Fund Manager Focus by Jenny Lowe

George Luckraft is a name associated with superlative performance.  

So what went wrong? Well, a number of things. His pure bottom-up investment approach struggled in the severe stock market conditions and his AXA UK Equity Income fund was heavily exposed to small and mid caps – causing dramatic falls in its performance.

Somewhat subdued, Luckraft has redefined the bottom-up process that took him into the market correction with a heavy small-cap weighting and he is once more in the top decile over six months.

‘Last year, I was faced with a portfolio of stocks that were going down and that was not a terribly sensible position to be in. So I decided to split the portfolio into two parts, one containing growth stocks and the other with more traditional income stocks.’ The advantage of doing this is it means the overall value of the portfolio can be maintained, with the growth element providing the resources to reinforce the yield.

Having started his career at Carrington Pembroke (subsequently ABN AMRO and now Artemis Unit Trust Managers) when he finished his degree in 1980, Luckraft has experienced three decades of volatile markets and is confident that the lessons he learnt from the latest crash will serve him well should the economy see another correction.

Out of luck
‘The recession left no business unscathed. I did not envisage how letting Lehmans go would be so dangerous for equity investors. I should have been more aggressive and taken a discount on some of my holdings’, he explains, adding that ‘without the collapse in the economy, those business models would have been fine. The majority of companies were cash generative.’

Hunt for income
And on his hunt for income, Luckraft is still adamant that smaller companies offer fertile ground for unearthing yield, especially those that are not heavily linked to the health of the weak domestic economy. ‘Small caps are an area where we can get some really interesting value and diversification of yield,’ he says. ‘There are plenty of UK small-caps that are dependent on overseas markets, yet they have been tarred with the same brush as those dependent on the domestic market.’

Luckraft points to Morson, a technical recruitment agency, as one that fits this profile. ‘Morson’s share price was smashed during the downturn, but it is still a profitable business and has managed to sign new customers.’

He also argues that family-run companies in which management have large stakes have, on the whole, continued to pay dividends and expects that over the next few years many families will seek an exit, sparking a round of takeover activity. With this in mind, he expects an increase in private equity activity in the small cap arena, as players look to put money to work and shy away from larger deals due to a lack of credit.

Luckraft highlights office2office, which was originally spun out of Her Majesty's Stationary Office and now specialises in the whole range of office services, as a key stock pick. ‘I have seen an increase in turnover and profitability already this year,’ he enthuses, ‘and there is real scope for a 50 per cent share price increase.’

In resources he likes Anglo Pacific and ATH Resources. ‘ATH came to the market on a large yield and has been very successful in getting new resources. It acquired a business that allowed the group to reclaim coal towards the end of last year and ATH is now looking to expand overseas.’