20 Feb 2023
During my latest trip to London, I had the opportunity to catch up with Nick Clay who manages the Redwheel Global Equity Income Fund, having moved across from BNY Mellon with his entire team. The objective of the fund remains the same - to deliver low volatility returns driven by a compounding dividend stream which starts at a higher level than the market. The fund takes a value orientated approach and aims to allow its investors to grow wealthy slowly. Nick believes that markets will be more volatile than in the post GFC period, as inflation is likely to fluctuate rather than be completely crushed and that sort of market should suit the investment style which is contrarian in nature due to the fact that it only buys stocks at a yield premium to the market. For stocks to yield significantly more than the market at time of purchase, they must be both out of favour and controversial.
Stocks are classified into five buckets of controversy. The first are troubled compounding machines where temporary problems are mistaken to be permanent, but the team believe that challenges are solvable. The second category is ex-growth cash generators where the market believes the business is structurally broken. The third bucket is described as profitability transformation where short-termism means investors do not believe a business is really changing. The fourth bucket of controversy is capital intensity where the market believes that a company is dull and, therefore, cannot attract investment interest. The final bucket is special situations which can be companies with, for example, hidden assets.
Nick is aware that with technological disruption, some businesses may be permanently challenged so is careful where they invest. For example, the fund has not got heavily involved in banks despite rising interest rates as the yield curve has inverted and non-performing loans are at extremely low levels on bank balance sheets. Nick had established a strong record at BNY Mellon (previously Newton Investment Management) and while returns from this type of approach can be lumpy, it has delivered above average returns over longer time periods, primarily due to the team’s skill in finding stocks with a high initial yield in the market that can still grow.
The next day I attended the Artemis Investment Conference at the Corinthia Hotel which involved a very pleasant walk from Hyde Park Corner taking in Trafalgar Square, home to two of London’s iconic sites: the National Gallery and the Church of St. Martins in the Field. The gallery has been situated in Trafalgar Square since 1838 and houses a collection of over 2,300 paintings. It came into being when the British government bought 38 paintings from the heirs of John Julius Angerstein in 1824 and today, private donations account for two thirds of the collection. The present building, the third site to house the National Gallery, was designed by William Wilkins and was completed in 1838, with the most well-preserved original feature being the façade onto Trafalgar Square.
St. Martin-in-the-Fields is a Church of England building dedicated to St. Martin of Tours. There has been a church on this site since at least the medieval period. The present neoclassical building was completed in 1726 and designed by James Gibbs and is one of the iconic sites surrounding Trafalgar Square. Due to its prominent position, it’s seen as one of the most famous churches in London.
The Artemis Global Select Fund is managed by Simon Edelsten and Alex Illingworth which since launch has given clients a low volatility approach and in general, protection in more difficult economic periods due to an emphasis on quality but at a sensibly valued price. The fund looks to invest in companies providing value for money and has delivered outperformance of the benchmark World Equity Index. The managers look for long-term growth orientated themes but only buy into stocks if valuations look sensible.
The managers now believe that while inflation is coming down, it is not going to return to the 2% level for a considerable period. They believe that the stocks held within the fund have a margin of safety in terms of valuation, meaning that they can still deliver positive returns. An example is Samsung Electronics where the valuation had fallen to around a PE of 7x with the manager believing that the semiconductor cycle will bottom in 2023. On the other hand, they are very selective in the technology space, holding only Microsoft and Alphabet, and the fund has never invested in Tesla. To take advantage of the re-opening of China, Simon has taken exposure in Prudential which has a significant part of its business in Asia, benefitting from the re-opening of the China/Hong Kong border. The only way to circumvent exchange control limits in China is to go to Hong Kong and buy a policy in RMB and then eventually get paid out in Hong Kong Dollars which is strictly tied to the US currency. Favoured themes in the portfolio include automation, online services, the sustainable consumer, scientific equipment and healthcare. The favoured stocks in this area respectively are Keyence, Alphabet, LVMH, Thermofisher, and United Healthcare.
Simon Edelsten believes that inflation will average 4-5% in the next few years which means there could be further bumps in the road for the global economy and quality companies are best placed to cope with less benign conditions. The fund offers investors a lower volatility approach to global investing with a tried and tested process that has delivered returns over lengthy time periods ahead of inflation and is managed by two highly experienced fund managers.
The following day on the way to the London Underground there was a small delay reaching the tube station as the Household Cavalry Mounted Regiment garrisoned at Hyde Park Barracks passed by. The Household Cavalry carry out ceremonial duties on State and Royal occasions such as at the King or Queen’s birthday parade and at royal funerals and on the way to meetings there are frequent sightings of ‘free pageantry!’.
I journeyed into the city to meet up with Robert Horrocks, CIO of Matthews Asia, based in the West Coast of the US. Robert was able to give an insightful update on the China re-opening story and the objectives of the ruling Communist Party. Robert believes that China wants to do a Germany. This means that China wants to have world class manufacturing at the high end in terms of value add, wants a capitalist economy with 80% of urban employment and 75% of innovation coming from SMEs and government intervention with some level of redistribution of wealth, creating a social market economy.
‘Common Prosperity’ means a re-distribution of wealth. This can be seen in the healthcare market where, unlike in the US, there is regulation of pricing due to government intervention. As a result, investors need to be selective despite healthcare being a growing sector. The winners are likely to be intellectual property in companies that are delivering real innovation and new therapies, allowing people to access things that would not have been available before, and these businesses will be allowed to be profitable and have premium pricing. China has speeded up its approval of new drugs.
Access to healthcare in China is different as there is no widely based GP type system, but manufacturers of medical equipment should do well and there are now online diagnostic tools and platforms which offer the prospect of strong growth to investors. There are some interesting businesses here providing the first stage of diagnosis to Chinese patients and low cost solutions. Other parts of the healthcare system in contrast will be subject to price pressures and controls and here the returns are likely to be minimal.
Regulation in online retail has been focused on not allowing companies to build monopolies by having below cost pricing which drives competitors out of business but would allow for prices to be ratcheted up after this occurred. This hit Alibaba as the retailer didn’t want merchants to operate on its own platform or any others.
Robert expects US and China tensions to continue for the next decade, with the US concerned about the challenge from the next upcoming superpower. This is increasing costs for some businesses but will provide profits for areas such as Vietnam and South-East Asia, together with Mexico and possibly Brazil. India could be another country to benefit from the move to China Plus One for manufacturing.
Matthews are generally positive on the prospects for Asian markets expecting corporate earnings to grow this year and further accelerate in 2024, benefitting from the China re-opening. Asia itself, and especially China, is in a different cycle to, for example, the US economy. In most markets, valuations are on the low side and even in India, look reasonable in absolute terms. However, this is unlikely to be a 2020 type roaring bull market, but rather one where there is a steady grind up driven by improvements in corporate profitability.
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.