Fund manager view: does meeting the CEO improve returns?
Miton last week launched its seventh fund in seven years – the LF Miton Balanced Multi Asset fund. It is the fourth in the multi asset fund range, sitting alongside its Defensive, Cautious and Cautious Monthly Income funds.
The new fund is managed by David Jane, Anthony Rayner and Henna Hemnani who have a collective 50 years’ experience. It invests in a global mix of assets seeking to deliver equity-like returns. At launch, the portfolio allocated 70% to equities with the largest exposure to Japan, Europe and Asia, 20% to bonds and 10% in cash.
Regarding the investment approach, the managers consider key macro views and themes such as the digital revolution, robotics and the emerging consumer.
At arm’s length
As with the group’s existing multi asset funds, the process aims to “minimise weaknesses and exaggerate strengths”, according to Rayner. They’re not stock-pickers, value or contrarian investors; they focus on risk, volatility, correlation and liquidity. Fundamentally, the team don’t believe in meeting the CEOs of the company they invest in.
Rayner says: “A lot of our approach is to limit human biases and to limit the impact in terms of psychological biases. One of the ways we do that is by buying baskets. We don’t meet companies, we don’t meet CEOs, we don’t get so involved. It means when we come to sell the company, we are at arm’s length so it’s easier to do. A lot of the design of this process is to try to limit inherent human bias.”
He goes on to explain that if they’re looking to tap into the US consumer theme, they screen the universe of US consumer stocks and put in parameters like valuation or liquidity.
“If we’re looking for the consumer, we look at what part of the consumer they’re exposed to. For example, housing-related companies may be less disrupted by internet stocks such as Amazon. It can’t compete if you’re trying to send over a ton of concrete across town. We tend to tweak those parameters until we get a basket of say 20 stocks and then go through them in more detail and do due diligence like look at the earnings and debt profile to spot any potential red flag.
“We’re not looking to buy the next best US consumer stock. We don’t want anything too exciting. In a way, the more boring, the better.”
He adds: “Big pharma companies such as Astra and Glaxo – why would we know more than those millions of analysts pouring over it?”
The Defensive fund returned 4.3% in the past year while the IA Mixed Investment 0-35% sector returned 2.5%. The Cautious fund returned 6.5% compared with the 3.8% returned in the IA Mixed Investment 20-60% Shares sector. The Cautious Monthly returned 6.9% in the year while the IA Mixed Investment 20-60% Shares sector returned 3.8%. The newest fund will sit in the Mixed Investment 0-35% sector.
‘Do businesses speak our language?’
Away from multi asset funds, ex Miton fund management duo George Godber and Georgina Hamilton set up the Polar Capital UK Value Opportunities fund in January 2017 and so far, it has exceeded £590m of assets under management.
Distinct from the Miton offering, this fund works on a bottom-up approach and has a high active share – in excess of 90%. The fund managers look for companies across the market cap spectrum that they believe are undervalued and they aim to achieve higher returns through less volatility.
Their stock selection process isn’t just about finding cheap shares – the stock must also be sustainable and pass the ‘profit stream’ test.
As well as pouring over accounts and results, the duo take time to meet the managers behind the companies they’re investing in.
Hamilton, says: “Twice a year we’re routing round the reports and results. This sets the framework but through the year, there may be 100 companies we’re interested in but 30 companies that will get through. During the rest of the year we’re meeting the management teams.
“I can tell you from a quantitative basis that if we had bought everything on an automated basis, we wouldn’t have outperformed. If we didn’t meet the management, would we be doing better or worse? For us, our hit rate and performance looks like it’s better if we’re meeting companies. It definitely works for us though it might not for others.”
She adds: “For every £1 invested, this should generate as good if not a better return; nowhere in the reports or accounts will it tell you that. We recently met with a high street retailer who revealed it will take 10 years to make money, showing the competitive environment. But others will get their pay back in three years. You can only get information like that by meeting management teams and it’s invaluable to us.”
The duo reveal that they have an automated system which tells them how many days it’s been since they last met a company manager.
“It’s more mechanically organised; visibility is tough in the UK, but by meeting the team, we hope that we’ve avoided any blow ups,” she says.
Godber adds: “The reports and disclosure are great but some of the level of detail we require you just can’t get. The second more tangible benefit is seeing whether businesses speak our language. Do you invest in the company, do you put a £1 down to generate a good return on capital, do you have that meet and beat expectation imbedded in what you do or are you guilty of always slightly overpromising? Those two bits I don’t see how we would be able to answer.”
Since launch, the fund has returned 20.4% vs 11.1% from its benchmark FTSE All Share Index.
‘No right or wrong way to manage funds’
Ben Yearsley, director at Shore Financial Planning, says it’s all to do with the individual process of the fund manager. Some rely on extensive company management to give them an edge; backing management that have delivered for them in the past. Whereas others rely solely on their own skill in analysing the report and accounts of a business in order to make decisions on what companies to invest in and therefore they’re not interested in meeting management.
“Company management can’t give information that isn’t in the public domain in a meeting with fund managers so it’s really about assessing their competence and understanding of the business.
“It’s probably more important the smaller the company is to meet the management and make an assessment as to their suitability as in small companies, senior management can have a much quicker and more direct impact on the future of the business. Whereas company management meetings with large companies will probably not give you a great deal of insight. Bad management can ruin a good company whereas good management can turn a bad company around.”
Yearsley says the fact that the CEO may be ‘nice’ is an issue to contend with, liking it to “a fund manager who is a good presenter but isn’t necessarily a good fund manager”.
He adds: “Judging how good or bad management is comes from experience and making mistakes.”
On a personal level, Yearsley says the majority of funds he holds have managers who insist on meeting company management before investing in a business.