Passive investing has grown in popularity over the last decade as markets have continued to grind higher making it difficult for active managers to beat the index.
This has been seen in the global equities space, where the average of all funds in the IA Global sector have underperformed the MSCI AC World index in seven of the past 10 calendar years.
Indeed, over the last decade, the sector has underperformed by 29.33 percentage points, returning 112.25 per cent to investors.
Performance of sector vs index over 10yrs
Source: FE Analytics
Despite this, the team behind the HL Select UK Growth fund have recently purchased shares in asset management firm Schroders.
Steve Clayton, manager of the fund, said: “Although low-cost trackers have gained increased attention in recent years, we think there will always be demand for active managers with tailored investment propositions and strong long-term track records.”
As such, having made recent additions to the portfolio in the form of Alfa Financial and Rentokil, Clayton has now added asset manager Schroders to the portfolio.
Schroders is one of the world’s largest investment managers with £438bn in assets under administration.
“We view Schroders as one of the highest quality asset managers around, benefitting from a sensible management team, significant scale, a deep product set, strong brand and powerful distribution network. These advantages help to explain Schroder’s impressive track,” the manager said.
Since 2007 the group’s profit before tax, earnings per share and net assets have compounded at around 7 per cent per annum.
It has paid a “healthy” dividend throughout this period, maintaining the pay-out through the financial crisis, and growing it strongly since.
Indeed, for the full-year 2017/18 the company paid a dividend of 113p – a 22 per cent increase on the previous year’s 93p.
In recent years the group has invested heavily in new products and has expanded its geographic presence in the US and Asia-Pacific.
“These investments strengthen Schroder’s market position and should sow the seeds for future growth,” Clayton said.
A firm favourite among long-term investors is a healthy and strong share register, which the manager said is another benefit for the firm, with the Schroder family owning 48 per cent of the company’s ordinary shares and over 87 per cent of the voting rights.
“This family influence means the business is very conservatively financed, with no long-term debt and plenty of surplus capital to deploy into bolt-on acquisitions and new growth initiatives. It also means the business is managed for the long term,” he said.
“As long-term investors, we care more about where profits will be in five or 10 years’ time than where they will be in the next quarter.
“We like companies that take a similarly long-term perspective and foster cultures geared towards sustaining success over decades.”
The company’s revenue stream is based on its assets under management (AUM), meaning its profits are sensitive to the levels of stock markets and funds’ abilities to outperform and attract new money.
While Clayton has no idea where stock markets are heading in the short term, he noted that history tells us they tend to rise in the long term, creating a tailwind for the firm.
Performance of indices over 10yrs
Source: FE Analytics
Indeed, over the past decade, all major equities indices have made significant gains, despite starting the period during the global financial crisis of 2008.
Additionally, structural demographic changes such as an older (and wealthier) population means that more money will flow into savings and investment products – another tailwind.
Clayton has invested in the non-voting shares of Schroders rather than those with voting rights. Given the size of the Schroder family’s ownership of voting rights, the manager said there are few real differences between the two.
As such, trading at a 20 per cent discount, the non-voting shares offer a more attractive valuation.
Additionally, these shares receive the same dividends as the voting shares, meaning the dividend yield is much more attractive, he added.
“The limited liquidity for the non-voters means we have had to build up our position steadily over a number of weeks,” he noted.
“As we were buying the price kept moving higher and so we decided to stand back once we’d established a decent-sized position.
“They currently trade at £26.90. If the shares come back, we may add to our position further but for now we are happy with a 2 per cent weighting.”
Clayton has run HL Select UK Growth since its launch in December 2016, during which time the fund has returned 30.45 per cent versus the IA UK All Companies sector average of 22.37 per cent – a top quartile performance in the sector.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £278m fund is a concentrated portfolio of 29 stocks – Schroders is the 28th largest holding at 2 per cent.
Its largest position currently is in the iShares Core FTSE 100 UCITS ETF, followed by specialist lender Burford Capital, media firm Ascential Group and data company GB Group, with analytics provider RELX rounding out the top five.
HL Select UK Growth has a yield of 1.82 per cent and a clean ongoing charges figure (OCF) of 0.6 per cent.