Investing for the challenges of today is like focusing on your toes while walking, according to Adrian Frost (pictured), manager of the Artemis Income fund, who says it will cause you to miss out on the true drivers of long-term performance.
In a previous article published on Trustnet, Frost spoke about the growing emphasis on ESG (environmental, social & governance) issues in his investment process.
There is still a degree of scepticism towards the subject, however Frost pointed out that while the importance of ESG issues may not be immediately apparent, this is often true of any theme that goes on to define the investment landscape for a multi-decade period.
Frost’s co-manager Andrew Marsh recalled his experience during the financial crisis when widespread panic prevented investors from behaving in a rational manner.
“I worked with a guy who on every Monday morning for four or five months, when I asked what he had been doing over the weekend, replied, ‘I've been buying more tinned veg, because economic Armageddon will be upon us very shortly’,” he said. “He also threatened to buy a shotgun.
“I think for most people, when you ask what springs into their head when you ask about the great financial crisis, it is pictures of the queues at Northern Rock, and people walking out of Lehman Brothers’ offices taking anything that wasn't screwed down and even some things that were.”
Yet Marsh said that the really interesting thing about the financial crisis, and the one thing that no one ever recalls about this era, is that as investors were preparing for the end of the world, the finishing touches were being applied to the tech revolution that would drive the longest bull run in history.
For example, in 2007 the first iPhone was sold, Netflix streamed its first video and YouTube launched.
“It seems remarkable there are 2.2 billion iPhones in the world today and 2.8 billion smartphones,” the manager continued.
“About 35 per cent of the world's population has a smartphone – it took fixed-line telephones 100 years to get to that level of penetration.
“There are 300 hours of content uploaded to YouTube every minute of the day and my kids are desperately trying to keep up with that.
“Then behind those consumer-facing apps were some really interesting things that were going on around tech architecture (at the time). VMware – the software behind the cloud – IPOed. Today 60 per cent of the S&P's capex is invested in cloud computing.
“And then we had Hadoop, this is the tech company no one has heard of, but it actually allows big data analysis to be brought across several computers. It is hugely significant and very smart, because it is really the forefather of open architecture.
“What we're trying to demonstrate here is the pace and rate of change has accelerated massively since that great financial crisis.”
Frost added: “When you look at issues such as Brexit and the great financial crisis, I think one way of looking at it is it's almost like you're trying to walk looking at your toes, which can be quite dangerous.
“And really all we're doing here is saying that we've learned to walk looking up and around and dealing with those challenges. I think the need to do that is the same, if not more so, for these ESG [environmental, social & governance] issues.”
The investment conditions of the past decade, including the tech boom, have favoured funds with a growth style. However, Frost, Marsh and third co-manager Nick Shenton prefer to take a more nuanced approach.
For example, Shenton said while three of the best-performing stocks in the fund over the past one and three years – Segro, 3i and London Stock Exchange (LSE) – are suggestive of a growth bias, they were not classed as growth stocks when the managers bought them five years ago – and they certainly weren’t regarded as “quality”.
Performance of stocks over 3yrs
Source: FE Analytics
“For us, it just makes common sense to put rigid characterisation of value and growth to one side and assess everything on its own merits and its investment characteristics,” he explained.
“Being pragmatic and style-agnostic has meant that we've been able to benefit from seeing investment cases evolve and, in some instances, flourish.
“And that goes far beyond what your initial investment hypothesis is. Good things happen to good companies.
“Believe it or not, LSE was probably a value stock at one point, I think we bought it at a 3 per cent yield back in 2012. It is a long way from that now. But if a pure value investor had bought LSE and saw the P/E [price-to-earnings multiple] go up, if they had been consistent with their philosophy, they would have sold.
“That's a good process discipline, but would have been completely wrong.”
Data from FE Analytics shows Artemis Income has made 149.11 per cent over the past decade compared with gains of 125.36 per cent from the IA UK Equity Income sector and 117.38 per cent from the FTSE All Share.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £5.2bn fund has ongoing charges of 0.8 per cent and is yielding 4.3 per cent.