The FSA Spy market buzz – 13 December 2024
M&G’s positive outlook; Wisdom from Schroders’s podcast; Alliance Bernstein on the power of curiosity; Janus Henderson on responsible AI; China’s retirement revolution; Apple and much more.
Both funds start from the same investment universe of large- and mid-cap stocks included in the MSCI Europe index, which covers 15 European developed markets, including the UK.
The Investec team narrows down this universe to companies with a market cap of $500m or more, but this difference is not significant, according to Hinton.
Both funds are managed purely as bottom-up stock picking strategies, with sector and country allocations being outcomes of that process.
With 58 holdings in the portfolio at the end of January, and the top 10 positions making up 30.6% of the portfolio, the Investec fund is more concentrated than the MFS fund, which had 76 holdings and 25.6% of its assets in the top 10 positions.
The two funds differ significantly in the way investment decisions are made. The Investec team uses a conventional process, where decisions are made by the sole portfolio manager, Ken Hsia, who is supported by a team of analysts.
The team uses a proprietary “4-Factor” process to screen the investment universe for ideas. The process is built around four factors: quality, value, earnings and technicals. It yields a short list of stocks which are then analysed in depth by the team of 15 global sector analysts. Their research guides Hsia in his investment decisions.
Hinton described the resulting portfolio as high-conviction and risk-aware, with no overall size or style bias and a high active share.
The MFS fund has no portfolio manager in the conventional sense. Investment decisions are made and implemented by a team of 10 London-based analysts overseen by Christopher Jennings, director of equities for Europe. The investment process is structured around weekly debates in which the analysts argue their cases. Hinton describes it as an unusual process.
The approach is designed to tap the skills of MFS’s team of Europe equity analysts. “They try to empower the analysts to give their best, highest conviction ideas,” said Hinton. The ideas that gain support of a majority of the team get implemented.
Decisions to sell positions are also made collectively, based on the companies’ valuations and the need for cash to fund new positions.
Analysts are incentivised through bonuses, which are paid based on the performance of the strategy.
Gabrielle Gourgey, the MFS fund’s deputy manager, focuses on communication to investors and does not make investment decisions.
The portfolio that results from this process has a strong focus on quality and is relatively overweight in defensive sectors. “You will never see in the MFS portfolio highly-indebted companies with a poor cash flow, or cyclical rebound stories,” Hinton said.
By comparison, the Investec fund uses quality only as one of the factors, so value and momentum styles can be seen in its stock selection. In particular, Glencore, a commodity and mining company that is one of the top 10 holdings in the Investec fund, would not make it into the MFS fund because of its high debt in the past few years.
“It would never pass the initial analyst quality check at MFS,” Hinton said.
The Investec fund has higher allocations to financials, basic materials and consumer products compared to the MFS fund, while the MFS fund is overweight in utilities and energy distributors compared to Investec.
M&G’s positive outlook; Wisdom from Schroders’s podcast; Alliance Bernstein on the power of curiosity; Janus Henderson on responsible AI; China’s retirement revolution; Apple and much more.
Part of the Mark Allen Group.