The Nutshell Growth fund stands out for being among the rare breed of IA Global funds that make it to the top.
In a crowded sector where trackers seem to have the upper hand, Nutshell Growth, launched in 2019, was in the 29th percentile over the past five years against its peers and rose to the fourth and 16th percentile over three and one year, respectively.
It achieved this through “eye-popping” portfolio turnover and a hedge fund-like process but at retail prices, and it has featured on Trustnet increasingly frequently, including among the ‘rising stars’ worth taking a look at, the best-performing global funds you may not know and unique funds doing something genuinely different to their peers.
Below, manager Mark Ellis discusses how he built the process, how his 700% turnover only cost him 20 basis points in the past 12 months and reveals one of his biggest gripes with the financial industry.
How do you invest?
We use a ‘live’ quality-growth, relative-value process, scouring the globe for the most exceptional quality companies for the best possible price.
Stocks need to pass three hurdles: a minimum return on invested capital, a minimum profit margin and a minimum retention ratio. We like companies to retain their earnings and compound over the long run.
Our internal model captures 37 different factors that we want exposure to. About 60% relate to quality, 20% are valuation measures and the rest is historical and forward-looking growth. The final step is a subjective checklist, the human element.
How is Nutshell Growth different to its peers?
It is really different to any other fund out there because of my background. My derivatives and hedge-fund skills underpin the process, which I’ve built myself between 2016 and 2019.
One key differentiator is that we recalibrate the portfolio from scratch twice a month, which ensures we are deploying the capital to the best stocks for the best possible price.
We also have a target weight for each stock that is fixed for two weeks, and we trade around any deviation through a live set of algorithms, which fire up if any of our stocks look overbought or oversold intraday. That provides some alpha. On average, we've added 5.9% per annum from all this extra work.
How high is your turnover?
Very high. In the past 12 months it’s north of 700%. When I tell that to a traditional fund buyer, their eyes pop out.
Back in the 80s, the drivers of turnover was broker lunches and paying your mates commission. We've really moved on from there and our commission rates are virtually zero. Over the past 12 months, our total trading costs were 20 basis points and we added 5.9% through our trades.
How is the portfolio positioned right now?
Because we're completely bottom up, we pivot to where we think the global value is. Typically, we're around 70% weighted to the US for example, but coming into this year, we had the lowest US exposure we've ever had, at around 50%.
That was purely because we identified that Europe was cheap at the start of the year. As Europe outperformed, beating the US by about 20 percentage points, we gradually took profit and pivoted back into the US. Now we're back to around 70% in the US.
We do that in the sectors as well. So, at the bottom of the 2022 bear market, we pivoted hugely into tech stocks, because names like Meta were trading on a price-to-earnings (P/E) ratio of 10x and the bottom-up process identified the real value in those mega-caps. This created the explosive returns we saw in 2023.
Do you have a preference for larger companies?
No, we pivot everywhere and are not constrained by market capitalisation. For example, in the past 18 months, three of our stocks have been taken over, including Fort Knox, a Swedish company that was the most expensive stock we've ever bought, on a P/E of 65x.
We are also not constrained by value considerations. The cheapest stock we’ve ever bought was an industrial company in the US called Encore Wire, which was on a P/E of 3x. Most growth managers would probably only look at stocks with multiples greater than 25x.
Who is the fund for?
One of my gripes with the whole financial industry is the lack of awareness of compounding and the underinvestment over the very long run. Most of people's holding period is decades, yet they still invest in cash and other short-term products.
From memory, if my daughter is born today and I invest about £3,000 in a pension for her, if it’s in a high-risk equity product that can achieve something like 15% per annum (which ideally I’d like to get close to with Nutshell Growth), that sum grows to something close to £32m by the time she retires; if it’s in a safer cash-like product yielding 4%, it grows only to about £45,000.
That’s to say that the fund is available for everyone with a holding period greater than three years, and is also why all my money and all my kids’ money is invested in this fund.
What are your best and worst performers of the year to date?
The top three are US healthcare company Medpace (3.9%), software company Fortnox (2.5%) and financial solutions provider Alpha Group (2.4%). The bottom three are weight-loss giant Novo Nordisk (-3.3%), software house Adobe (-1.9%) and American cybersecurity player Fortinet (-1.3%).
Fortinet (8.5%) is our largest position, followed by Adobe and Novo, so all these are recovery value positions. Fortnox and Alpha have been taken over, so no longer in the portfolio. Medpace is currently mid-portfolio with a 2.1% weight.
What do you do when you’re not working?
I'm usually ferrying around my five children to different activities. We sponsor the local field-hockey club and I had my first-ever match with my 13-year-old boy a couple of weeks ago. It’s the best thing ever.