Investors in the £2.9bn AXA Framlington UK Select Opportunities fund concerned about a “big bang” when AXA Investment Management’s Chris St John takes over from industry veteran Nigel Thomas needn’t worry.
The fund has a strong long-term track record, delivering a 150.61 per cent total return over 10 years compared with a 127.22 per cent gain for the average IA UK All Companies fund and return of 126.86 per cent for the FTSE All Share index.
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
St John noted that he has worked alongside Thomas for a number of years and will continue doing so during the transition period.
“From a practical perspective, Nigel doesn’t leave until March next year and I will formally take over in December but any decisions I’ve made on the fund will be made by the both of us,” said St John.
“There is no ‘big bang’, no agenda here: had I been recruited externally and had a history of investing in value stocks then you could expect a lot of change but there is going to be very little.
“Inevitably over time the fund will change but that would happen if Nigel was managing.”
Indeed, St John highlighted the similarities between his existing offshore AXA World Funds Framlington UK fund – which he manages with Thomas – and AXA Framlington UK Select Opportunities.
The UK equity manager said that he focuses on three key factors that drive long-term returns: balance sheet strength, compounding profits and patience.
“Balance sheet strength is not necessarily the best way to make short-term good returns but if you want to make good returns in the long term then an appropriate financing structure is important,” he said.
“What you don’t want is a manager who is running the business and making decisions for the debtholders just to pay high coupons or bankers’ large fees for renegotiating debt.
“We want decisions to the benefit of equity holders but sadly as an equity holder we are the least preferred creditor in the Insolvency Act and, as a consequence, equities are riskier and we have to deal with that risk when investing.”
St John said the second factor – compounding – was also underestimated by many investors.
The manager, who also runs the £208.2m AXA Framlington UK Mid Cap, said as a growth investor he recognises the importance of allowing growing earnings to accrue to equity holders.
He explained: “If you have compounding profits you can pay compounding dividends.”
Indeed, he highlighted the total returns of mid-cap stocks over the long term compared with other major benchmarks.
Performance of indices since 1999
Source: FE Analytics
The final factor – patience – is also important and ties in with the compounding effect, said the manager, who believes that short-termism can lead to lower returns.
“The longer you hold equities, the more chance they are given for that compounding growth to reflect the value of the underlying equity,” said St John.
“If you buy an equity on a Monday and it goes up by Friday then as fund managers we tend to congratulate ourselves, but all it means is that there are more buyers than sellers.
“I would argue that whenever you buy an equity it’s a type of distortion – it’s either getting a little bit cheaper or a little bit more expensive.
“But if you want to negate the effect of that distortion, the best way of doing it is holding equities for a long period of time and let fundamentals and compounding get the upper hand.”
As such, the manager said in his existing strategies and in AXA Framlington UK Select Opportunities there is a focus on holding equities for the long term.
Additionally, St John said AXA Framlington UK Select Opportunities and AXA World Funds Framlington UK look very similar on a number of valuation metrics such as dividend yield, price-to-book, and forward 12-month P/E (price-to-earnings) ratios.
“The one difference is that [while] both funds have lower gearing than the FTSE All Share there is even less net debt in the offshore multi-cap fund,” he said.
“From a stylistic perspective they are very similar, unitholders of AXA Framlington UK Select Opps can take comfort from that stylistic similarity in that nothing is really going to change.”
One other difference is the weighting towards FTSE 100 stocks in AXA Framlington UK Select Opportunities. While both strategies are unconstrained, St John said the exposure to FTSE 100 stocks has risen principally because of promotions from the FTSE 250.
The FE Alpha Manager noted that the two funds also have similar sectoral positions, with underweights in oil, capital goods, resources and banks while being overweight healthcare stocks.
“From a sector perspective we don’t have any constraints we’re much more interested in the drivers of the underlying businesses,” he said.
“These funds are ultimately put together on stock-specific basis whilst having recognition that there are underlying cycles domestically and internationally that have tailwinds and some have headwinds.”
St John said another analyst will be recruited to support the UK Select Opportunities fund, while he has also reduced some existing commitments to free up more time to concentrate on the strategy although there will be a £1.1bn net increase in the assets that he manages.
Since launch in 2016, St John’s multi-cap £153.9m AXA World Funds Framlington UK fund has delivered a 34.82 per cent total return slightly behind the 36.53 per cent gain for the FTSE All Share index but ahead of the average FO Equity UK sector fund’s 27.44 per cent return.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
It has an ongoing charges figure (OCF) of 1.00 per cent.