Three investment “double acts”

Contrast is important in investing, as it is in the entertainment industry.

| 9 min read

From the slapstick of Laurel and Hardy to the flawless rapport of Morecombe and Wise, double acts are a comedy staple. Everyone has a favourite. Although it’s difficult to choose, I’d go for the Two Ronnies with unforgettable sketches like “Four Candles”.

What makes a good double act? They all work differently, but contrast tends to be the key. Dissimilar characters or differences in opinion can be the perfect vehicles for the jokes to flow. But they have to be complementary as well, playing to each other’s strengths.

When it comes to investing, contrast is important too. A pairing of investments of different types in a particular area can be useful. It can help avoid ‘style’ bias – being too orientated in one direction, for instance towards value or growth stocks. If chosen well, if one investment is faring poorly the other ought to be doing much better, and over the longer term both could be contributing positively to returns.

Here’s some examples of some funds we believe work well together in their respective areas. Please note each represents a different investment approach and type and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.

UK Equities: Liontrust Special Situations and GLG Undervalued Assets

This pairing is a great example of how, when it comes to fund management, there is more than one way to skin a cat. Despite having very different approaches, both funds have been strong long-term performers, though this is not an indication of future returns.

Liontrust Special Situations Fund has been managed since its launch by Anthony Cross and his co-manager Julian Fosh with the same philosophy. Rather than obsessing about valuation, they concentrate first on finding the right type of business. The managers believe that the companies most likely to succeed over the long term tend to possess certain strengths, which competitors find hard to replicate.

This includes “intellectual property” - intangible assets such as strong brands, copyrights or patents –as well as strong distribution channels or recurring revenues that allow continual reinvestment and development to maintain an edge. These characteristics can help keep competitors at bay, allow greater control over pricing and potentially deliver superior profit growth over the longer term.

Meanwhile, Henry Dixon, manager of the GLG Undervalued Assets Fund is more focused on current value. He believes conventional equity valuation principles often place too much emphasis on forecasted future earnings. Instead, by focusing more on the current shape of the balance sheet he targets companies whose share prices do not fully reflect their ‘intrinsic’ value.

Mr Dixon searches for two types of company: those trading below the analysis of their “replacement cost”, and those whose profit streams are undervalued by the market. He aims to sell assets as they come to be priced at what he considers to be fair value and to replace them with fresh ideas in bargain territory.

US Equities: Fidelity Index US P and Fidelity American Special Situations

Here’s a fund pairing that’s comparable to the ‘straight man’ and the ‘wise guy’. We believe they represent great examples of best of breed investments in their respective areas, but they are entirely different to one another.

Many investors choose to use passive funds for exposure to US equities – and for good reason. The US market is notoriously difficult to outperform with very few active managers able to do so consistently. This is often put down to the fact that it is highly efficient with such a large research community covering each constituent of the index in great detail. Whatever the reason, a low-cost index fund could represent a solid choice. Using funds with the lowest charging structures can, over the long term especially, translate to higher returns.

Fidelity Index US, for example, aims to track the performance of the S&P 500 index, which tracks around 500 large US companies. The composition of the index, and the fund, is determined by the size of each company. The fund has highly competitive costs and uses ‘full physical replication’ – a strategy that seeks to physically hold all or close to all of the securities of a particular index, with the approximate weightings of that index.

For those wanting something a bit different in the area, one complementary position could be Fidelity American Special Situations, which although from the same fund management group and in the same sector, is a world apart in terms of the make-up of the portfolio.

The fund is actively managed with Angel Agudo adopting a value-based investment style, preferring companies that have gone through a recent period of underperformance and where he believes little value is ascribed to their recovery potential. His philosophy is that the stock market is inefficient at pricing companies that have gone through a troubled period and are consequently unloved and out of favour. He constructs a relatively concentrated portfolio of around 50 best ideas (which can add to the risk) across a range of company sizes but with a typical bias towards medium and small sized firms.

Given the very pronounced ‘value’ tilt of this fund we would expect it to have trouble keeping up in an environment where the market is being driven by growth stocks – as has been the case recently. In particular, Mr Agudo has been steering clear of highly-rated technology stocks, for instance the fund has no exposure to recent strong performers such as Amazon, Microsoft – unlike a passive fund which would have large positions by virtue of their size.

Over the longer term, a more value-focused approach can work well, and it would be wrong to shun the fund just because its style is out of tune with market sentiment. It remains very different to the index with a high active share, and we believe it could be well positioned for a change in leadership in terms of stocks driving the US market. You can read more about the actively managed US funds on our Foundation Fundlist in this review from earlier this year.

Global Equities (Ethical): Baillie Gifford Positive Change and Edentree Amity International

Investors wishing to invest with sustainability and ethics in mind have a growing array of options. One exciting relative newcomer is Baillie Gifford Positive Change, which combines the high-conviction, growth orientated style of Baillie Gifford with a selection process that focuses on identifying companies that aims to contribute toward a more sustainable and inclusive world while generating strong returns.

Investors familiar with Baillie Gifford’s approach to investing will see that this fund bears the group’s hallmarks. A high-conviction, concentrated portfolio (of around 30 holdings), which increases risk as well as return potential, a search for exceptional businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.

The fund will have a distinct bias to more expensive growth-orientated stocks. The managers pay little attention to short term valuation fluctuations and aren’t overly concerned with short term reporting numbers. Instead, they try to take at least a five to ten year view believing that market ‘myopia’ is a persistent structural issue. The focus is on companies addressing societal challenges – for example Tesla in the development of widespread electric vehicle use – rather than just excluding companies that cause harm. The managers believe that companies making a positive change to society will eventually be rewarded with good long-term share price performance.

Baillie Gifford Positive Change is one example of a large number of funds labelled ethical or sustainable that invests mainly in higher growth areas. These stocks tend to be more expensive, leaving an ethical portfolio potentially too reliant on certain areas and subject to a lot of volatility. One exception to this is Edentree Amity International.

This is a long-standing ethical fund with a stable team, which has in the past exhibited some strong returns versus its global equity benchmark and peers. However, it has struggled in relative terms over the past few years owing to its value focus, as well as the fact it has missed out on much of the substantial outperformance of the US market, notably driven by the large internet stocks. Yet between 2003 and 2007 the fund exhibited much stronger returns. Past performance is not a guide to the future.

The fund’s managers, led by Robin Hepworth, look to outperform through owning a concentrated portfolio of global equities which make a positive contribution to society and the environment through sustainable and socially responsible practices. Socially responsible investing is embedded in the culture at EdenTree with a genuine belief that as fund managers they should engage actively with companies on sustainability and governance issues.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Three investment “double acts”

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