Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Mirabaud - UK High Alpha is a fully constrained, highly focused strategy, integrating ESG and climate change risks into decision-making. The strategy invests in a distinctive portfolio of between 25-35 companies with a bottom-up focus, leading to a clear mid-cap bias with the aim of delivering capital growth.
The strategy is highly flexible, seeking opportunities across the market-cap spectrum that meets the investment team's definition of quality - scalability, optionality and low risk. Scalability refers to companies that have the ability to scale their business models. Optionality represents activities or potential that has not been recognised by the market and finally low risk means finding conservatively financed companies with secular growth and being careful about the price we pay for them.
Another important element of quality is the degree to which companies practice sustainability. ESG credentials are embedded in the stock selection process as a measure of sustainable investment quality. Whilst the strategy scores highly on ESG criteria, we will invest in companies with poor ESG reporting practices, provided we know that ESG risks are well-managed in practice. This reflects the importance of the investment team's engagement with companies.
The strategy is managed by a highly experienced team. Jeremy Hewlett, lead portfolio manager, brings over 36 years' experience in UK equity investing. Jeremy is supported by David Kneale, Head of UK Equities, with 19 years' experience. Both Jeremy and David have been working together for 16 years and bring a degree of knowledge on UK equities that's difficult to match.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
It's important that we stayed focused on looking for quality and maintaining our strong discipline. Our quality ethos positioned us well going into the pandemic - and through the crisis. Covid has revealed and then pierced the Achilles heel of numerous companies conventionally thought to be of secular growth and hence of remarkably high quality, exposing them instead as highly vulnerable and extremely risky - areas we avoided because of our quality focus.
We believe that the crisis will lead to new working and socialising behaviours, resulting in a two-track economy. Post-Covid winners will be a genre of companies that we have labelled as ‘the digitals' and ‘home services' - the latter a catch-all for domestic consumption. In contrast, companies that we describe as ‘the analogues' (firms with little digital presence) and ‘crowd space service' (companies relying on their customers gathering in communal places) have been more highly challenged
However, it's important to recognise that the resolution to Brexit and the removal of uncertainty was another key factor in decision-making. The risks from trade barriers have been removed, leading us to favour a stronger economic backdrop later this year, which has been amplified by the vaccine rollout. This opens up new opportunities.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
First, we think it's worth pointing out that the prospects for UK equities appear highly favourable for 2021. Generally, macro-economic policy is unprecedentedly supportive for financial assets, with returns potential highest amongst equites where free cash flow growth is theoretically worth relatively more than ever before.
In particular the UK domestic banks appear attractively valued, despite challenges to growth from historically low interest rates. Conservative lending practices since Brexit and regulatory changes to provisioning and capital distribution have ensured that their loan books are resilient, and that their capital positions seemingly able to absorb losses far greater than look likely to occur. Consequently, we have added Lloyds Bank, which now makes up around 6% of the strategy, in keeping with our high conviction decision making.
And reflecting ‘the digitals' winners, we introduced a new position in Auction Technology Group, which enables on-line auctions, or in other words on-line marketplaces connecting 2,000 auction houses to bidders in 150 countries, with strong network effects and virtuous circle economics.