Investing in the UK requires an experienced hand, argues Juliet Schooling Latter, research director, FundCalibre, as she considers this month’s three-year track record fund: VT Downing Unique Opportunities.
What do mass produced toothbrushes, the steam engine, chocolate bars, the light bulb and the world wide web all have in common? The answer is they were all invented in the UK. Despite these achievements, the world has become dominated by the US tech behemoths for the past two decades, and interest in UK equities has fallen away – with the market often seen as an “old economy” dominated by traditional industries like oil and financials.
We also know the reasons for its deeply unloved status – performance on the global stage has arguably been lacklustre in recent years, mainly brought about by uncertainty after the 2016 Brexit vote. This dented the confidence in UK companies and made many domestic and international investors look elsewhere.
Having got over Brexit and the many challenges posed by the global pandemic, the past couple of months of political instability have once again put the UK under the microscope for all the wrong reasons, namely the weakness in sterling and the threat to both the pensions and mortgages. All of this ultimately cost Liz Truss her job.
There is a strong argument that the recent weakness in UK equities has created an extremely compelling entry point. Although we have heard this before, the truth is valuations have become even more attractive and there is now significant dispersion in performance – creating major opportunities for active managers. This is particularly relevant when you consider the dispersion in returns across sectors. For example, UK stocks have outperformed their global peers principally off the back of energy prices rising almost 40 per cent in 2022, while others like consumer discretionary and industrials are down over 20 per cent*.
This month’s fund is an ideal consideration for this type of environment. Launched early in 2020, the VT Downing Unique Opportunities fund is a multi-cap UK equity offering run by the highly experienced Rosemary Banyard. Rosemary has spent more than 30 years in the investment industry, as both an analyst and a fund manager.
She has built an excellent track record, particularly at Schroders where she was co-manager of the Schroder UK Smaller Companies fund and lead manager of the Mid Cap Trust. In 2016, Rosemary left to join Sanford DeLand before joining Downing in 2020.
Rosemary’s approach to analysing a stock is to act as if she is buying the whole company – therefore she will look for long-term success rather than short-term gains. The Unique Opportunities title of this fund refers to those characteristics of a company which will enable it to produce sustainable, above-average returns. This might be in the form of intangible assets, such as patents or strong brands: cost advantages due to better processes or scale: a leading network; or high switching costs for existing customers.
These companies tend to have easy to understand business models, which allow for accuracy in forecasting success and good management teams who can grow the company organically or, if by acquisition, with good discipline.
With around 3000 companies in the universe, Rosemary starts with a screen to remove those that aren’t going to fit her model. These include companies with low return on equity, weak financial strength, low cash conversion and low margins. She is also willing to consider a few names that may have just fallen short of the screen, but which she knows from her many years investing. The resulting shortlist will then be subject to Rosemary’s proprietary model analysis and valuation.
Rosemary will conduct a three-year cash-flow forecast, from sales and profits down to how much free cash there is likely to be. This will provide a target price for a stock. If the current price is below this, she will initiate a purchase. The price is then updated with each set of results.
Preference is given to how much of a margin of safety there is in the valuation, and the long-term view of the company. If the portfolio is fully invested, Rosemary will sell stocks to buy better ones. This is mirrored in the strong sell discipline: she will sell a stock if the story changes, the pace of acceleration changes or if the previously good metrics deteriorate without good reason.
The final portfolio typically holds between 25-40 names. Although multi-cap in nature, the minimum company size is set at £150m and it will be rare for Rosemary to venture this far down the market cap spectrum – by the same token she will not venture into the mega caps.
Top holdings at the end of September include 4imprint (4.3 per cent), Aptitiude Software Group (4.2 per cent) and EKF Diagnostics (3.8 per cent)**.
Rosemary really has been a low-key industry success story over a long period of time. Her edge comes from her ability to look beyond the 1–2-year period the broking community focuses on to forecast returns and we see no reason why she cannot replicate her previous successes with this new fund.
*Source: Lazard: Outlook for UK Equities -Q4
**Source: fund factsheet, September 2022
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.
