River & Mercantile UK Dynamic Equity - searching for diamonds in the rough

Dominic Rowles | Wed 15 May 2019

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• New manager William Lough uses a similar investment process to his predecessor
• Lough didn’t do as well as the broader UK stock market over the past year
• He has a short track record and his fund isn’t on the Wealth 50

Our view

William Lough took responsibility for the River & Mercantile UK Dynamic Equity Fund when Philip Rodrigs, the fund's previous manager, left the company in February 2018. Lough previously served as an analyst on River & Mercantile's Equity Research team but doesn’t have a track record running a fund in his own right.

We think it's important for a fund manager to have a long track record. Positive performance over the long term is one of the things that give us the confidence to hold on to a fund, even when the going gets tough and they hit a snag.

We're encouraged he has the backing of an experienced team, and uses the established River & Mercantile investment process. But we prefer to invest with managers who have long, successful track records so we're not considering his fund for a position on the Wealth 50 list of our favourite funds. We'll keep an eye on how his career develops and let investors know if our views change.

How's the fund invested?

The manager invests in companies he believes have been overlooked by other investors, meaning their share price doesn’t properly reflect their prospects. They come in all shapes and sizes but can broadly be split into four sections.

Growth

This section includes companies the manager thinks are capable of rapid earnings and share price growth whose prospects have been underestimated by other investors. A new investment in leisure cruise company Carnival is an example. Its share price was held back by concerns that pressure from competitors could force the company to cut prices. But the manager thinks demand for cruises will remain strong, boosted by rising and increasingly wealthy populations in emerging markets.

Quality

Quality companies typically generate reliable dividends and growth over the long term. Tate and Lyle sits in this portion of the fund. It's a global provider of ingredients for the food and drink industry. The company's relatively stable earnings mean it can reinvest into areas with the potential to grow more strongly, such as healthier food and drink products where demand is on the rise.

Recovery

Companies in this part of the fund have been through a difficult period, but the manager thinks they're capable of a recovery. Specialist packaging and component maker Essentra is a relatively new investment. Its share price has struggled in recent years because of a poor corporate strategy implemented by a previous CEO. But the old CEO's been replaced and William Lough thinks the new management team's doing a good job. He expects the company's earnings to grow over the next few years which could boost the share price.

Asset-backed

Companies in this section of the fund own plenty of assets but are often overlooked by investors who focus on short-term earnings. A recent investment in telecoms giant Vodafone is an example. The manager thinks the company's current value is well below what it would cost to replace it – a potential indicator that the share price is too low. The company's also trying to improve investors' returns by cutting costs.

Please note the manager has the flexibility invest in derivatives which, if used, adds risk.

How's the fund performed?

The fund's risen 0.2%* since William Lough took control. The broader UK stock market rose 7.2%. Our analysis shows the fund didn’t do as well as the broader sectors, and size of company, the manager typically invests in. This means his stock-picking hindered returns. This is a very short period of time to judge performance though and past performance shouldn’t be seen as a guide to the future.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2019

One of the weakest performers was online gaming company 888 Holdings. It struggled amid concerns US gambling regulations could tighten. It wasn’t all bad news though. UK sportswear retailer JD Sports bucked the trend in the UK high street and grew sales more than expected. Online vehicle marketplace Auto Trader also delivered strong returns.

Find out more about this fund including charges

River & Mercantile UK Dynamic Equity key investor information