22nd July 2022
A core part of our investment process is meeting with as many active fund managers as possible across every asset class on a regular basis. Just like a hamster on a wheel we constantly strive to understand the attractiveness, or not, of any asset class at any moment in time. Using this last couple of weeks as a typical ‘Diary of a Fund Manager’, we have met with managers from a broad mix of asset classes: Japanese smaller companies, precious metal equities, global equities, natural resources, emerging market equity, US small and mid caps, private equity, shipping and UK micro caps. Hopefully this illustrates that we get access to the best fund management talent around the world who are experts in their field and, as generalists ourselves, are able to gain great insights from their knowledge and experience. I believe this is a little discussed aspect of active management compared to passive managers, who have to rely on their own knowledge and macro views to inform their asset allocation decisions. Well worth the additional cost of active management in my opinion!
As Ben wrote in last week’s Crescendo, we are currently meeting with lots of managers who are getting very excited by the prospective returns for their funds over any time period other than the next few months, with many saying they haven’t had such a cheap portfolio in their careers. That makes us stand up and take notice.
However, the natural counter to good access to managers is the danger they are bound to always say how attractive their portfolio is, because they have a vested interest in us buying their fund. The better they are at promoting their fund, the more units they will sell and the more assets they will manage on which they earn more fees. That is true. However, we have built up decades of experience in managing funds of funds, so we have a good sense of which managers have been perma-bulls who talk their own book at every meeting, and which managers have been more measured over the years other than a couple of occasions when it was right to listen and back their judgement.
Further, managers of investment trusts are a great source of realistic expectations as they manage closed-ended funds where the scope for asset growth arising from being bullish is much less than in an open-ended fund. Yes, there are exceptions in the investment trust sector when being bullish at the time of issuing new shares or seeking to narrow the discount can be worthwhile, but in most cases, managers of investment trusts are less motivated to over-egg the prevailing investment opportunity. I can recall a number of meetings where I have heard the manager say “do not buy my fund/trust”, much to the dismay of the sales person sitting next to them. Building up long term relationships with trusted managers is key to gauging when the best opportunities in certain asset classes arise and when to back them.
While we like to back young and up and coming managers who will hopefully become the stars of the future, being able to pick up the phone or send a quick email to a manager with decades of experience is invaluable. One example over the years is Peter Harvey, manager of Schroder Strategic Credit, who we have invested with for more than 17 years. I admit that it is much easier to call when corporate bond funds are cheap or expensive as you just have to look at the yield of the funds – buy when the yield is high and sell when it gets low. But Peter has often been able to guide investors when relative and absolute return prospects for his fund are good regardless of the level of yield, i.e. a yield of 4% in benign conditions can offer as good risk adjusted returns as when the yield is much higher, but in a more uncertain economic environment. At the moment, Peter is very excited about absolute returns now his portfolio is yielding in excess of 8% and we have taken notice and been adding exposure across our funds.
What made me think about this subject was a meeting we had a couple of weeks ago with a manager of a small and new emerging market equity fund we recently backed at launch last December. We are early into our relationship with Ed Butchart at Corinium, but he has plenty of past experience running similar strategies, and it was great to be able to pick his brain as to how he sees current market opportunities compared to the past. In summary he didn’t think it was time to buy more emerging market equities today given how dependent the region is on global trade and the likelihood of an imminent recession. It was so refreshing for him to dissuade us from adding to our small toe-hold position, especially as he seeks to grow the assets at his new boutique fund management business. We will continue to have regular updates with him and be ready to react when his outlook changes more positively.
I’m not saying we rely completely on the nod and a wink of a manager for whether to buy a fund or not – there is a lot more going on behind the scenes at HFM HQ than that! The price you pay is one of the most important determinants of future returns, and by anchoring our process to valuation we can independently assess whether a manager’s conviction is justified by how good value or not their portfolio looks relative to its own history. We are naturally cynical and try to find reasons to doubt overconfident managers, but when that confidence comes from an experienced and trusted manager we have known over the years and who has managed funds through a market cycle, this helps give us a really good steer on which asset class is looking attractive and which fund would be the best way to gain that exposure. With so many expressing their optimism at the moment, and being backed up by very attractive portfolio valuations, we in turn feel optimistic on the prospects of our funds’ returns on a 3 year view.
Daniel Lockyer – Senior Fund Manager
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