HEAD-TO-HEAD: Barings versus Merian

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INVESTMENT APPROACH

There is very little overlap between the two funds, with just one stock in common among their top 10 holdings.

“But this is perhaps not surprising given there are more than 5,000 companies to choose from in the universe,” according to McDermott.

“The Barings fund managers describe their process as ‘boring but consistent’,” he said.

“They look for growth at a reasonable price and like strong and improving balance sheets, solid management and well-established business franchises,” he said.

As a result, the managers won’t invest in IPOs, for example, and like to have a series of meetings with companies before they invest.

In their search for suitable stocks, the team screens the investible universe, using liquidity and market-cap metrics, narrowing it down to around 600 companies. They then look for companies featuring low gearing, high return on equity, and high historical earnings.

Lead manager Nick Williams and his team also use valuation metrics to help set price targets. These give a sense of control to Williams’ process, particularly as he has strict criteria to trim positions on the upside.

After a stock price rises 40%, its exposure is scaled back to its purchase level. The sell discipline sees a stock reviewed if it falls 10% from its purchase price, and a 20% fall typically results in a sale.

Williams’ preference for solid, quality companies results in a portfolio with a higher return on equity than the index.

ESG criteria have also been applied since 2016 as a way of assessing issues and risks.

With around 80-110 holdings, the largest positions are rarely above 2%. The strategy’s sector exposures tend to stay fairly stable over time with a certain balance across the board.

However, there was a notable increase in the communication services sector during 2019, which more than doubled and stood at around 10% of the portfolio as of the end of May 2020. Banks are avoided as they are deemed low quality in small caps.

“The managers also pay a lot of attention to liquidity, which will determine the size of holdings. Both country and sector allocations are reasonably spread, and the total number of holdings is currently 95,” said McDermott.

Turning to the much smaller Merian fund, “country and sector weightings are slightly more skewed towards certain areas, such as France and Italy and industrial stocks,” according to McDermott.

“The managers look to buy and hold high-quality companies experiencing secular growth for the long term,” he said.

The portfolio is constructed from the bottom up, without regard to benchmark weightings, and typically consists of 40-55 stocks. A typical position size at purchase is 2%, and if a position exceeds 3% through strong performance, the managers will either trim it or, if the investment thesis has played out, exit entirely.

A liquidity filter reduces the initial investment universe to around 1,000 stocks. The managers then seek stocks that satisfy valuation, growth, quality and financial strength criteria, which further cuts the list of candidates for additional, qualitative analysis to around 100.

Meeting with company management is also important in assessing likely outcomes over the next three to five years, evaluating the sustainability of a company’s growth, and identifying any potential catalysts.

“The managers have a solid process, which they have used for a number of years and target quality cash generative businesses with sustainable competitive advantage,” said McDermott.

“They tend to like regional or global leaders in niche markets and have a preference for owner-managed businesses,” he added.

Fund characteristics

Sector allocation:

Source: Factsheets, *30 September 2020, **31 October 2020

Country allocation:

Source: Factsheets, *30 September 2020, **31 October 2020 

Top 10 holdings:

Source: Factsheets, *30 September 2020, **31 October 2020

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