows well, there is also a pocket of less familiar companies, the future of which he will be discussing with deputies Paul Casson and Ambrose Faulks.
‘Looking back over the past few years, Tim and I have owned lots of the same stocks but we owned them at different times,’ said Legget.
‘There are a few stocks – 3-4% of the portfolio – which I don’t know what I’m going to do with yet because I haven’t seen them, while there is a small tail of stocks – around 5% of the portfolio, or seven holdings – which we will trade out through time.
‘Luckily I’ve inherited Ambrose and Paul, who know the investment thesis on those stocks, and it keeps continuity on investment themes and prevents paralysis of decision making for fear of upsetting each other on a shorter-term view,’ he said.
Legget concedes that this acclimatisation period could see the portfolio turnover to temporarily pick up, though he expects a fairly quick return to the 30-50% range he operated while at SLI. That is, unless markets dictate otherwise.
‘A lot of the portfolio is already positioned for my macro view, which is really cautious,’ Legget expanded.
‘However, there is potential for heightened volatility and multiples compression, which could create an opportunity to add some stocks at some interesting valuations.’
Legget believes 2016 will be a year of damage limitation, with investors likely to be occupied by avoiding stocks ‘that could lose 50% rather finding ones that go up 50%’.
As such, while his top-down view is telling him that there could be some opportunities thrown up unexpectedly within this wider market slide, he is not optimistic about annual return potential.
‘There will be fewer opportunities to make a lot of money on individual stocks, and investors could lose a lot money out there. There will be chances to outperform the market, but whether that gives you a positive return is will depend on how the macro plays out.’
One way of exploiting these fluctuations is through the shorting capability, which can account for up to 10% of the fund.
‘There are a number of tail risks out there that are causing the market to de-rate further,’ said Legget. ‘Using the tool of shorting is another opportunity to add alpha within the fund.’
On a sector view, he is bearish on commodities – despite a 3.5% weighting to Shell – basic materials and general retail, while his favoured plays include life assurance firms such as Aviva and telecommunications companies, particularly BT and Vodafone.
At the centre of this investment vortex is a gloomy outlook on the UK, particularly the FTSE 100, where Legget says we could see a raft of further dividend cuts stemming from additional earnings compression.
‘Our cautious view is around earnings expectations for UK stocks continuing to drift down,’ he explained. ‘If we look at the multiples that the market is trading on, it is 15.5x or 16x earnings today. While it has historically been higher, it has also been a lot lower. In an environment where people are being more pessimistic on growth, there is scope for that multiple to be compressed further.’
Although the US consumer economy is providing a much-needed relative bright spot compared to the broader gloom permeating markets, it is the equivalent of trying to warm up by sitting round a cigarette, and Legget warns that any further stutters could not only lead to another quantitative easing (QE) injection, but also something more entrenched.
‘If growth disappoints then we could have QE 4 at some point this year,’ he said. ‘But rather than investors seeing it as more liquidity equalling asset prices going up, they could see it as the original QE programmes being less effective and having failed to bring sustainable growth and a return to normal monetary policy.
‘Maybe the threat of deflation is higher than we thought and the outlook for a Japanese-style economy appearing in other Western economies is more likely than we thought. That could prompt questions over what the long-term real growth prospects for these economies are, and could lead to a derating of equities.’
Still, the philosophy that Legget will carry through 2016 is one he hopes will enable him to avoid jumping the gun.
‘Patience feels like something that could prove rewarding,’ he said. ‘By waiting to see how the picture develops, there will be an opportunity to buy things cheaper.’