The manager reduced the size of his £1.2 billion fund from 78 holdings to 52 at the start of the year, while concentrating the top 10 stocks to more than 40% of the fund.
‘We’ve gone back to basics – it’s one of the reasons we’ve got better,’ Brough told Wealth Manager.
‘Maybe the fund got too big at £3 billion – the market has turned out to be far less liquid. And I didn’t think industrials and consumers would fall to the prices they have,’ he added.
Brough, who sported Bradley Wiggins-style sideburns during the interview, said going back to basics and cutting holdings has so far this year boosted performance and will see him return to form, much like Wiggins, who came back to win the Tour de France this summer.
‘Hopefully the course ahead isn’t going to be too steep for the Wiggins approach not to win,’ said Brough.
The manager has a triangle approach, where he invests in A stocks, trades B and avoids C stocks.
He said A stocks are those that have pricing power, quality management and a very strong business franchise, while B stocks are those that have had a change of management strategy, withdrawal of industry and the potential for re-rating.
Brough said Elementis is an example of an A stock, as there has been a huge increase in drilling for shale gas in the US, while the firm has a cash-rich balance sheet. Even though the company share prices went down around 5% in a day a couple of weeks ago, Brough emphasised investing in this firm is for the long-term.
He also owns Sports Direct, which he said has seen its major competitor fall into financial distress. The firm has invested significantly in the internet, which now amounts to 15% of sales.
‘B stocks are where capacity goes out of the industry so the stocks go up – but this doesn’t always work, as with HMV,’ said Brough.
‘You need capacity going out, but also need to be in a dominant position. So Sports Direct, for example. JJB was dominant, but it went bust two months ago - so it also needs to dominate and have internet presence.’
William Hill is another company Brough owns, in the view the firm has a strong balance sheet and is supported by factors such as the internet, which has enabled expansion into overseas markets.
Brough has a significant weighting in Victrex, with the stock representing 3.7% of his portfolio. ‘This is a special chemical firm, that creates peek, a plastic that is much lighter – it’s used in the [Boeing] Dreamliner. I’ve held it for a long time.’ Year to date, the share price has moved 20.6%.
‘Atkins is another change story,’ said Brough. ‘I like change stories. They have new management and a lot of tech know-how. They are engineering consultants – this industry is undergoing a lot of consolidation but they have exposure to worldwide governments and growth – not just in the UK.’
Brough’s top 10 holdings also includes Grainger, the residential property manager. ‘This was a great source of disappointment because it got over-leveraged,’ said Brough. However, he highlights the firm is reducing its debts and says the rise in German house prices are reasons to be optimistic on its prospects.
Premier Oil, meanwhile, represents around 3.6% of his portfolio. ‘Premier Oil has at least started finding oil,’ said Brough.
‘Qinetiq will be a turnaround story, based on the queues for James Bond,’ said Brough. ‘Leo Quinn is the chief executive, he did a good job at De La Rue, and he is turning around Qinetiq, where he has been for the last 18 months.’
Brough added he has EasyJet in the fund, which is a ‘good story’ and has brought in allocated seating which people will pay for, while reducing the number of flights by 22 million.
However, Brough concedes some of his holdings slipped into the ‘C’ category and have hurt his performance. These ‘C’ stocks are those where there is industry overcapacity, those that are experiencing long-term decline and do not provide growth opportunities.
‘JD Wetherspoon - the number of pubs may be shrinking but the availability of cheap booze is everywhere,’ said Brough. ‘Consumer spending remains under pressure and you can’t drink beer on the internet.’
‘We sold out of Wetherspoons because beer consumption was going down, and people are drinking more at home before they go out. We held it for around 10 years but then recently sold out.’
He added: ‘Against the backdrop of what is a pretty tough climate in the UK, consumer spending is still around 65% of GDP. Those companies that have made it on the internet will do well.’
Luminar also dealt a blow to the fund’s performance when it went bust. ‘Luminar was a disaster – there were a number of nightclubs closing at a rate of 10% a year. So Luminar went bust.’
‘Mouchel – we weren’t holding it when it went bust – it managed to snatch defeat from the jaws of Victory, by turning down a couple of bids.’
However, Brough said he managed to sell out of HMV before it went down completely, as capacity had gone.
Brough also sold out of Telecity Group earlier in the year. ‘That did well, it was a great success for me, but it was trading at 30 times earnings and it’s a shed with a few computers in it,’ said Brough.
Over the last three months, Brough has turned around performance to deliver 11.45% versus the benchmark’s 8.9%. Over one year, he has returned 28.06% against the index’s 25.5%.
However, over three years the fund remains well behind the benchmark, returning 25.85% versus a 42% rise in the benchmark.
‘[The] fund hasn’t covered itself in glory over the last few years,' Brough admits.