Catch up and a cuppa with… Will McIntosh-Whyte

Rathbone Strategic Growth Portfolio was launched in the aftermath of the global financial crisis.

Offering not to try and ‘shot the lights’ out, but simply to deliver the steady returns people need to achieve their dreams, without taking on too much risk, it has certainly met its aims over the past decade.

We caught up with assistant manager Will McIntosh-Whyte, who told us how a toothpaste marketing strategy changed their view on a China-related holding, and why he thinks currency is one of the biggest risks to portfolios today.

Will, what is your view on China?

“China has the second highest number of billionaires in the world and is the hub of one of the greatest manufacturing supply chains the world has ever seen. But we think it is only just getting started.

“And, while many think of it as an emerging market, we would argue most Chinese people probably see it as a major player on the world stage – and we would agree. It vies with the US in terms of economic size, and accounts for about a third of global economic growth, yet it only accounts for a small part of the global stock market index, which seems crazy.

“We invest in China in two ways. The first is in domestic Chinese companies that are not impacted by the ongoing trade wars. The second is via global companies that do business in China – but it’s really important to get this second part right, as not all companies enter the Chinese market successfully.

“For example, we met the management of Colgate-Palmolive, who were bemoaning the fact that they were struggling to sell their toothpaste in China. Their strategy was to reduce price. But actually, Chinese consumers don’t want whiter teeth, they want specific flavours like Jasmine or Green Tea, so a Chinese company that had recognised this was dominating sales.

“Coca Cola has set about things differently and recognised that you can’t just force a global strategy on all markets, so they have fully empowered a local management team to take on the marketing of their product.”

You’ve mentioned trade wars – how much impact does politics – and politicians for that matter – have on your investment decisions?

“There has been a massive shift in politics over the past decade and it matters in terms of investments now. Ten years ago it barely featured in any investment process, today it’s a huge factor.

“We now look at the political risk of not only countries, but also industry sectors and individual companies – especially those in monopoly positions, or those with pricing power that could be deemed ‘unfair’. Politicians are more likely to get involved in all sorts of issues today – especially if it’ll win them points on Twitter.

“We think the next 10 years will be dominated by more public grievances, more government intervention and more market volatility.”

In the UK Brexit is obviously a big concern. How are you dealing with it in the portfolio?

“We have very little exposure to UK GDP – so no property investments at all and only a small allocation to UK equities. But actually we think it is the pound – our currency – that is one of the greatest risks to portfolios today.

“So when it comes to currencies we are more active than we were a few years ago. The pound has obviously devalued a lot against other currencies since the EU referendum, but we think there is now more risk that we could miss out on the pound rising in value, than it devalues further. So all our euro holdings are hedged and 70% of our US dollar holdings are also hedged.

“This might sound a bit complicated, but what we are doing is trying to take out the currency risk.

“The normal relationship between the UK stock market and the currency is that if the pound falls, the FTSE 100 rises (due to it being full of companies that get their earnings in other currencies), as we have seen over the past couple of years. If the currency appreciates, you would therefore expect the FTSE 100 to fall.

“However, the UK stock market is so under-loved that, should there be any good news about a Brexit outcome, the pound could rise and global investors could come back – which means the stock market could rise anyway, due to increased demand.”

How do you use passive funds and ETFs in the portfolio?

“We use trackers and ETFs as short term tools, not long-term investments. For example, if we get inflows of money into the fund, but our favoured holdings are not looking good enough value to buy more of them, we’ll put the money to work in a passive fund until such time as we feel it is right to add to our core holdings – then we’ll sell the passive and buy those instead.

“We’ll also use ETFs to get exposure to gold if we think the portfolio needs some diversification and protection should stock markets come under pressure.

“Aside from that, we need to keep an eye on ETFs as our stocks may be held in their ‘baskets’. For example, Apple is in an ETF tech basket, a retail basket, a US basket and a global basket. If investors decide to sell a lot of the tech basket, the ETF has to sell some of all of its holdings – not just badly performing ones – so Apple will fall in value even if the company itself is still good and its outlook strong. This is because the ETF is a ‘forced-seller’.

“We need to both know this could happen, and also be aware that opportunities may arise to add to holdings at lower prices.”

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