The £1bn Seilern World Growth fund has generated some of the highest returns in the competitive global sector over the past decade, doing so with a process that rules out the vast majority of companies in advance.
FE Analytics shows the Seilern World Growth has made a total return of more than 340 per cent over the past decade, compared with around 150 per cent from the IA Global sector and 200 per cent from the MSCI World index.
This is the third highest return of the peer group (beaten only by Baillie Gifford Global Discovery and Wellington Global Health Care Equity) over this time frame. In addition, it’s in the top decile over one, three and five years.
Performance of Seilern World Growth vs sector and index over 10yrs
Source: FE Analytics
Seilern Investment Management, which runs Seilern World Growth, Seilern America and Seilern Europa, was established in 1989 but was focused on the institutional market for much of its early days. The firm recently started expanding into the UK wholesale space and added its funds to the Investment Association sectors in early 2018.
Thanks to their strong track record, the funds have appeared in several Trustnet articles highlighting high returns so we caught up with Seilern World Growth lead manager Michael Faherty to find out how this has been achieved.
Seilern Investment Management is resolutely a quality-growth investment house, the manager pointed out, and the entire way its process operates is to identify a small number of the highest quality businesses in the market.
As an investment style, quality-growth has had an incredibly strong run over the past decade as ultra-loose monetary policy and a lacklustre growth environment pushed investors into more reliable parts of the stock market.
Performance of investment styles over 10yrs
Source: FE Analytics
As the chart above illustrates, the index of global quality stocks has made almost twice the return of its value-orientated peer over the last 10 years. The growth index has also beaten value by a significant margin.
However, Faherty pointed out that Seilern World Growth and the other funds run by the group have a much more detailed process than just buying any old quality growth stock in the hope that momentum will lead to high returns.
Indeed, the firm dedicates time and effort to building the ‘Seilern Universe’ – a list of between just 50 and 70 companies that have all the attributes it is looking for. This shortlist is whittled down from a starting universe of around 58,000 companies and only 0.1 per cent of these are left by the end of it.
First of all, the 58,000 stocks are run through a series of screens that exclude those with market caps of less than $3bn (to ensure sufficient liquidity) and those in non-OECD countries.
Whole sectors are also stripped out of the universe, for reasons such as the lack of a compelling growth case (utilities, telecoms, banks), holding limited pricing power (commodities, oil & gas, airlines) or needing high capital intensity (heavy industrials, insurers, auto makers).
“There are lots of sectors which we will not invest in. This means the fund has a very understandable and stable way in which we expect it to perform and how it has largely performed in the past,” Faherty said.
“We’re very clear at articulating to clients when the funds will not perform. In a situation where you have what you might call a rally in cyclical assets or value assets, or what we would call a ‘dash to trash’, this is a fund to should underperform and has underperformed in the past.”
The next part element of building the Seilern Universe is applying the ’10 Golden Rules’, or a series of characteristics that each company must hold if it is to be considered a good quality-growth opportunity for the funds.
In short, a company needs to have a scalable business, superior industry growth, consistent industry leadership, sustainable competitive advantage, strong organic growth, wide geographic and customer diversification, a solid financial position, transparent accounts, excellent management and corporate governance, and be asset-light and profitable in order for it to be admitted to the Seilern Universe.
“These characteristics aren’t rocket science and shouldn’t surprise anybody. But the point is, we are exceptionally disciplined in terms of how we interact with these rules. If any these rules are breached, a company does not make it into the university. If a company is in a fund and any of these rules are breached, it will be removed from the fund,” the manager explained.
“Some of these will go in tandem. If you have a company that is growing very strongly and has consistent industry leadership, they will also tend to have strong competitive advantage, a scalable business model and probably strong organic growth on the back of that. They tend to sort of cluster together – it’s not as if we’re hunting for totally different animals.”
Even meeting the strict requirements of the 10 Golden Rules does not guarantee that a company will be added to the firm’s shortlist. Each stock that makes it this far is then assigned to an analyst who carries out more bottom-up research into it, examining the industry it operates in, speaking with its management, looking into its competitors and analysing its growth drivers.
Companies are then discussed by Seilern’s investment committee and this panel of fund managers has to unanimously agree whether or not it can become a part of the firm’s investable universe. The final hurdle is that founder and chairman Peter Seilern is able to veto any company, although this is rarely exercised.
“He has this right because he’s the guardian of the philosophy, he knows exactly what a good quality-growth business looks like because he’s been doing this for years and it is ultimately his process,” Faherty said.
Once a stock is in the Seilern Universe, distancing itself from the 99.9 per cent that did not make it through, the odds are that it won’t find itself in the portfolio of Seilern World Growth.
Seilern’s funds run portfolios of between 17 and 25 stocks, with Seilern World Growth currently featuring the likes of Google parent Alphabet, beauty giant Estée Lauder and payments major Mastercard as its biggest holdings.
In terms of geographical allocations, it has 65.8 per cent in the US with 9.2 per cent in the eurozone and 2.9 per cent in UK companies. Information technology is the largest sector allocation, followed by healthcare and consumer discretionary.