Juliet Schooling Latter, research director, FundCalibre and Chelsea Financial Services continues her series for professional Paraplanner looking at funds that are coming up to or have just past three-year anniversary of launch.
In April 2016, George Godber and Georgina Hamilton made a new start. Having worked together first at Matterley Asset Management (co-founded by George), then at Miton, they resigned and announced they were moving to specialist boutique Polar Capital. Just over six months later in January 2017, they launched Polar Capital UK Value Opportunities fund.
Eleven years into their partnership, their process is embedded, unchanged and remarkably successful given value strategies generally have struggled over the past decade. Despite the headwind, Polar Capital UK Value Opportunities has returned 17.6%* since launch – 3.5%* more than the IA UK All Companies sector average and 6.25% *more than the MSCI United Kingdom Value index.
George and Georgina look at three criteria when selecting companies: cheap valuations, sustainable return on capital and a good, solid funding position.
The fund benefits from the managers’ ability to hunt down the best ideas across the market-cap spectrum. Active share is high (87%**) and the holdings end up being very different to other UK equity funds, so it can be complimentary in a portfolio as there is very little overlap.
The portfolio is relatively ‘flat’ with maximum weightings of around 3%, which means diversification is strong. Some sectors will be avoided altogether – those that are too expensive like healthcare equipment and staples, and some sectors fall down on their financial safety check – telecoms and utilities. The current split is around a third each in large, mid and small cap stocks**.
When I spoke to them prior to writing this column (24 October), Georgina described the current market environment as being “like having two enormous elephants sitting either side of a see-saw”. There are some exciting opportunities in the UK in terms of valuations as everything is so cheap and unloved, but these are balanced by clearly elevated risks of Brexit, a Corbyn government and even trade wars. “If those risks change, the reaction could be severe. We see some of these risks starting to abate, and the result could be very exciting risk/reward in the market in the coming months.”
George added: “Valuations are very cheap vs the rest of the world and, more importantly, the headline numbers are masking big variations. Small caps in particular are trading at an extreme discount – a decade low to the FTSE 250 – and we have been able to cherry pick ideas.
“However, when it comes to the ‘sustainability of return on capital’ part of our process, it’s become harder to assess due to the macro environment, so we’re spending much more time on this. The knock-on effect is that stocks on our watch list are taking longer to get into the portfolio, as we want to be doubly certain. Any profit warnings are being severely punished, so the cost of getting it wrong is very high.”
The managers also look for companies that can gradually improve their business and get good payback on capital expenditure. What they are trying to avoid is defensive capex expenditure that is just maintaining a customer base, rather than enhancing returns.
Georgina cited Speedy Hire as an example. It provides construction rental equipment and is using AI to improve utilisation of its fleet. “It’s a slow process,” she said, “but by having the right numbers of machines in the right places, usage has gone from 40% to the mid 50s already.”
The pair believe that the trade wars, while fluid, seem to be headed towards an agreement and the “nightmare scenario” of a no deal Brexit and Corbyn government seem to be receding. Any improvement in sterling would be beneficial, and the M&A picture is starting to change with more movement over the summer months. They are excited that there are some brilliant franchises currently trading at knock-down prices.
The fund currently has just under £1 billion** in assets under management. Capacity is expected to be £1.2 billion, so they are not actively marketing at the moment, although inflows are still being taken.
*Source: FE Analytics, total returns in sterling, 31 January 2017 to 23 October 2019.
**Source: fund factsheet, 30 September 2019
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
