Stocks are volatile as a result of a global pandemic, yet to generate long-term returns investors must ignore the market furore and abide by their investment discipline, according to Fund Managers Chris Murphy and James Balfour
Over the past decade UK equity income fund manager Chris Murphy has made a name for himself as a manager who has been able to ignore short-term noise and, to an extent, systematic biases. Instead, he focuses on the long-term potential of companies over multiple investment cycles. His approach, he notes, means he tries as much as possible to invest in what he describes as "dull, boring businesses".
Yet despite this rather sober label, the fund is one of the best performing UK equity income funds in the market today. The Aviva UK Listed Equity Income Fund has returned 74.1% over ten years to 31 March 2020, ahead of the FTSE All Share benchmark which returned 53.6%.** Murphy manages the fund alongside his co-manager, James Balfour who joined Aviva Investors in 2012.
"Markets are driven by short-term news flow, earnings upgrades and downgrades. And a lot of investors have a tendency to value businesses when they are doing really well with high returns. All that means is that they value them inappropriately. What is needed is discipline to understand company behaviour based on facts."
Murphy and Balfour invest in stocks on the basis that any business, no matter how successful it appears to be today, will become "average or worse over time". Their approach therefore aims to pick stocks based on businesses' cash flow and their ability to invest that cash over the long term.
"We want to base our decisions primarily on if the cash they hold can pay the bills, fund capital expenditure and ultimately pay dividends," explains Murphy. "To understand how companies do that we split the lifecycle of a company and its cash flows intro three broad silos of: future cash flow, cash compounding businesses, and those in the recovery process."
"Typically, the stocks in our portfolio are better-established businesses, mature even and can have slightly higher valuations too. But they do also have the potential for a decent amount of compounding growth which means they often deliver ahead of the market. And because they are more established they can pay out a slightly higher yield and return cash to investors rather than consuming it."
In addition, by honing in on company fundamentals and not the macro outlook, the focus remains on the long-term prospects of the stock: "We don't chase stocks. We don't want to or need to. We invest in businesses for their potential to generate cash over a number of years, therefore the entry price and trying to tie into that doesn't matter as much. It really is about conviction of ideas rather than valuations, and the consistency of our portfolio returns shows that."
