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Hi, I’m Joss, research analyst at FundCalibre. I’ve been joined today by Alex Illingworth, co-manager of the Mid Wynd International Investment Trust for Artemis. How are you, Alex?
Morning. Very well, thank you. Bit cold
<Laugh> It is a bit chilly at the moment. Well, let’s get straight to it. For those viewers, unfamiliar with the Trust, can you tell us what sort of companies you’re looking to invest in, please?
[00:28] Yeah, so thanks for the introduction. I mean, basically we’re looking for companies that can benefit from secular growth, so, that means like consistent growth tailwinds. Unusually, we build the portfolio by investing around a certain number of these themes. So, we look for these areas of secular growth, and then develop themes around those to focus our scarce resources – our analytical capability – around those particular areas.
So, to give you an example, one theme might be healthcare costs. We’re trying to find companies which can help government or health systems globally, save costs. What we will then do, is make sure that we can build the portfolio in a way which can offer strong risk-adjusted returns. Now look, these themes can change. We’re not tied to them, but they certainly are our weathervane in terms of directing our analysis.
But ultimately, we are trying to get clients rich, but we’re trying to get rich clients slowly but surely. We think that the job doesn’t end at just finding the very best companies exposed to the best tailwinds; you’ve got to be very conscious about valuation and you’ve also got to be very conscious about the way that you put the product together in a way so that you can deliver diversification and deliver consistency to ultimately deliver what we’re really about, which is strong risk-adjusted returns.
Very interesting, Alex. And I understand you’ve shaken up the portfolio quite a lot in the past few months to find winners in a very new and different regime, to see the portfolio through a new market cycle. Can you explain what you mean by a new and different regime, and let us know what changes you have made?
[02:22] Yeah, I mean, obviously we build the product from the stock level upwards. And we’re not macro investing here, but clearly it looks like the era of low inflation and low interest rates is something that is more likely to be in the past, than in the future. And in that environment, companies on very high valuations are on a bit of a sticky wicket. So, to use [a] Buffett [Warren Buffett] term that’s [the] ‘too hard’ basket.
We think it’s important to try and reorientate the fund to one that is much more conscious about valuation; you want to find companies that are battle ready for this new type of environment, you want companies that have what we call pricing power – the ability to pass cost increases onto their customers, because the product is so demanded or has a lack of competition.
What we’ve done in the portfolio, what you alluded to, is about 18 months ago or so, we started to try and change the shape of the portfolio in terms of the average multiple that we are prepared to pay. So, our job we see at the core part of it, is to judge value for money through the cycle. And in doing that, we have the ability to judge both growth and value. And when we saw the growth-type names becoming very extended, we have the ability to tilt the portfolio. And indeed, we took the product from a price. earnings multiple – forward price earnings multiple- [for] the whole portfolio, average price earnings, multiple of 22.3, down to 14.7. This is by the end of June. Obviously, markets have bounced since then. So, we made a material change and actually during that process increased the dividend yield, the running yield on the fund by 72%. So that’s what I mean about changing the portfolio, having that ability to judge money through the cycle.
Yeah. And just on that Alex, in effect, does this mean that you’re unlikely to invest in some of the very big companies investors may be used to seeing in portfolios – the likes of Amazon, apple, etc? Or does this mean you’re less likely to invest in the US too?
[04:37] Well, the choice of companies that we put into the portfolio is driven by two things: one, the theme – the area of secular growth – and then two, the valuation. That has resulted in us not being terribly invested in some of the largest companies in America. We don’t own Amazon, we don’t own Tesla, we don’t own Meta. Apple’s now over 4% of our index, despite it being ‘All World,’ including emerging markets as our benchmark. And we own very, very few of those shares. So, the reason we’re not invested in those is not because we’re specifically saying America is expensive, or specifically saying these companies are expensive, but it’s driven by a function of the thematics and the valuation focusing our attention elsewhere where we see better value for money.
Just to answer your question on the US, because some clients and some people looking at the product may see that we are quite what we call underweight US… I mean, the US as a result of the last decade has become 65% of the MSCI All World [Index], as I said, including emerging markets, which when you take a step back and you’re trying to run a relatively ‘Captain Sensible’ approach to grow people’s real wealth through the cycle, get rich slowly but surely, two thirds of anyone’s money in any particular country, just given the fact there’s always political [and] there’s always currency risk, seems to us largely too much. So, I mean, I wouldn’t go so far as to say it’s structural, because the constituents of the portfolio are driven by the themes, but it feels quite difficult for us to get very overweight America, whilst it still retains a very large percentage of the benchmark.
By converse, you know, Japan is now only just over 5% of the index, despite being the second largest developed economy in the world.
That certainly does make sense. What is your outlook for the various markets next year? Are there any countries you think are in a better position than others and does that influence your stock picking at all?
[07:03] It will only influence our stock picking if the themes drive us in that direction. And I will pick out Japan again here, because we have one theme around automation; the growing use of robotics and vision technologies within industry becoming much more ubiquitous on the factory floor.
It’s a very, very strong theme for reasons that probably everybody can understand, and that does lead us to Japan. But what I will say with Japan is, certainly from a macro perspective, they have an extremely cheap currency. If inflation does wash up on the shores of Tokyo Bay, it would be a godsend to that country. And we actually are beginning to see some types of wage inflation. Now, put that together with some fantastic engineering know-how – not always packaged in the best companies – but some fantastic engineering know-how, and proximity to China, which clearly is beginning to now open up … you put that together and compare it to the value for money that’s on offer in Japan, and it certainly looks much more attractive than most other areas, most obviously versus America. So, I think Japan’s been much forgotten over the last 25 years, ever since I’ve been running global equity money. But I wouldn’t be surprised if Japan continues to play a bigger role. I mean, we’ve got 9% of our portfolio in Japan, so that’s nearly double the benchmark rate.
Yeah. Could you talk about one or two stocks, maybe in Japan or generally throughout your portfolio, that you really like?
[08:32] Okay, so I’ll use a Japanese example as you suggest. A company called Hoya [HOYA Corporation]. So, many of you may not know this company, but actually they make glasses – eyeglasses, not drinking glasses – but also, they make photo masks for high-end lithography, which goes into the most advanced semiconductors, and glass discs for data storage.
It’s actually a pretty consolidated industry [but this company is] one of the two market leaders in most of the areas and market leaders in particular in photo masks for the semiconductor industry. And the growth here looks pretty secure and pretty durable. Yet, certainly in sterling terms, the share price has fallen off quite a lot. We think it’s a high quality business. We’ve been looking to try and reinvest in this area for some time. And it has [other] drivers, not just demographics; more people needing glasses, getting older, but also the Asian issue is now… the data suggests that 80% of over 20-year-olds in Asia, 80% of those over 20 need glasses. The research is unsure really about whether that’s as a result of too much screen time, or not enough outdoor time to stretch the eye etc., but from an investment perspective, it doesn’t matter. These are drivers, these are secular drivers going right back to the beginning of the conversation, secular drivers for a company such as Hoya.
Well, Alex, thank you very much for that. That was both insightful and interesting. If you’d like to find out more about the Mid Wynd [International Investment] Trust, please go to www.fundcalibre.com. Thank you very much, Alex.
Thanks Joss.
