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The first week of our “feast of ideas for your ISA” event focused on growth and value. We spoke to managers that invest in either or both of these styles about the outlook for these factors and how they have invested through the recent style rotation.
F&C Investment Trust
How do you limit volatility and timing risks? F&C Investment Trust’s (F&C) long-running manager Paul Niven discussed how he seeks to achieve this through a blended “best ideas” approach. In practice, the core of this approach is diversification, including a blend of listed and unlisted equities and a mix of underlying style factors – which helped the trust avoid the worst of the growth sell-off in 2022.
Nonetheless, he argued that diversification does not have to mean that an allocation is passive. Instead, he allocates the trust’s portfolio to different, concentrated sub-portfolios with clear styles, managed both within the trust’s own investment house and by external managers.
He also explained how his own active input into the trust’s overall allocation came into play through the tumultuous three years since the COVID-19 pandemic began. Most notably, he has rotated away from US listed equities and into the private equity mid-market, as valuations are looking especially attractive in this area. This allocation in particular embodies his belief in taking “rewarded risks”, while using diversification to balance these.
Monks (MNKS) has been punished over the last year, falling onto a discount for the first time in half a decade. Investment specialist Jon Henry discussed how “growth” as an investment definition encompasses many different things.
For the team managing Monks, there are three core types of growth: stalwarts, rapid and cyclical. In the first case, the team would expect to see smooth, steady growth over the long term. In the second, they see an opportunity for a dramatic uplift in earnings at a point in the future, based on sector or company-specific factors. The third category refers to businesses with a strong capital allocation discipline, which invest through down cycles and so will see growth over the long-term cycle.
Overall though, a central requirement of their investment case is a more than 30% chance of a stock price doubling in five years.
Of course, it has been a challenging 18 months for growth. Nonetheless, Jon said that the team has tested the inflation resilience of the portfolio, and after weeding the portfolio of the most exposed holdings, they are now in the position of allocating capital across the portfolio with no plans to execute a widespread rebalancing. He also emphasized that their portfolio companies are profitable, aiding resilience.
When it comes to the long-term opportunity in growth, Jon said: “there can be periods in which the relationship between share price and earnings can break down, but over the long term, we believe that earnings will always drive share price growth”
Allianz Technology Trust
Tech has had a tough 12 months, with the more growth-oriented part of the market suffering due to interest rate hikes. Allianz Technology Trust (ATT) manager Mike Seidenberg, who took over from Walter Price last year, presented a more upbeat analysis of the current state of play when he spoke at the Kepler Trust Intelligence event this week.
Mike noted in his presentation that valuations had become overheated during the pandemic but that they have arguably returned to much more attractive levels today. He also discussed the bottom-up approach his team takes to the market and some of the themes, like cloud computing and IoT, that emerge from this process.
Notably, Mike and his team believe tech continues to offer secular growth to investors, with various technologies now an integral part of our lives. Another trend that Mike touched on here was the current labour shortage we’re seeing across large parts of the globe. Such periods have historically supported investment in tech, as companies seek to automate processes when they can’t find the workers to perform certain tasks.
International Biotechnology Trust
International Biotechnology Trust (IBT) invests in innovative companies in the healthcare sector. In a somewhat similar fashion to ATT, managers Ailsa Craig and Marek Poszepcynski believe that the sector became overheated because of ‘tourist’ investors during the pandemic and that valuations have returned to more ‘normal’ levels since these people have been flushed out.
The sector, they argue, retains its long-term appeal, with ageing populations globally needing to spend more on healthcare, and more innovation being driven that creates products which those people can use.
However, despite what are arguably secular trends, the managers believe the sector tends to behave cyclically, with low valuations leading to M&A, which in turn leads to growth. This then takes the sector into a ‘hype’ stage where valuations are high, which eventually leads to a downturn, before the cycle repeats itself.
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