James has delivered top decile performance for the New Star UK Special Situations Fund since he took over management of the fund in May 2003, returning 108.6% against a UK All Companies sector average of 74.9%[1]. Since the fund launched on 2 April 2001 it is ranked 11th out of 217 funds in the IMA UK All Companies Sector.
1) Why now?
"Before you make any purchase ask yourself what new information may prompt a move in the share price - the market has a tendency to discount existing information quickly. It is better to travel in hope than to arrive goes the stock market adage."
2) Be contrarian.
"Why own stocks that everyone already owns - from where is the marginal buyer going to come? I often find the most value in stocks and sectors that have been ignored."
3) Cash and profit margins.
"These are a good indicator of a company's health and worth. Ideally, you should be looking for margins on an improving trend, which provides confidence that profits are not peaking. Cash is king. I prefer companies that fully convert their operating profit into cash."
4) Management is key.
"Firstly, follow what the directors do - they know their business better than we do. For example, a director's purchase of shares in Marks & Spencer helped crystallize my decision to buy shares in the recovering retailer last year. Investments that have gone wrong tend to be in companies where the management has little personal money tied up in the business. Secondly, when meeting a management team look out for spin. Scepticism really can be a virtue."
5) Valuation.
"Look at valuations in their own right. Be careful with relative valuations. If the benchmark or sector is overvalued you will be buying overvalued stocks. I look at price/earnings ratings in absolute terms."
6) Patience is a virtue.
"Try not to get bored with your stocks. You bought something for a reason and if the original story has not changed then do not be unnerved if the market is a little slow in catching up. Quality and value will out over time."
7) Recovery stocks.
"These represent about half my fund but investors need to be careful to differentiate between recovery stocks. Some face short-term issues that can be resolved; others may be in genuine structural decline and need to be avoided at all costs. The best recovery stocks, in my opinion, are those companies with "internal problems". These are likely to have a better success rate as they are not trying to sell new products or attract new customers but just need competent management to get them back on track."
8) Small companies.
"Investments in smaller companies tend to be more volatile and it is much harder to get out if you get it wrong. My own rule is: the smaller the company the stronger the investment case has to be."
9) Software companies.
"While there are gems amongst technology stocks the sector should come with a health warning. First, every technology company tells you they have the "best" software - the reality is few do. Secondly watch out for accounting tricks - how do they book the sales and what are they capitalising on the balance sheet?"
10) Knowing when to sell.
"I often find this the hardest decision, especially when the investment has been a good one. Remember why you bought the stock and what you thought it was worth originally. Do not be afraid to leave a little something for the next man."
Discrete year performance - New Star UK Special Situations Fund
30/06/2005 to 30/06/2006 22.5%
30/06/2004 to 30/06/2005 24.3%
30/06/2003 to 30/06/2004 31.0%
28/06/2002 to 30/06/2003 -2.0%
29/06/2001 to 28/06/2002 -0.8%
Source: Lipper, mid-mid, net income reinvested
Past performance is not necessarily a guide to future performance.
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