What can retail investors learn from fund managers?

We look for inspiration in six of Standard Life’s top investing principles
Thursday 18 May 2017 Author: David Stevenson

Can retail investors get a head start by replicating stock picking and portfolio management techniques used by fund managers? The answer is definitely ‘yes’, although there are some limitations.

With this is mind, we attended a presentation on 10 May by asset manager Standard Life (SL.) to see if we could pick up any tips from their fund experts on how a retail investor could build and manage a portfolio of stocks.

Before we reveal six of their steps to investment success, it is worth considering that a large asset manager has various advantages over the average retail investor when it comes to choosing stocks. We now give you some examples.

Kick the tyres

Andrew Millington, acting head of equities at Standard Life, says ‘the first thing we do is meet with companies and get to know the management team’.

Retail investors do have the opportunity to attend some presentations by companies, but they tend to be limited to very small stocks.

Therefore fund managers have an advantage in that they can pretty much meet anyone they want. Spending quality time with the management of a company in which you have an investment is extremely valuable, in our opinion.

You also have to consider that funds managers will probably have a large support team, helping them research the market and individual stocks.

Retail investors have to do everything on their own – and probably in their spare time, unless they are lucky enough to make a living from the stock market.

STANDARD LIFE’S SIX PRINCIPLES OF INVESTING*

1. Go for growth

2. Go for quality

3. Run your winners

4. Concentrate your efforts

5. Management longevity

6. Value isn’t everything

*According to two of its fund managers. Some of these principles won’t apply to all types of investments; for example, high growth companies wouldn’t suit a capital preservation strategy.

Source: Standard Life / Shares

First steps

So how can retail investor take influence from a fund manager? Firstly, read their investment process which is often published on their website.

At Standard Life’s aforementioned presentation, two of its fund managers discussed their particular approach to picking stocks. Most of their strategy could certainly by replicated by a retail investor.

Taking to the stage were fund managers Lesley Duncan from Standard Life UK Ethical (GB00B6Y80X40) and Harry Nimmo from Standard Life UK Smaller Companies Trust (SLS).

They like to look for growth stocks. These are the companies that have strong improvement potential for the future, growing in value but probably not paying great dividends.

Duncan likes Boohoo (BOO:AIM), a young fashion retailer that combines speed of delivery with access to high fashion. She says it has ‘fleet of foot adapting to changes in the retail market with plenty of potential’.

Nimmo also likes to choose low risk quality stocks. He believes this group, along with growth stocks, should remain fine regardless of the state of the economy. Housebuilder Bellway (BWY) is cited as an example of one of his preferred stocks.

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Momentum approach

The two fund managers say you should ‘run your winners’ and not take profit on winning stocks too early.

One way to spot companies in a rising trend is to use financial websites that offer pre-set filters to screen the market. Look for ones that say ‘momentum’.

This filtering approach is relevant to Standard Life’s next top tip, namely concentrating your efforts on certain parts of the market and not trying to look at everything.

The asset manager has a stock selection filter system called ‘Matrix’ which looks for companies based on certain criteria. Nimmo says this system ‘cuts down the legwork’ and reduces the ‘noise’.

This tool helps the firm identify companies with improving or deteriorating characteristics. Standard Life also says this tool helps dispassionately steer stock selection.

Nimmo likes XP Power (XPP) which he claims is below the radar of many investors. He says XP is an extremely efficient producer of low power solutions.

Clearly retail investors are at a disadvantage because they wouldn’t have access to Standard Life’s Matrix system. However, there are plenty of stock screening services available for a small fee to the general public from the likes of SharePad and Stockopedia, for example.

They may not be as sophisticated as Standard Life’s system, which includes filters on risk and credit quality, but they will certainly be good enough to sort the market into different silos depending on what you desire.

Time at the top

The Standard Life fund managers favour leadership longevity in a company. It bodes well if the founder of a successful company is still in control. One could deduce that they know what they’re doing. Conversely, a company that regularly reports a change in management may well be one to avoid.

The final principle the Standard Life duo apply to their equity selections may seem controversial. They suggest that ‘value isn’t everything’. They do not restrict themselves to only buying stocks if the rating is low.

For example, they cite theme park virtual queuing specialist Accesso Technology (ACSO:AIM) as a stock on a high rating, yet a business which they believe is worth owning for attractive earnings growth.

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Important information:

These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell Youinvest.

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Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.

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