“We are not trying to buy the next big thing, companies that haven’t proved themselves yet,” says Dr Ian Mortimer (pictured), manager of Guinness Asset Management’s Global Innovators Fund. For a fund that has beaten its benchmark, over one, three and five years the portfolio construction must be robust to achieve those results. Moreso perhaps for a fund of only 30 holdings with a low turnover rate.
Dr Mortimer tells Fundeye the starting point of how his team get to their select group of 30 companies, some well-known megacaps, some very much less so. First themes are identified, sectors where he believes there is going to be growth. These include advanced healthcare, AI, big data and cloud computing for example, then the difficult job of selecting the right companies to benefit from these growing themes comes in.
“We start with a thematic view, companies with exposure to secular trends, one of the risks of just looking at themes is you end up chase these and forgetting about the types of companies you’re buying,” says Dr Mortimer.
He adds one of the risks in choosing growth companies is paying too much for future growth as it’s unknown. Therefore, the firm employs a strict valuation discipline looking at the underlying quality of the company such as return on capital, free cash flow yield and real actual earnings that are growing. These metrics are hardly a revolution in portfolio construction, its limit of 150 percent on debt to equity imposed dates back to Benjamin Graham’s days, although the complication comes with finding companies that fit the ‘innovators’ label.
Although admittedly picking the hidden gem can be hugely profitable, if a company is still an unknown force it is also a highly risky strategy, hence some evidence of a track record is needed. Getting the balance right is where this fund seems to have found success, holding stocks such as Samsung which is certainly not an unknown force but given its fairly recent governance issues was trading at a discount. Given the company appreciated by more than 40 percent last year, largely down its computer chips department, it earned a re-rating and was among the top contributors to the fund.
This strict adherence to a valuation discipline has some surprising results for what is essentially a growth fund. Last September, when the long-heralded rotation into value finally looked to be in play, the fund still beat its benchmark, an oddity explained away by Dr Mortimer and his holding of attractively valued industrial stocks such as Siemens and Schneider Electrics which “buffered” the fund during the time.
Money well spent
When it comes to the fund’s holdings, there seems to be preference for companies that spend money on R&D rather than physical capex. Indeed, Dr Mortimer says he prefers ‘asset lite’ businesses but adds that R&D spending is no certainty of growth, he tracks how much companies have been spending in the past as investment can often take years to turn into growth.
Regarding selling stocks, as said, the fund has a low turnover rate although perhaps due its concentration sounds higher than it is at 35 percent per annum (last year the fund sold out of three stocks including Chinese tech giant Baidu). However, changes to companies R&D spending habits might raise a red flag, cutting costs to boost short term earnings is not what this fund wants from its investments. Furthermore, when looking at how management are incentivised, short term goals such as sales targets are not exactly music to the ears of the team. Increasing return on capital is what Guinness wants to see rewarded by management as it’s a longer-term goal. Companies with high operating margins that suddenly start dropping might indicate that it’s losing market share, these factors and others are all considered when valuing or re-evaluating a holding.
There are various ways to play the themes that this fund favours. For instance, there are numerous robotics ETFs on the market if you want exposure to that sector but Dr Mortimer says that Innovators offers a ‘multi-faceted approach’. The diversity within its 30 holdings is wide, from Chinese private education provider New Oriental Education which was up 121 percent last year in dollar terms, to Paypal. With these stock picks, there seems to be almost a contingency plan in play to some of them. For instance, Paypal may suffer in an economic downturn as people spend less but as Dr Mortimer mentions is almost buffeted by the fact that society in general is moving away from cash payments.
For those passive investors trying to time when to move into value stocks away from quality or growth stocks it should be noted that sectors themselves shift out of these definitions depending on geo-political factors for example. Given Coronavirus, oil prices are down so commodity stocks have suffered and might now find themselves in the value bucket. Healthcare, another sector although generally considered defensive, moves from growth to value from time to time. Perhaps a new factor, innovation, would be a way to play this fund in a passive way. Until someone builds and back tests a model for creating such an instrument, Guinness’s fund seems a solid way to access companies at the cutting edge of the semiconductor industry such as Lam Industries as well as next generation computer graphic card makers such as Nvidia, while also containing the well-known quality names such as Amazon.
Guinness Asset Management Global Innovators Fund (IE00BQXX3C00)
Fund size £290 million
Fee 1.99 percent
5 year annualised return 11.2 percent
Top holdings Amazon, Intercontinental Exchange, Adobe Systems
Net asset value growth
