19 Oct 2022
Arriving in London on the day of Her Majesty Queen Elizabeth II’s funeral was a sobering experience. Heathrow Airport, due to the huge number of flight restrictions, was as deserted as during the Covid-19 era.
The outlook in general in the UK is sombre and has clearly not been helped by the extreme levels of political and economic uncertainty under the new Prime Minister. The next day, walking across Green Park to get into the City of London, crowds were still massed around floral tributes to the late Queen.
One of my first meetings was with visitors from Singapore, Rasmus Nemmoe and Naren Gorthy, who are the co-managers of the FSSA Global Emerging Markets Focus Fund. The fund has delivered strong performance over the last 12 months. India is a core positioning with a weighting just over double that of the benchmark index. This is a long-term position, and the fund is focused on companies which are compounders and have the capacity to grow 15-20% every year. Stocks in India are liked for bottom-up reasons as they are some of the highest quality businesses in the emerging world with good management teams and India now looks more positive from the top-down perspective. The Modi reforms are now delivering benefits and corporate confidence has increased. Furthermore, India is well placed to benefit from companies wishing to diversify supply chains from China and is seeing strong FDI. Favoured names in India include ICICI Bank, HDFC Bank, together with ICICI Lombard the insurance company.
China is also a significant holding in the fund at around 30% with the manager picking up stocks on price weakness. Relatively new holdings include Swellfun the Diageo subsidiary, and Taiwan listed Silergy that manufactures power management integrated circuits. Relative performance has been helped by the fund trimming exposure to semiconductor names where Rasmus Nemmoe believed work from home saw an unsustainable uptick in demand for the sector which benefitted from upgrading of devices and the crypto currency boom. In Mexico, there is a focus on defensive consumer businesses with holdings including Alsea which holds the Starbucks franchise, and Walmart Mexico which is dominant in the grocery market.
The portfolio is focused on strong balance sheet companies which have net cash and, as with any market, there is some degree of short-term earnings uncertainty. The managers believe earnings growth of 10% p.a. over the next five years is not an overly ambitious target.
Walking back to the hotel, I passed the Piccadilly Arcade, and the West End features a number of these shopping experiences linking major thoroughfares. It was opened in 1909 and is a Grade II listed building. The advantage when these arcades were built was that it offered shopping in comfort before the era of mega malls with numerous shops under one roof, providing a sheltered retail experience whatever the weather. When the arcade was built, the St. James’ area was a hangout for the capital’s gentry and royals, hosting gentleman’s shops catering for the upper classes. Today, the arcade is home to tailors, shirt makers, shoe shops, jewellers, hairdressers, together with pharmacy and mustard and vinegar makers, resulting in an eclectic and eye-catching retail mix.
In difficult market circumstances, absolute return orientated long/short equity funds offer investors the potential of upside in varying market conditions, although the caveat here is that returns are solely driven by manager skill. In other words, these funds do not benefit from stock markets rising over the longer term. The TM Tellworth UK Select Fund is managed without any reliance on directionality of markets and looks to generate returns by finding a set of companies which are purchased for the long book, offset by companies on the short book, expected to perform worse in relative terms. Thus, when looking at alpha generation, a long is a winner if it goes up relative to a short position and vice versa. The objective of the fund is to outperform its benchmark cash index with low volatility and to achieve this, it must have a factor neutral position together with low net market exposure.
The fund has delivered positive returns in 26 out of 33 months. It combines macro indicators with bottom-up stock selection and uses the macro to guide the managers to the right sort of companies on which to conduct detailed research. It also, since 2016, has used alternative data sets as lead indicators such as web traffic and Google search data. There is detailed proprietary analysis of company accounts which is particularly useful on the short book as it highlights companies looking to conceal business risk.
The fund has two lead managers, John Warren and Seb Jory, who are both highly experienced investors The fund’s uncorrelated returns with equity market direction make it a potentially interesting holding, particularly in tougher market conditions.
I also had the opportunity to catch up with Adrian Brass who joined Artemis from Majedie Asset Management to manage the Artemis Extended Alpha Fund which uses shorting to add value and reduce risk with the fund at times having only 90% market exposure which should lead to less volatility than the overall market index. Adrian has joined with a wealth of experience having previously worked at Fidelity running US equities.
Today, the fund is cautiously positioned as the manager believes there will be earnings downgrades with the US economy at an early stage of slowdown with, as a result the fund being defensively positioned. Some favoured names in the fund include high quality compounders where valuations have fallen to a significant discount to expected intrinsic value, including Exchange ICE and Elevance Health. Adrian also looks for new management teams that can turn a business around. Some examples are the catering business Aramark which is looking to copy the success of Compass and utility PG&E – they have a new management team which has appeased the Regulator in California after the disastrous fires. With the fund’s flexibility in being able to short the market, investors could reasonably hope for relatively strong performance in today’s challenging market conditions.
RSMR provides impartial, qualitative, forward-looking research for advice businesses.
Click here to head to the RSMR blog for market updates and a whole host of informative, up-to-the-minute content.
Click here to sign up to RSMR research where you can access RSMR fund ratings, fund profiles, factsheets, insights, market updates and event information.
This information is for UK Professional Advisers only and should not be given to retail clients.
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.