195. Why the UK government will find it difficult to resist calls for a windfall tax
Simon Brazier, manager of Ninety One UK Alpha, discusses the outlook for the UK economy and the...
“What’s wrong with the middle? The middle’s great. Never too hot or too cold, far too big or way too small. Not a marathon or a sprint, a famine or a feast… The middle is the best of both. The happy place.”
Wise words from a Clover advert back in 2009… When the makers were proud to be slap bang in the middle of margarine and butter.
This is perhaps one of my more tenuous links to the world of investing. But, for whatever reason, the advert has stuck in my head all this time and I remembered it recently when a couple of fund managers started talking about the ‘forgotten middle’.
For what seems like years now, we’ve been debating the merits of growth vs value – the ever-widening gap between the two as growth dominated in the post-financial crisis era, and the much anticipated ‘rotation’ as value bounced back with the easing of lockdowns.
But do investors need to focus so much on these two extremes? What’s wrong with the middle?
Ben Leyland, manager of JOHCM Global Opportunities, has been actively focused on the ‘forgotten middle’ of stocks in recent weeks, which have quality characteristics, but haven’t been at either end of the Covid winners/losers spectrum and therefore have not been in vogue.
“The portfolio is moving away from the macro-sensitive names, into more idiosyncratic ideas that have been overlooked by the market, maybe for being listed in the wrong geography like Europe, or being in the wrong sector and categorised incorrectly like Motorola,” he said.
“We’ve found lots of companies with improving fundamental outlooks – companies that have been reinvesting in the business or restructuring but have been forgotten by the market because they aren’t delivering great margins yet.”
James Thomson, manager of Rathbone Global Opportunities, also gave us the example of CostCo: “It’s one of our long-standing holdings that we rarely talk about because it doesn’t have a lot of razzmatazz,” he said. “This business rarely appears in our top contributors or our bottom, it just keeps chugging away and we love it just as much as our sexy Amazons, PayPals or other leading internet disruptors in the fund.
“Long before the flywheel of Amazon Prime, Costco was one of the largest membership clubs in the world — which drives incredible loyalty and repeat purchases. Most retailers work on gross margins around 25%, yet Costco insists it be lower, with circa 11% gross margins. It reportedly never marks items up by more than 15% and the discounts from suppliers for buying at such scale and the benefits of selling in bulk to its members present a price discount to the consumer that is eye watering. This creates the highest barrier to entry in all of retail. And it’s still growing its store base by 3%. While many US retailers flop as they expand overseas, Costco’s slow and steady global expansion has been an unmitigated success.”
Summarising the argument quite nicely in his recent video interview, James Ashley, chief economist at Goldman Sachs Asset Management said: “Our key message on growth vs value is don’t be so dogmatic about it that you are only going to invest in one or the other. Just look for attractive companies that have got a good valuation, with strong medium-term earnings prospects, that you believe in.”
Ninety One UK Alpha
The team behind this fund believes that markets are excessively focused on short term factors and that most analysts typically concentrate on the next set of results and not where a company will be in five years’ time. This creates opportunities to invest in quality companies that will deliver for many years into the future.
City of London
Manager Job Curtis focuses on companies which have the ability to pay and increase their dividends over time. He pays close attention to valuations and is careful not to overpay when he initiates positions. He particularly likes companies with a competitive advantage and has historically favoured multi-national brands with stable earnings and growth prospects.
Janus Henderson European Selected Opportunities
This fund’s manager has a pragmatic approach whereby he considers the overall macroeconomic environment and sector trends, as well as the criteria of individual companies. He uses sector analysis in his process, focusing on under-researched opportunities. The resulting high-conviction portfolio of 40-50 mega and large-cap stocks has neither a growth nor a value bias.
Lazard US Equity Concentrated
Stocks in this fund fall into one of three buckets. ‘Compounders’ are firms that don’t need a lot of capital to run and can keep re-investing their profits for ongoing growth. ‘Mispriced’ are cheap stocks where there may be potential for earnings to rise, while ‘tactical’ purchases are initiated when the managers want exposure to a certain business or sector for a particular period.
Stewart Investors Asia Pacific Leaders Sustainability
This is a concentrated fund, typically with fewer than 50 holdings and around 40% of its value is in its top 10 holdings. It invests in quality companies and has a strong valuation discipline. Specific consideration is given to companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.
Fidelity Global Special Situations
This fund is run by a pragmatic manager who does not stick too rigidly to one particular investment style. While he is aware of macroeconomic events, his ideas are driven at the stock level. Investments fall into one of three buckets: corporate change; exceptional value; and unique businesses – companies with a dominant position within their industries, which should be able to grow for many years to come.