In 2019 a new boutique asset management firm Devon Equity Management was formed by three former colleagues from listed Jupiter Asset Management, Alexander Darwall, Luca Emo and Richard Pavry, the former and latter taking the roles of CIO and CEO respectively.
Although hardly an unknown entity, fund manager ranking site Vadevalor picked out Mr Darwall and awarded him their highest grade, triple AAA. To read more about this unique business click here.
Mr Darwall and Mr Emo have a long track record of picking successful European equities and the firm brought the successful European Opportunities Trust with them along with a SICAV fund that invests along similar lines.
While speaking highly of his former shop, Mr Darwall does concede that there some things that a big listed entity such as Jupiter has that simply isn’t suited for his needs. He gives the example of the order management system, which for Jupiter dealt with a variety of asset classes and instruments including derivatives and bonds. These are not needed for what Mr Darwall describes in a deadpan fashion his ‘lowly long only’ equity strategies.
“Luca and I have a very focused way of investing and knew exactly what platform we needed,” says Mr Darwall in relation to why Devon is ideally suited for his strategy.
And what a strategy it has been. The European Opportunities Trust has delivered since inception (in both firms’ hands) a return of 1770.5 percent, absolutely demolishing its MSCI Europe benchmark which has returned 287 percent in the same time frame. While some fund managers claim to be index agnostic Mr Darwall states ‘yes! We are trying to beat the index’.
For conscientious investors, characteristics they tend to approve of are shown in abundance at Devon. For instance, high conviction. Mr Emo says, ‘the number of holdings that we've had in the portfolio for a very long period of time is I think remarkable. There are three holdings, which have been in the trust since launch, and currently they make up 28 percent of the portfolio,’.
This high conviction in their stock picks is echoed by Mr Darwall, who says ‘we don’t tend to change our holdings a great deal because of changing economic circumstances’. Some of these macro-economic conditions include the amount of stimulus being pumped into the markets by central banks and huge public sector spending which he describes as ‘terrifying’.
However, whether inflation is transitory or here to stay is unlikely to inform the stock picking process, moreover he’s more concerned with micro economics where circumstances of a particular company seem to change, that is what will drive a change in the portfolio.
Portfolio construction
Companies that appeal Mr Darwall and Mr Emo are those that can grow longer and stronger at a higher rate with better margins than you might expect. In addition, they prefer those which do not have competitor factors which might limit that growth (an economic moat in other words) and also be in an industry where the regulator is not particularly interested.
The above point is perhaps why utilities companies are not exactly flavour of the month at Devon, as due to the regulated nature of the sector companies don’t really enjoy pricing power.
“We're trying to find companies that have more IP, less capex. More pricing power, with a greater differentiation industry structure and the ability to go global,” says Mr Darwall in part to explain the presence of some true pharma giants in the portfolio such Novo Nordisk (a company heralded as a great choice for the long term by stock pickers the world over).
When it comes to some popular ways to view the market which may inform certain fund managers’ decisions, for instance are we in a growth or value environment, Mr Darwall says these are “false distinctions” and is not alone as seeing the terms as meaningless industry constructs.
Furthermore, while some may claim that their funds are seeking to serve prevalent themes in today’s market, specifically the burgeoning Asian middle classes which according to some can be served by companies listed anywhere, this is a tad facile for Mr Darwall.
“People like simple ideas like a growing middle class in Asia. Well, there are other things going on which is China would much rather see Chinese companies supplying those services [to the middle classes],” he states.
The power of the boutique
While Devon’s overall AUM is just shy of £2 billion, there are some impressive stats within what some might see as a fairly low number (in the context of asset managers). The European Opportunities Trust makes up for more than half of the total and one European based foundation has a segregated mandate with the firm of over £640 million.
Earlier this year Devon joined the Group of Boutique Asset Managers, an organisation chaired by the CEO of Skagen Funds Tim Warrington. In these times of a seemingly endless supply of cheap financing which has probably helped more than a few companies keep afloat, when in a more normalised market they would have gone to the wall, investors are perhaps seeking genuine innovative active solutions for when conditions normalise.
These type of solutions may no longer be simply supplied by the titans of asset management, where listed entities are sometimes forced into short term thinking to keep their shareholders happy. When the rising tide that has so far floated all boats finally recedes, it will be firms that have funds prepared for this eventuality that will succeed.
As Mr Darwall says in response to a question about whether the firm's funds are 'all weather': "I don't mean it is necessarily going to outperform in all markets. No, I'm talking about real world economic scenarios."
