Copy of the Fund Manager's Comments from the 2016 Annual Report
The stock market in the UK ended 2016 with healthy yet volatile gains. The year was dominated by the UK referendum on EU membership and the US elections with shock results of a Brexit and a Trump victory. Both outcomes triggered an initial sharp reaction in financial markets driven by fears of political and economic turmoil. Although the panic was short lived in both cases, it still resulted in indiscriminate moves in stock prices. A cut in interest rate by the Bank of England and re-introduction of quantitative easing following Brexit steadied the stock market in the UK. Market hopes for a pro-growth fiscal stimulus following the Trump victory stabilised the stock market in the US. Political risks highlighted voter discontent with the established political elite.
Based on forward multiples, stocks are generally trading above long term valuation averages. Our overall strategy for the Fund remained unchanged during the year. The Fund retained its bias towards a portfolio of solid stocks whilst targeting companies benefiting from significant positive change in areas where we believe that innovation and new products or concepts thrive, and could deliver above average returns over time. Whilst this approach may increase the volatility of the Fund, this is partly balanced by the use of index futures to mitigate the impact of a pullback in the market. However, as explained in the past, this could also result in periods of underperformance.
For the year to 31 December 2016, the value of the Fund increased by 3.0%* compared with a rise of 16.8%* for the FTSE All Share index. As explained above, in a year in which we witnessed two macro events, the associated volatility and the rotation in markets to more value type stocks resulted in relative underperformance, mainly in the second half, as the Fund’s portfolio is dominated by growth stocks.
At 31 December 2016, the portfolio consisted of 27 companies. Pharmaceutical & Biotechnology made up 14.6% of the portfolio followed by Software & Computer Services 12.3% and Support Services 10.7%. The Fund’s overseas exposure was 24.9%. The cash position at the period end was 14.6%.
As explained in our recent reports, the Fund now targets mid to large capitalised stocks in the US and some relatively higher growth economies to benefit from a wider selection of “high growth” opportunities. Whilst the Fund’s exposure to these overseas companies has increased in recent times, we will still maintain more than fifty percent exposure in UK companies. The Fund’s sector classification has changed from UK All Companies to the Specialist sector.
Stock markets have continued the upward trend into 2017 on increasing investor expectations of a fiscal boost for the global economy following the election of Donald Trump. However, doubts remain over President Trump’s policy priorities. 2017 faces a number of challenges with the potential for protectionist US trade policies, continuing uncertainty surrounding the complex Brexit negotiations, elections in Europe, the Italian banking crisis, another Greek bailout, excessive Chinese debt and rising interest rates in the US. Risks to financial stability will remain at the forefront in investment decisions.
Against such an uncertain backdrop, our investment process remains unchanged. We expect any likely gains to be more modest and volatile in nature. Earnings growth will be required to justify further sustained rise in stock prices. We will continue to maintain a defensive bias using index futures to mitigate some of the downside risks in volatile markets whilst maintaining a portfolio of stocks in the UK and overseas which we consider have company-specific drivers to succeed in different economic climates. We believe that in such situations our balanced approach provides some protection on the downside with good opportunity for a better relative performance over full market cycles.
I thank you for your investment in the Manek Growth Fund.