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Financial Times: Fund manager in focus

EXTRACT: Many of the so-called “mega-cap” stocks are on low valuations with high yields and strong balance sheets. We expect better performance from these companies, including Royal Bank of Scotland, GlaxoSmithKline and Royal Dutch Shell.

By Ellen Kelleher
Published: July 21 2007 03:00 | Last updated: July 21 2007 03:00

Simon Gergel has managed the Allianz RCM UK Equity Income Fund since May last year. The fund, which is benchmarked against the FTSE All-Share, aims to achieve high income as well as capital growth. Gergel is able to use a number of strategies to improve returns such as writing covered call options.

How would you describe your investment style?

I have a traditional approach to investment. It is critical to understand the long-term competitive position of a business, the strength of its brands and technology and its financial structure. We have our own market research tool, Grassroots, to help us assess the competitive dynamics of different industries.

Our investment process begins with cashflow, which is particularly important when looking at dividends. Our in-house team of research specialists analyse the sustainability and growth prospects of a company’s cashflows, profits and dividends.

Valuation is a key driver of future returns. An ideal investment would have a robust business franchise, strong cashflow, a good dividend yield and decent growth prospects and trade at an attractive price.

To find these situations it is necessary to be open to contrarian ideas. We try to buy good businesses that are out of favour for some reason.

A strong sell discipline is also important and we will sell a share once the price reflects our view of its future prospects or if the investment case changes.

What is your outlook for the sector?

UK Income funds have done well over the past few years as many high-income sectors such as tobacco and utilities have outperformed. Looking forward, we think that within the high-yield universe better returns will be achieved from some of the financial stocks such as banks which have lagged behind and are now lowly-priced. We favour companies with attractive dividend yields in growth sectors such as aerospace, pharmaceuticals and media, and have repositioned the fund accordingly.

Rising UK interest rates are likely to put pressure on consumer spending over the next year. This is already impacting share prices of related companies in sectors such as retailers and house builders. We are monitoring these industries for opportunities to buy into high quality franchises at attractive prices.

What is your best investment decision?

We bought Britvic last November. The company makes soft drinks such as Robinsons squash, Fruit Shoot and holds the UK distribution rights to Pepsi and 7UP. Last summer was tough for the carbonated drinks industry because of health concerns over drinks with sugar as well as the heavily-promoted launch of Coke Zero. The Britvic share price fell heavily. We bought in at a depressed valuation attracted by the firm’s record of innovation and its exposure to the faster-growing still drinks market. Trading this year has been much stronger.

And your worst?

GlaxoSmithKline, the pharmaceutical giant, has disappointed. We built up a large position in GSK earlier this year. The shares had suffered as several drugs approached or passed patent expiries and the company had been slow to deliver new products.But we continue to believe there is significant value in GSK and we are maintaining our position.

What is your current top tip?

Many of the so-called “mega-cap” stocks are on low valuations with high yields and strong balance sheets. We expect better performance from these companies, including Royal Bank of Scotland, GlaxoSmithKline and Royal Dutch Shell.

Copyright The Financial Times Limited 2007

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