“We see high quality growth managers as hedgehogs who only go after one thing, whereas we are the foxes who get into every corner of the garden.”
RWC Continental European Equity deputy fund manager Russell Champion believes the style-agnostic approach within their investment process should give them an advantage over many of their growth-orientated peers in these uncertain times.
The fund, which has a bottom-up approach, is managed by Graham Clapp, a 35-year veteran of the industry. While the fund is some six months away from its three-year track record - it launched in December 2017 - it has a tried and tested process which has been used by Graham throughout his career, notably in his time at Fidelity and Pensato, the latter of which he helped found in 2008 and which was acquired by RWC in 2017.
Clapp's experience is supported by numbers - he has had some 15,000 management meetings with about 4,000 different companies.
"The process has seen its strongest performance in 2009 and 2012, in the aftermath of both the credit crunch and the sovereign debt crisis. The fund's process is designed to find companies where the economic potential is greater than what the share price implies," said Champion, who also worked with Clapp at Fidelity and Pensato.
"European equities have fallen 20.2% between 20 February and 31 March 2020. We are in another one of those challenging periods."
The fund's initial universe is about 2,000 stocks. The managers start by identifying the companies that are likely to have the highest deviation in economic performance from market expectations. The high forecasting error in analyst estimates for these companies implies a significant stock picking opportunity; these stocks offer the greatest potential, with research concentrated in that direction.
Once these companies have been identified, the managers undertake detailed fundamental analysis in order to understand the business better than the market, such as key drivers of profitability within the business.
The team focuses on the areas that it is best at forecasting. Demographics, disruption, pricing and costs are just a few examples. Once the analysis is complete, companies are given a rating from one to seven(with one being the best), depending on where the managers think the share price will be in three years' time. The fund has a heavy bias towards mid-cap stocks, which are often under-researched by the investment community.
The portfolio itself is siloed into five different types of companies: secular growth, hyper growth, cyclical growth, special situations and recovery.
Champion said recovery stocks accounted for over 50% of the process in 2009, compared to just 21% at the start of 2020.
"I think we can expect this allocation to increase to some degree in the near future, when we find out whether we are in a short-term recession or a long-term depression. What we have been doing already is dusting off the playbook from 2009.
"The time to own recovery stocks is when all the bad news is factored in. We will be looking at companies in detail to see whether the market has been too critical in its assessment."
The average holding size is usually around 3%, which prevents any one stock from dominating the portfolio. The fund is benchmark agnostic and has a high active share.
Since launch the fund is down 10.2%, compared to a 15.6% fall for the Investment Association Europe ex-UK sector.
"We feel our style has been against the market for much of this fund's life, with quality growth companies driving performance. But we feel that is set to change in this environment,'' added Champion.
Clapp is an experienced manager backed by a team that has proven its ability to deliver in the long-term. It's a strong consideration in a sector full of opportunities for active managers.
Darius McDermott is managing director at FundCalibre