The Top 10 Holdings Of The Best UK Fund

Published in Investing on 6 September 2012

The top-performing UK fund is up 24% this year. These are the fund's 10 biggest bets.

The Cazenove UK Opportunities Fund is a £500m fund run by manager Julie Dean. In the last 12 months, the fund is up 23.9%. In that time, the FTSE 100 (UKX) rose 10.9%.

I spoke with Julie Dean to understand her investment process.

Julie Dean describes herself as an acolyte of no traditional investment style: "I'm not a income, growth or value investor. I am simply seeking the best risk-adjusted returns on capital for investors."

"There are signs that the US economy is improving. China, however, is slowing and Europe is struggling -- including Germany because of China. The overall economic picture is mixed. Globally, there is a very weak level of underlying economic growth. Quantitative easing around the world leads to pulses of business activity. This gives periods where more cyclically sensitive stocks do well. I look for the companies that are best positioned to benefit from these conditions. It is important to understand how different companies perform at different stages of the business cycle. This typically depends on their sensitivity to the cycle and their operational gearing. I also want companies that are underrated or have something about them that will help them to outperform."

Here are the 10 shares that the best-in-class UK Opportunities Fund has the highest (relative to its benchmark) exposure to:

CompanyPrice (p)P/E (historic)Yield (historic)Market cap (£m)
Babcock International (LSE: BAB)94420.62.43,370
Reed Elsevier (LSE: REL)6059.67.34,390
Howden Joinery (LSE: HWDN)14711.30.3943
Melrose (LSE: MRO)232N/A*3.12,990
GKN (LSE: GKN)21311.92.83,470
Sage (LSE: SGE)30215.73.23,820
ITV (LSE: ITV)8413.61.93,380
Legal & General (LSE: LGEN)12910.45.07,610
RSA (LSE: RSA)1138.28.04,060
Hansteen Holdings (LSE: HSTN)76.550.45.4471

Melrose last reported negative earnings per share.

I've picked out four of these as particularly interesting.

1) Sage

Sage is one of the few world-class software companies in the UK today. Sage provides accounting software to businesses of all sizes. The company has grown fast. Since its formation in 1981, Sage has quickly grown into a FTSE 100 company.

Sage remains a growth company today. Five years ago, earnings per share (eps) was 11.7p. It rose every year to hit 19.4p in 2011. Further growth is expected, with eps forecast to hit 22.1p for 2013.

As growth has moderated, Sage's price-to-earnings (P/E) ratio has also declined. Five years ago, Sage shares typically traded on a P/E of 20. Today they trade on 15.2 times the 2012 forecast. Apart from a brief period in 2009, they have never been cheaper.

As Sage has matured as a business, its income fundamentals have improved. Sage has been increasing its dividend to shareholders year-on-year since 2003. Sage is expected to increase its dividend by 6.2% this year, giving a 3.4% yield.

2) Reed Elsevier

Reed Elsevier is a business information company. The company also runs a number of industry events such as The London Book Fair.

As you might expect from such a business, profits dipped between 2007 and 2010. However, the company remained profitable and continued to pay a dividend throughout. This resilience is testimony to the quality of Reed Elsevier's products and management.

Despite this, shares in Reed Elsevier are still moderately priced. Better still, they are accompanied by a solid dividend.

Consensus expectations are for Reed to deliver 49.8p of eps for 2012, rising to 52.2p in 2013.

3) Legal & General

Legal & General is one of two insurance companies that the fund is heavily exposed to.

Like its peers, Legal & General shares tend to do well when the market is doing well and vice versa. At the market's nadir in 2009, shares in the company changed hands for less than 30p each.

Though the company cut its dividend for 2008 and 2009, it has since been recovering -- fast. The dividend for 2012 is expected to exceed the company's pre-crisis payout.

Legal & General's dividend has a much better level of earnings cover than its cousins Aviva (LSE: AV) and RSA (LSE: RSA). If you are looking for an income from the insurance sector but are worried by the possibility of dividend cuts, Legal & General could be the share for you.

Management is clearly confident in Legal & General's future. The company announced an 18% increase in its interim dividend with half-year results in August.

4) ITV

ITV is the household name TV company.

In recent years, shares in the company have proved highly sensitive to economic sentiment. The shares have four-bagged since the market lows of March 2009. In that time, the FTSE 100 is up 'just' 60%.

Profits and dividends at ITV suffered between 2008 and 2011. ITV reported a loss for 2008. A sharp dividend reduction in 2008 was followed two years without paying. The dividend has since been restored, albeit at a much lower level than was enjoyed pre-crisis.

As a large supplier to corporate advertisers, ITV will always be regarded as a highly geared play on economic confidence.

The confidence of ITV's own management has improved significantly. At the half-year stage, the company announced a 100% increase in interim dividend.

If you think Julie Dean's top picks might be worth further research, then check out the track record of top fund manager Neil Woodford. He is one of the UK's true super-investors. If you want to find out what shares he has been buying then download the free Motley Fool report "8 Shares Held By Britain's Super Investor" . The report is 100% free and will be delivered to your inbox immediately.

David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!

Further investment opportunities:

> David does not own shares in any of the above companies.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

AleisterCrowley 06 Sep 2012 , 11:32am

As the majority of managed funds fail to beat the index, and past performance is a poor predictor of future performance I think any analysis like this meaningless.
Just my opinion...

elephant888 06 Sep 2012 , 11:58am

Aren't we always being told that stock market investment is only suitable for 5+ year terms? Aren't we always being told that past performance is no guide etc? Isn't the Fool's general guidance to either be passive or DYOR, never pay for a fund manager's* yacht?

What the deuce is this article doing here??

* except Neil's of course.

goodlifer 06 Sep 2012 , 12:43pm

Why don't all these Foolish experts put their money where their mouths are: just hand their money over to be the Blessed Neil, get on with their own silly little lives and leave us to get on with ours?

I've asked this question before, but nobody's come up with an answer.

ANuvver 06 Sep 2012 , 4:51pm

Weeeell. Ever the contrarian:

I personally welcome articles that address ideas beyond the HyperFool approach.

The hook of this is a look at assets that have outperformed this year, and the time focus is defined by that. What I find most interesting is Dean's self-categorisation as essentially a "risk-focused" investor.

Just because we're all cap'n'bells round here doesn't mean an appreciation of other approaches can't be useful or interesting. She runs a fund, and seems to have a blistering year. I prefer not to pay experts, but I'm still interested in their opinions, whether I agree or not. In fact, I make it a point to pay special attention to opinions I *disagree* with.

Not least because, despite parochial tendencies hereabouts, what institutions do moves the needle far more than what we happy few do.

Although, despite her reluctance to fly a tribal investor type flag, she seems to attach a lot of importance to value, and a lot of the holdings listed are motley favourites...

Hope everyone's enjoying a nice vista of green after the Draghinator's "I'll be a backstop" performance today.

MunroMan 06 Sep 2012 , 6:20pm

It's a high beta fund and the Market has gone up. Taking more risks in a rising Market always gives better returns than the index.

Hanging on to that outperformance is the hard part.

jaizan 06 Sep 2012 , 7:50pm

12 months is way too short a time to evaluate fund performance and conclude if they have any special stock picking skills.

sludgesifter 06 Sep 2012 , 9:54pm

Take 2000 unit trusts---or, equally well, 2000 random portfolios of shares. One of them will have performed impressively over the past year. How well will it do over the next year? In expectation, averagely---just like any one of the other 1999.

goodlifer 06 Sep 2012 , 11:35pm

ANuvver.
"In fact, I make it a point to pay special attention to opinions I *disagree* with."

Up to a point - but where do you draw the line?
Hardly a day goes by but junk mail offers to show me a money-back-if-not-satisfied system to make my fortune on the horses, the pools or by two hours computer trading a week.
Or cold callers try to explain the final answer is fine wines, carbon credits or building sites ripe for development in Newbury.

Obviously they all get instantly junked, but you could argue - and I couldn't refute you - that every now and then I might be throwing away the opportunity of a lifetime.

What you say only makes sense if you think the other person's opinions are worth bothering with.
Not always an easy decision.
But life's too short to take everyone as seriously as they would like you to.

ANuvver 07 Sep 2012 , 1:59am

goodlifer:

Oh certainly. Just throw them all away. If someone's discovered the great secret, why the hell are they doing you such a favour? What's their angle?

Still, anyone who tells you they've never been taken is lying. We all have, one way or another, and hopefully the damage wasn't too bad and we learned by it.

What I really meant was that if, say, someone's presenting a well-reasoned bear case for something I'm bullish on, I'll pay attention. It's all too easy to concentrate exclusively on stuff that confirms your opinions!

And just because I'm a bottom-up income/value sort of guy, doesn't mean I don't keep up on momentum, charting, macro considerations, et al.

Been chewing over the Gross/Siegel debate of late. How about something on that MF? Right up Fool Boulevard, I'd have thought?

goodlifer 07 Sep 2012 , 1:42pm

ANuvver
"It's all too easy to concentrate exclusively on stuff that confirms your opinions"
Too right.

On the other hand experience suggests one can spend a lot of time and effort analysing what one should have realised straight away was useless garbage.

I think we're in broad agreement really.
.

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