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?
The ES R&M Global Recovery Fund uses a distinct and robust process to generate absolute and relative returns from Value and Recovery stocks. At a time when many assets are very expensive, the key advantages for the investor are that we look for alpha from Value and Recovery over the long term, and returns from these investment factors are moving from the bottom of the cycle and turning more positive. Additionally there are the returns from our PVT platform (see below), along with my own stock picking skills, which were sorely tested at the beginning of last year, but which have come through positively.
Our investment philosophy is known as PVT- short for Potential, Valuation and Timing. Potential shows how we look for companies that can grow profits and cashflow; Valuation refers to buying companies when they are cheap versus their medium-term profits and cash flow or assets; and Timing recognises that Value investors are often early to an investment, so we use timing tools to improve when we allocate capital.
Our process combines quantitative research with fundamental stock-specific analysis. Our proprietary quantitative analysis tool (MoneyPenny) allows us to quickly and systematically review vast amounts of complex data efficiently, scrutinising a large universe of UK and global equities to track down and target the best opportunities to investigate further. We then use the knowledge, expertise and, importantly, experience of our 12 strong investment team to carry out fundamental research. In this way, we validate every PVT idea to find those that will work best in our portfolios.
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
There are significant opportunities available in Value, Recovery and PVT stock picking as we emerge from the Covid crisis and reflationary impulses pick up speed. The return to Value has only just begun, and recovery stocks are 6 months into what would normally be a 3 year positive cycle of profits recovering to pre-recession levels, and even possibly beyond, as costs have been taken out of them.
Our portfolio shows a clear tilt towards value, recovery stocks (those with a lower ROE than the market today but improvement potential) which cover the globe and the fund is also invested across different capitalisation tiers. We believe in having a well-balanced portfolio regionally and ours is less US centric than many global funds. We are, in fact overweight Europe with optimism about many policies and positive changes in the region.
Recent portfolio changes have included adding to stocks with traditional value characteristics such as banks, financials and energy. We have also included some high scoring recovery stocks that our quant screening has thrown up. Other additions include quality and growth franchises, and now selected de-rated defensives, some of which may also have atypical cyclical recovery exposure angle.
Are there any themes you would like to highlight?
There are several big themes playing out for the future: These are Value, reflation and potential market regime change. The world is now arguably moving into a more reflationary phase, during which interest rate expectations and government bond yields trend upwards - this will be an environment that is more supportive of shorter duration value equities and inflation hedges than the deflationary period we have been in since the Global Financial Crisis (GFC). This change of direction in bond yields will ensure that this value cycle has longevity. Meanwhile, looking at the shorter term (next two years) Value and Recovery will be well supported by strong fundamentals - we are in the sweet spot of the cycle for these types of stocks as they are the most geared to both economic recovery and the bottoming out of interest rates. With a big value gap still in place (spread of valuations between cheap and expensive stocks) and robust fundamentals, the immediate outlook for Value is robust and will not be a six-month wonder.