Face to face with Ninety One Global Special Situations co-managers, Alessandro Dicorrado and Steve Woolley

Alessandro Dicorrado and Steve Woolley took on the management of this fund in January 2016, when it was known as Investec Global Special Situations. It had previously been managed by Alastair Mundy, Mark Wynne-Jones and David Lynch.

The pair are part of Ninety One’s Value team, and the fund is a high conviction, contrarian portfolio, investing in companies that are cheap and out of favour.

We had a face to catch up with the managers on 8th July 2021.

Meeting summary

This was the first time we had spoken to the managers for about 12 months. What was really interesting was they actually talked down value, saying that much of the trade had already been made. As such they had already rotated out of many of their ‘bounceback’ holdings.

They are now populating the fund with idiosyncratic ideas and diversifying sectors. They also said they are being a bit more flexible with the process to pick up some cheap names in less traditional ‘value’ sectors.

Strategy

Alessandro and Steve start by screening for cheap, out of favour stocks which have fallen 50% relative to their index. This typically leaves them with a list of around 250 stocks to conduct initial due diligence – a list that is then whittled down.

The managers analyse a number of factors, including why a company’s share price has fallen and what the current market consensus is. They also study the balance sheet and cash flow dynamics. In total, they cover a 30-point checklist. Finally, the analysis is subject to peer review. The resulting portfolio is concentrated, with 35 underlying holdings.

Positioning

In 2020, the managers bought a lot of cyclical/industrial companies that were being priced for bankruptcy. They have sold out of most of these now and rotated the money into some idiosyncratic ideas such as Sprout Farmers Markets – a US supermarket with good growth prospects but which is too small to be noticed by banks and investors.

The 20% overweight to industrials is now 8%, and they were underweight healthcare but re now neutral. They see some latent value in the airline supply chain and hold names like RollsRoyce. The managers are also seeing some pockets of value in auto parts and he supply chain. The market is focused on pure EV suppliers, whereas they are playing the old industry names that are transitioning.

They also still see value in financials. They have sold most of their UK banks, but like ideas elsewhere. They hold three classic banks in BoA, CitiGroup and Natwest, but they bought these on the cash return story, rather than hoping the multiple goes up. CitiGroup has announced about 16% buybacks for example. Rising interest rates might be a tailwind, but they will sell on this news as they don’t want to hold for the macro/interest rate narrative.

Consumer staples are now one of their biggest overweights on their 50% fall screens, which is the first time in a long while this has happened. The deep value stocks they hold are the ones most likely to be sold in the coming months.

The managers said that some of the tech names currently looked cheap, having sold off a lot in recent weeks. They hold Twitter and were looking at Facebook. They were also looking at some of the Chinese tech names, focusing on the higher quality names such as Tencent and Alibaba.

The 50% screen is not a hard and fast rule for a stock. They do supplement this with other ideas, and this is where the tech names have come room.

The fund has 42 holdings currently, which is in the usual 40-45 range. 45 is pretty much the peak, unless they are buying baskets of stocks for certain trades. The portfolio will get more concentrated as broader market valuations go up.

Markets

Alessandro and Steve believe there are three parts to the value trade; inflation, covid recovery and genuine valuation disconnect.

The inflation trade is now fairly normalised, so any moves now will be reliant on an overshoot of current expectations.

The Covid recovery trade is also mostly done, though with some opportunities.

As far as the valuation disconnect goes, the value vs growth graphs show that growth is expensive, rather than value being cheap. The gap will narrow, but more from growth slipping, rather the value having much more to go.

As such it’s all about picking the right stocks today – finding those idiosyncratic ideas.

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