e-fundresearch: Do you have a benchmark? If so, which one?
Smith: The S&P500 Composite Index.
e-fundresearch: Are you also responsible for other funds at the moment?
Smith: I also manage the M&G Global Leaders Fund, which focuses on internal change within companies, such as new management or restructuring, which is reflected in the performance of the portfolio. This is also part of the M&G American Fund’s focus, so in fact a number of the M&G American Fund’s holdings are also held in M&G Global Leaders Fund.
e-fundresearch: What volume do you manage at the moment?
Smith: € 2.4 billion as at 31 August 2008.
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e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003, 2004, 2005, 2006, 2007? Absolutely and relatively to the relevant benchmark.
Smith: The fund has delivered top quartile performance over three and five years and since I took over the fund.*
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Smith: I believe that focusing on careful selection of companies that are enhancing their returns is the best way to secure positive rewards for shareholders. It is pleasing to note that the US corporate sector’s positive attitude towards shareholder value creation – one of the key drivers of the country’s stockmarket over the past ten years – remains broadly intact. As a result, I am confident that we will continue to find a stream of exciting investment opportunities in the US.
e-fundresearch: How long have you been fund manager?
Smith: I have been the fund manager of the M&G American Fund since December 2004. I also manage the top performing M&G Global Leaders Fund. I joined M&G in December 2000 from JP Morgan Asset Management where I was a CFA-qualified senior media analyst.
e-fundresearch: What kind of capital market situation do we have at the moment?
Smith: With so much uncertainty about the economy, and the prospects for the financial sector, I believe taking a broadly neutral approach to macroeconomic factors such as these becomes all the more pertinent when investing in equities. Even with the threat to profits that economic slowdown brings, those companies that adhere to value creating principles are better placed than most to weather a more turbulent economic environment.
e-fundresearch: How do you act in this environment?
Smith: The M&G American Fund’s four constituent investment strategies – finding companies undergoing external change, internal change, innovation/R&D or which have undervalued business franchises – while all being expected to contribute to performance over the long term, are designed to show little correlation with each other, thus aiming to reduce volatility across the economic cycle.
Healthcare conglomerate Johnson & Johnson, which falls in to the undervalued business franchise category, illustrates how the market can turn its back on a well-run company; the group’s returns are expected to deteriorate and its growth to slacken. Our view of Johnson & Johnson is, however, much more optimistic, based on its phenomenal track record of returns and value creation. In addition, the firm has highly recognisable brands and a healthy pipeline of products, which we believe will help generate good returns in the years ahead.
e-fundresearch: What are the special challenges in this environment?
Smith: As investors continue to come to terms with the long-term fall-out of the credit crunch against a backdrop of a slowing US economy, it is not surprising that sentiment towards US equities has continued to be of a risk-averse nature. Investors have chosen to pay up for perceived short-term earnings visibility and stable growth with valuation taking more of a back seat. However, analysis of the long-term drivers of share price performance returns reveals that individual stock valuation matters, and I am confident that the market’s appreciation of valuation will return.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Smith: I am still finding opportunities among US companies. People should remember that the US corporate sector’s positive attitude towards shareholder value creation – one of the key drivers of the country’s stockmarket over the past ten years – remains intact.
Firms across the Atlantic have long been known for their commitment to rewarding shareholder loyalty and producing returns above the cost of capital. Many US businesses are only too aware that in today’s increasingly competitive world they cannot afford to stand still if they are to continue along the path of shareholder value creation. After all, for those companies prepared to make necessary internal changes, take advantage of external developments by adapting their strategy or put in place successful R&D initiatives, the rewards can be significant. Crucially, an investment strategy focused on these factors has a place throughout the economic cycle; a management team’s decision to restructure, spin off a division or end an unprofitable product line will go ahead regardless of what happens to US GDP. What is more, not everyone realises the potential of this disciplined approach to capital allocation, making the valuation of the US market relative to the rest of the world the most attractive it has been for several years.