20 Dec 2021
London Travel Diary December 2021
Flying into London Heathrow from Dublin typically takes a westward route then follows the River Thames, often providing some interesting sights on a clear day. My late autumn trip flew in over the world famous Royal Botanic Gardens Kew which were founded in 1840 and house the largest and most diverse botanical collection in the world. Kew is rightly famous for its glasshouses and the Palm House built between 1844-8, constituting the first large scale structural use of wrought iron. The larger Temperate House, which is twice the size of the Palm House, followed later in the 19th Century, is now the largest Victorian glasshouse in existence. Kew was the location of the successful effort in the 19th Century to propagate rubber trees for cultivation outside South America. Some readers might be surprised to hear that I took a trip to Kew Gardens as a child in the late ‘60s when the cost was only 1d and entry costs have been kept at minimal levels since to attract visitors.
The West End was relatively quiet compared to pre-pandemic and the next day, I walked down to St. James Street to visit the Artemis office for an update on the Global Select Fund with Simon Edelsten and Alex Illingworth. Simon recently recruited two younger team members which he believes will help bring a better perspective to the themes within the fund and will ensure that the managers are close to the latest trends, providing diversity of thought with a generational difference. One of the new team members has come from outside the industry but has worked on the environment scene looking at carbon trusts and will keep the team up to date with ESG views, an increasingly important area with companies now being asked to pay for externalities.
Simon always endeavours to run a portfolio with balance, taking a pragmatic view to portfolio construction. In 2020 the fund benefitted from its relatively defensive position and focus on companies with secular growth themes including automation, online services, and scientific equipment, which takes in stocks such as Keyence, Alphabet (Google), and ThermoFisher. The fund also benefitted from the prominence of ESG related issues; energy transition with Freeport-McMoran, low carbon with Union Pacific Railroad and the sustainable consumer, bringing LVMH into the portfolio.
The fund aims to have balance between growth and value and in the autumn of 2020, purchased banks in the US together with some mining names. With fund manager Simon Edelsten becoming more cautious about the stickiness of inflation in recent months, he has exposure to two banks in Japan and two in Asia with the latter names benefitting from improved digital technology. The fund has also trimmed the position in some growth names that performed strongly in 2020. Looking forward, despite Omicron, Simon expects a further normalisation of the global economy in 12 months’ time but believes that certain aspects of the macro backdrop will be more challenging for markets than in recent years with a pullback in central bank support. The cost of the move to green energy is, in effect, a regressive tax hitting the poor and the old and will undoubtedly hurt some consumers. While most companies claim they can pass on costs, this is unlikely to be true across the board, so marrying strong analytical skills with awareness of valuation will be important to generate positive returns for investors. Simon favours sectors that have traditionally allowed companies to pass on cost increases, an example of this being US railroads.
The portfolio is positioned for more difficult market conditions caused by rising rates and within it are healthcare names such as Pfizer and Moderna who will be able to sell every vaccine they make, together with testing stocks such as ThermoFisher, that have strong growth prospects, giving investors a balanced approach to equities rather than just being an out-and-out growth orientated fund. Both the UK and Ireland continue to suffer from staff shortages in the hospitality sector and the hotel where I stayed only had half the rooms open. The restaurant of celebrity chef Theo Randall is only open five days a week, not through lack of demand, but due to staff shortages. These are some of the factors contributing to supply side inflationary pressures.
I also visited the relatively new offices of M&G where I met with Alex Araujo, manager of the Global Listed Infrastructure Fund which has now passed its four-year anniversary. The fund was set up with a differentiated approach which has delivered strong performance within its sector, having a wider mix than traditional infrastructure approaches through including evolving and social infrastructure. All holdings are, however, backed with physical assets. The approach is not just based on yield, but income and growth, and the distribution in 2021 will be higher than that of 2019. The Global Listed Infrastructure asset class has historically performed relatively well in down markets, except in periods of high levels of interest rate volatility, but the lack of exposure to high growth technology names meant that the asset class had a more difficult 2020. Overall, it has lower economic sensitivity than mainstream equities and preserved capital overall during the Covid-19 period and has delivered outperformance in bouts of market volatility seen in the fourth quarter of 2021. Looking back over the last decade, global listed infrastructure has delivered a higher income stream than equities and a total return with lower volatility.
The fund will continue to only invest in businesses owning or controlling critical infrastructure, long life concessions, or perpetual royalties; strategic assets with physical backing and long-term growth. ESG has been further integrated in the process with examination of business sustainability and carbon footprint and there is a focus on businesses with improving ESG as well as already strong ESG credentials.
The fund invests in traditional economic infrastructure assets such as utilities, energy, and transport, but by including both social infrastructure with health, education, and security, together with evolving infrastructure of communication, transaction, and royalties, has been able to pick from a wider universe with stronger growth potential. An example of a social infrastructure name is student housing provider Unite which holds a high-quality estate focused on Russell Group universities in the UK where demand for high end accommodation from overseas students remains strong. The influence of ESG factors on companies was well demonstrated by Unite last year when it made the decision not to charge students unable to finish their courses due to lockdown, and those trapped in the UK, involving a short term hit to profitability but further strengthening the company’s reputation as a quality provider of student accommodation. Within evolving infrastructure, data centre names such as CoreSite have been strong contributors to performance, benefitting from the ongoing digitalisation of the economy. In September, the fund purchased Xinyi Energy, a pure solar power company providing exposure to structural growth in Chinese renewables with an attractive yield.
The fund has been a strong performer versus its peers since launch with the manager Alex Araujo successfully rotating weightings between names in the portfolio, capitalising on valuation opportunities as a result of the manager’s excellent understanding of infrastructure stocks.
I had the opportunity to catch up with highly experienced European fund manager Paul Wild at JOHCM, who has managed this portfolio for over a decade. In recent years, Paul has evolved his process to involve long-term themes arguing that Europe now has leadership in several areas for the first time, including the Green Agenda and the introduction of CO2 reduction targets and action on emissions. Over the next five years, around a third of the EU budget will go on the Green Deal and sustainability including water waste and recycling and will benefit from the Recovery Fund. Some of the names in Europe which are beneficiaries of the Green Deal include Schneider, St. Gobain in industrials and UPM in materials. Utility names Veolia and RWE are well placed and within autos, VW is another Green play. All these businesses will contribute to reducing climate change. To look at a couple of examples, St. Gobain is a beneficiary of better insulation with its building products in flooring, roofing, and the wider insulation market, and has the potential to double energy efficiency in a house. Schneider has 75% of its business targeted on energy efficiency with low voltage and medium voltage electrical components. UPM in the pulp and paper space is benefitting from the replacement of plastics by wood-based products and Veolia is focused on waste and water management and recycling of domestic and industrial waste. The manager takes an agnostic view to investment styles but is very valuation conscious and this year, the portfolio benefitted from an early overweight position to banks which now have the prospect of improved net interest margins as rates rise over time. The fund takes a pragmatic approach to investing in Europe and has a strong long-term record within the sector.
No trip to London would be complete without visiting the Oxford Street Christmas lights in early December, although streets normally thronged with shoppers were unusually quiet. Thankfully, I was able to return home before the onset of travel restrictions through a deserted Heathrow Terminal 2 and would like to wish readers a peaceful Christmas and a happy and healthy 2022.
Graham O'Neill, Senior Investment Consultant
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company Registration Number 5227656. Registered office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark.