How would you describe yourself as an investor?
“Fundamentally, I would say I am a bottom up stock picker in that I spend the vast majority of my time appraising companies looking at companies – the way their business model is structured, the quality of their end market position, whether their business model generates cash, whether it has high levels of indebtedness. Then we spend a lot of time interviewing management trying to understand what motivates them, how their compensated and how that leads them to the decisions they make within the company.
“So basically spending time to see whether we’d like to invest in a company but alongside that I think it is really important to observe that we really spend a lot of time on valuation. There is very little point in buying a great a company if the vast majority of the future profits are already in the price.”
“So we spend a huge amount of time figuring out what we think a business is worth and then establishing whether there is a gap between that value and the prevailing market price, which makes a good company into a good investment.”
How have you changed the Threadneedle UK fund since taking over in September?
“There was very little change required. I understood the mandate quite clearly, the fund was set up in line with that mandate and it has been performing well for some time. So, very little change was needed to be made but equally I wanted to make sure that the fund represented my best ideas. The major change is a reduction in off index positions because I felt there was enough opportunity within the UK market that didn’t need to go off index.”
“Strategically, I think the biggest change was an opportunity in commodity areas – so I did reduce the mining position and used those monies to invest in a company in the defence area and a leading global hotel franchise.”
Do you have a particular investment style?
“I am not particularly style-ee as an investor. I am much more of a bottom up stock picker and I genuinely quite open minded in that I think if you have a certain style it can lead you to close your mind off to other areas which limits opportunity set. I am quite conscious that I do not want to do that.”
“However, deep down if anything I do have a quality bias. I like owning good quality business and strongly financed business. I have an aversion to high levels of indebtedness.”
“Of course though I want to buy these businesses when everyone else is selling so you have to have that contrarian mind set goes with the quality biases.”
What are the headline risks for UK large caps
“They do say that the equity market rides a wall of worry and at the moment I would completely recognise the fact there is an awful lot to worry about. Obviously we are on the verge of a very complicated election which is unlikely to lead to strong result. But many people have moved ahead of that risk.”
“The other risks are more pertinent to levels of the market would be the withdrawal of liquidity in the US and the speed at which interest rates rise over there.”
“The eurozone is as uncomfortable as ever and obviously we have seen a big QE induced equity rally over there. So yes there are plenty of risks out there for us to be conscious of but many opportunities as well.”
Should UK equity investors expect moderate medium term returns?
“I think we would all acknowledge that the big returns of 2012, 2013 – high double digit returns – are less likely persist going forward. Mainly because the asset class has enjoyed such a significant re-rating over the last three to five years. It has been a very benign environment – quite volatile from a macroeconomic perspective but quite benign in terms of the re-rating of the asset class.”
“We have always been of the view that for equity markets to make progress from here we would probably need to see a resumption in corporate earnings growth or an acceleration in earnings growth.”
“What we are doing as fund managers is making sure we are in those companies that have reasonable valuations but more importantly the ability to grow. In a market that is generally struggling to grow there are business that can because they have superior business models or balance sheets or managements. We want those sort of companies.”