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Mid cap companies, less researched than their large cap cousins, provide a fertile hunting ground for undervalued shares, according to Leigh Himsworth.

Leigh Himsworth, Gartmore’s Head of UK Equities, is a Yorkshireman and has what could be described as a Yorkshireman’s approach to investing – careful, direct, no-nonsense. His roots define his prudent fund management style, focusing on the detail that lies behind each investment story, with strict rules about when to sell. Perhaps most important of all, he puts his investors at the heart of this investment process.

Mid cap focus
Leigh’s Yorkshire traits are not the only factor that gives him standout in the UK equities market. Leigh is a mid cap manager. He believes that to achieve outperformance in the crowded UK equities universe, investors could benefit from looking down the capitalisation scale. And the skills required for successful mid cap investing fit well with Leigh’s approach.

Five years ago, the FTSE 250 Index would have featured some relative unknowns that have now established themselves as household names, such as Burberry. Such companies grew rapidly, with share prices increasing exponentially, leading to their promotion to the FTSE 100 Index. Leigh firmly believes that a strategy of looking for the ‘next big thing’ has the potential to reap greater rewards than investing after a period of growth, and there are a number of compelling reasons why growth can be identified further down the capitalisation scale.

For Leigh, possibly the most important factor is that mid caps are under less scrutiny by the rest of the market. “With large caps, so many analysts are looking at them and meeting management. It’s difficult to add to the valuation argument. Further down the scale, you may be the only one to meet them and you can bring your specialist knowledge to bear.” This is where Leigh’s investment process really comes to life. He focuses on fundamental analysis to uncover what lies behind the company’s growth. He visits the companies he invests in to understand how they operate.

Leigh also believes that mid cap growth lies in the capability of senior management. Of course, these stocks are subject to greater volatility than their large cap peers, however good management can be the make or break factor in creating a market leading position. Good management is easier to identify at this level, and the impact is less likely to be swallowed up by uncontrollable factors, such as interest rates or commodity prices.

Since Leigh took over management of the Gartmore UK Alpha Fund, he has turned the portfolio around from a UK large cap strategy, to take advantage of mid cap opportunities, with exposure to mid caps having risen from around 15% to over 50% since October 2009.

Risk aware
When he started his investment career in Rensburg’s Bradford office, he was deeply aware that he was managing someone else’s money. “And that has remained with me,” he says. “My prime focus is the unit holder. It all stems from that.”

Leigh joined Gartmore in September 2009 from Royal London, where he ran the top-quartile UK Mid-Cap Trust*. He has three rules of thumb. The first is aiming to generate returns in excess of what investors would get in a building society. Moreover, the excess return should compensate investors for the added risk taken on by investing in an equity portfolio.

The other two, closely connected, are about diversification and controlled risk. There is rarely any duplication in the Alpha Fund. “I wouldn’t own Debenhams and Next in the same portfolio,” he points out. “They are similar animals and they move in similar ways, for similar reasons. But I might own a mix of, say, Debenhams and Halfords.” For Leigh, it’s all about diversifying the sources of returns in his Fund.

”Whatever the stock selection, you don’t need to own big positions”, he adds, “in stocks or in sectors. By not having big sector skews, you don’t get caught by huge swings in the market.”

To control risk, he also has cast-iron rules of not falling in love with companies and not getting too greedy. That means establishing a sell discipline at the time of purchase. So when a stock reaches a pre-determined price target, for example, it will be sold or the situation reassessed to see if something else has changed. “If we have achieved our desired return in only one week, let’s lock it in.”

Reporting day could be a trigger for this, when good results could make front page news for a mid cap, causing the share price to rocket. However, after profits are taken and the cooling off period has ended, the headlines are generally forgotten by the markets, so Leigh can re-enter the position at a lower price, if the fundamentals haven’t changed, of course. An example of this is Greggs, the much loved local bakers with a national high street presence, which had a strong rise in share price on the back of reporting day.

Gartmore UK Equities
The Gartmore UK Alpha Fund follows Leigh’s mid cap philosophy. It has no underweight limits, investing instead where Leigh can find value. “The intention is to get the Gartmore UK Alpha Fund into the top decile,” he says. “It’s higher risk, but with the potential of higher reward.”

As well as managing money, Leigh’s role as Head of UK Equities is to keep lines of communication open within the UK Equities team: to share views on the markets and on stock selection. “Each person on the team is very experienced, but still young enough to want to prove something to the market,” he says. “Everyone is autonomous, but my role is to help raise our value to more than the sum of the individual parts.” So far, so good, although the Yorkshire accent hasn’t quite caught on yet.

Edward Russell-Walling is a financial writer and editor. His work has appeared in titles such as the Financial Times, The Times and The Banker.

For further fund information and literature, click here.

*The Royal London Mid-Cap Growth Trust was first quartile over 6 months, 1 year, 3 years and since Leigh’s involvement in the fund – from 1 June 2006 to 31 July 2009. Source: Lipper. Basis: mid to mid, net income reinvested, net of fees in sterling terms relative to the IMA UK All Companies Sector. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Please ensure investors read the Simplified Prospectus before investing. The Gartmore UK Alpha Fund invests in shares, which are more volatile than other asset classes such as cash or bonds. The Fund may hold concentrated positions. If one of these concentrated positions declines in value, or is otherwise adversely affected, this can have a greater effect on the Fund's value than if it held less concentrated positions. The Fund can invest in smaller companies which can be more risky than investing in larger companies due to lack of liquidity and increased volatility. Funds with an emphasis on a particular sector or geographical area are exposed to a higher risk of volatility than a fund which is more broadly diversified. All opinions and estimates constitute the Fund managers judgement as of 30 June 2010 and are subject to change without notice. The views expressed must not be taken as an offer to buy or sell units or shares in the markets mentioned. These views are provided for information purposes only.

• This entry was posted on: Wednesday, 30 June 2010 11:18 BST
• Filed under: News
• Tags: Gartmore UK Alpha Fund, Leigh Himsworth, News
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