Disorder and opportunity
George Luckraft of AXA Investment Managers reflects on ten tumultuous years in investment markets.
I have had the privilege of running the Allshare Income Unit Trust for St. James’s Place for the last ten years. It has been a decade marked by huge uncertainty and change, reflected in significant investment market volatility.
The fund launched just before the start of the great financial crisis. As was common for a UK equity income fund at that time, the portfolio included a number of banking stocks, which had traditionally been utility-like dividend payers. It was a very challenging time for income managers, since many of the financial stalwarts were directly or indirectly affected by the crisis in confidence and liquidity across the sector.
This period has reinforced my belief in a long-term, active investment approach based on fundamental research, building conviction around core holdings. Around a quarter of the portfolio’s holdings have been held throughout the ten years since launch, centred on a core of the largest constituents in the FTSE 100, including Royal Dutch Shell, BP, HSBC, GlaxoSmithKline, BAT and Vodafone. The non-FTSE 100 holdings have in the main seen their market positions strengthen markedly, though this has not been necessarily been reflected in their share price performance.
The companies that have disappointed have mostly had one feature in common. In association with their strong cash flows, they have also had relatively high levels of borrowing. The financial crash and subsequent sharp recession left many of these companies exposed. In many cases, management teams were able to repair balance sheets through equity fund raisings, but some failed to survive. I still bear those scars, and this has been reflected in my subsequent evaluation of companies’ prospects.
One of the great pleasures of my job is holding a company over time as it grows in size, scale and, hopefully, share price. Hilton Foods is a good example, as it has grown substantially, both in the UK and abroad, without recourse to shareholders. The company is a trusted partner to some of the leading food retailers around the world and has a well-established growth plan. Benefiting from these long-term success stories requires patience. IQE, a semiconductor specialist, is a prime example; its shares were lower at the time of the Brexit referendum than back in 2007. They have soared since then, as it became clear that IQE technology is a key part of the new Apple iPhone – some stock could be sold at more than seven times the June 2016 price.
The appeal of investing across the market capitalisation spectrum has always been the ability to exploit areas of inefficiency, where diligent research can be rewarded. Trends such as fund management consolidation, increased regulation and the growth in index tracking will create more opportunities as these inefficiencies grow.
Ten years ago, investors were still scarred from the technology boom and bust, but we are now seeing the transformational effects of a genuine and enduring new technological revolution. This will produce many investment opportunities but will also threaten existing business models. As always, backing good management teams will increase the chances of negotiating the future successfully. A strong valuation discipline should also help avoid some of the excesses, with a requirement for income generation acting as a good anchor. However, as we know, investing in equities always comes with risk.
The last ten years have been a challenging yet fascinating time to be an investor and I look forward to managing the fund through the inevitable changes of the years ahead.
AXA Investment Managers is a fund manager for St. James’s Place.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of George Luckraft of AXA Investment Managers and do not constitute investment advice. This is not a recommendation to purchase, sell or subscribe to financial instruments, an offer to sell investment funds or an offer of financial services. This does not constitute a Financial Promotion as defined by the Financial Conduct Authority. No financial decisions should be made on the basis of the information provided. The views are not necessarily shared by other investment managers of St. James's Place Wealth Management.