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Who benefits from the UK’s recovery?
This article first appeared in Investment Week on 5 July 2024 The UK stock market appears to be f...
ES R&M UK Recovery
Finding undervalued companies that are yet to deliver on their potential is the aim of the ES R&M UK Recovery fund. Manager Hugh Sergeant holds approximately 200 of these out-of-favour stocks in the portfolio. He uses his three decades of investing experience to identify companies where he believes management have the capability to turn things around. This fund was previously known as R&M UK Long Term Recovery.
Our opinion
Hugh has a wealth of experience at his disposal, creating an impressive track record of investing over the past three decades. We like that Hugh looks to add to his holdings at almost fire-sale prices in volatile times and will be patient with their turnaround, which further increases the possibility of long-term capital appreciation.Company description
River Global is the bringing together of AssetCo’s River and Mercantile, Saracen Fund Managers, SVM Asset Management and Indian specialist Ocean Dial Asset Management under one brand in December 2023. They offer a focused range of long only equity products with a pragmatic, sometimes contrarian house view; as a result, a number of funds tilt towards value investing.
Fund manager
Hugh Sergeant is head of UK equities and has been running this fund since its launch in 2008. He also runs a number of other R&M mandates. Hugh achieved an economics degree from the London School of Economics, before beginning his investment career at Gartmore in 1987. He worked at various asset management firms, including UBS, before joining R&M in 2006.
Today continues to represent the best opportunity to buy value type shares since the end of the TMT bubble in 2000.
Hugh SergeantFund manager
Investment process
As the name suggests, Hugh is looking for recovery stocks, where good businesses are currently experiencing below-normal profit levels, which are depressing their valuations. If they have the capabilities to help themselves out of this predicament, Hugh will take them onboard. He believes that it is crucial to meet company management first to ensure they are the right people to set their company on the path to recovery. The investment team has a bespoke philosophy and process called ‘PVT’: potential, value and timing. It has a quantitative process that underpins all investment choices.
ESG
ESG - Integrated
The analysis of ESG factors is integrated into R&M’s multi-factor PVT model. The managers are looking for issues that are either creating, or likely to create, a material impact on the business within the fund’s investment horizon. They define these issues as those that are likely to create a negative feedback loop on performance. They also look for ESG opportunities that have scope to create a positive feedback loop. The inputs to the scoring system are created internally, allowing for more customised analysis. Hugh fully accepts that there is a level of subjectivity to these inputs, particularly around the level of materiality. He therefore keeps a flexible approach, on a stock-by-stock basis, looking at the factors that will affect each company the most. As such, the approach does not just exclude companies based on their business activity or sector, but scores them and ranks them into four tiers which gives Hugh a guide to the best and worst firms. If a portfolio company appears in the bottom tier of this ranking, he will follow an ‘assess, engage & divest’ approach - aiming to improve the company first, before exiting if this can’t be achieved.
Risk
Having such a diluted portfolio adds a large amount of diversification, therefore reducing stock-specific risk greatly. However, the nature of the ES R&M UK Recovery fund is to find stocks that have been beaten up by the market and, therefore, sentiment could continue to go against them which means it may take a while for them to turn around. Hugh also allocates a portion of the portfolio to AIM stocks (a sub-market on the London Stock Exchange that allows smaller, less viable companies to float shares). The fund is designed to perform over a longer duration than many and investors should be prepared to stay onboard for the journey.
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