HEAD-TO-HEAD: Gam versus Guinness

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Investment approach

The Gam Star Disruptive Growth Fund is a global equity product that aims to identify companies across a variety of industries which are set to benefit from the disruption that the next wave of technological change will bring about, according to McDermott.

“Companies that make it into the portfolio will use technology to drive their business forward and become leaders in their industry through the exponential growth that digital disruption offers,” he said.

The cross-industry approach means it is not just a tech fund, although it does sit in the tech, media and telecom sector and will have a natural bias to most of these areas. Sectors which are unlikely to be technologically enabled, such as real estate and mining, typically won’t often feature in allocation decisions.

To build the portfolio, the manager, Mark Hawtin, starts by identifying the themes that will lead to industry disruption.

These could be the use of big data helping mobile apps, the use of artificial intelligence and analytics in the healthcare sector, or cloud storage for Amazon, for example,” said McDermott.

Hawtin will tap into a variety of sources, such as trade journals, global news outlets and the network of companies and industry leaders he has built up throughout his career. “He will apply this knowledge base to the investment universe and identify which sectors are likely to see most disruption and where the winners and losers are set to be.”

Once Hawtin has ascertained broad ideas for companies to consider, he will analyse them.

“This will involve a large number of company meetings, and a lot of modelling on the companies by his team based on fundamental research,” said McDermott.

“The modelling will involve seeing what could go wrong or right for the company, and the sensitivity to each scenario, allowing the team to put a risk-adjusted value onto the company,” he said. The portfolio will then be constructed with around 40 of the best ideas.

The fund will have a growth bias and is likely to perform strongly when sectors it favours do well. It is likely to underperform if there is a cyclical rally, when sectors such as banks, real estate and oil and gas do well.

“Hawtin will look at the fund through factor exposures, to ensure that one theme does not become too dominant and leave the fund exposed to one risk factor,” said McDermott. As such, no more than 20% of net asset value can be in any one theme.

“Because the portfolio positions are few and show conviction, the fund performance also depends on the manager getting the right stock calls,” he added.

Turning to the Guinness Global Innovators Fund, “as the name suggests, the objective is all about finding, and investing in, innovative and disruptive businesses which are changing the world in which we live,” said McDermott.

The team, led by Ian Mortimer and Matthew Page, builds its investment universe by identifying nine innovation themes. The managers then pick the highest quality, fastest growing and best value stocks from within these themes.

“The two managers are highly experienced and have developed a clear and consistent process which has proven to be successful,” said McDermott.

Their nine core innovation themes are: advanced healthcare, artificial intelligence and big data, clean energy and sustainability, cloud computing, internet, media and entertainment, mobile technology and the internet of things, next generation consumer, payments and FinTech, robotics and automation.

The universe is screened for quality: return on capital should be more than the cost of capital the previous year, debt-to-equity should be less than 150% and positive earnings growth should be expected in the coming year, according to McDermott. This reduces the universe to around 500 stocks.

From here, firms are assessed on four different metrics: quality (looking at the initial screen in more detail in terms of margins, returns on capital and balance sheet strengths), growth (historic sales and profits and forecast growth for the future), valuation (relative to history, the industry and the market) and momentum (one-, three- and six-month price and earnings).

“Companies which look interesting on these metrics will be researched in much more detail including full modelling,” said McDermott

“Like all Guinness funds, the portfolio is made up of 30 equally-weighted stocks. The managers trim winners and top up underperformers: there is a strict one in one out policy,” he said.

As to be expected, the fund has generally had a high weighting in technology stocks (historically 40% to 50% of the portfolio). It also has almost nothing in financials, utilities, materials, energy, real estate or consumer staples, noted McDermott.

“The fund’s deliberate avoidance of many sectors and its high weight to technology means its alpha is likely to be quite lumpy,” he said. “It will naturally have a heavy bias in favour of the growth style of investing and may underperform when more cyclical areas are rallying.”

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 July 2021

Regional allocation:

Source: Fund factsheets, 31 July 2021

Top 10 holdings:

Source: Fund factsheets, 31 July 2021

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