HEAD-TO-HEAD: JOHCM versus Threadneedle

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Investment approach

The manager of the JOHCM fund, Alex Savvides, invests in UK companies that are undergoing substantial positive change that is not recognised in the current share price, according to McDermott.

“Savvides has strict investment disciplines: each holding in the portfolio must pay a dividend, and the companies must be well established, in structurally sound markets,” he said.

At the heart of his process is the idea of profiting from the uncertainty that change can bring, McDermott said.

Stocks are divided into three types of opportunity: restructuring, recovery or growth. “Savvides will look to buy into stocks after the share price has been hit, and then wait for the business to normalise as the new strategic approach takes effect.”

He is also free to choose across the market cap spectrum, meaning the portfolio can invest in companies of any size and its bias towards any particular market segment will vary over time. The portfolio is likely to be concentrated (typically 35-50 companies).

However, “due to the sometimes contrarian nature of the strategy, the fund can be susceptible to quite high drawdowns (such as in 2020) where broad market sentiment is very negative. It tends to perform best in a strongly rising market when optimism is high or increasing”.

Investing primarily in large cap UK businesses, the Threadneedle fund offers something genuinely different to its UK equity peers, with the possibility to profit from both rising and falling share prices (shorting), according to McDermott.

“This increases the potential for higher returns, but also the fund’s reliance on the manager’s stock picking skills,” he said.

Manager Chris Kinder looks for out-of- favour companies with resilient long-term business models, which he believes are “cheap” considering their long-term growth prospects.

“He and his team must be convinced a company has a sustainable competitive advantage before they invest,” said McDermott.

They pay close attention to factors such as research and development, how easy it would be to replicate the company’s assets, and barriers to entry. The team sit with management and quiz them on how they’re spending their company’s money.

Kinder’s long positions will be a combination of three factors, according to McDermott.

The first is companies that are “moving forward”, that is, those offering new products to a market and winning new business. The second factor is out-of-favour stocks with good long-term prospects, but are currently under-appreciated, perhaps with refinancing needs. The final factor is “attractive valuations”.

Conversely, when Chris is not positive on a stock, he can take a short position.

“In these cases, he and the team will look for companies whose shares are quite expensive, yet whose underlying fundamentals are deteriorating,” said McDermott.

“These are firms which could be disrupted by new technology, with over-loved stocks whose growth opportunities are overestimated and those on unattractive valuations, both versus their own history and on accounting metrics,” he said.

Although the Threadneedle will always be more heavily invested in the companies that Kinder likes—and have a much smaller amount in the stocks he dislikes and is shorting – “it is important to remember that shorting does increase the risk of a fund,” said McDermott.

“On the other hand, this ability to make money from falling prices, as well as the fund’s defensive nature, has helped to protect investors’ capital in flat or down markets.”

Fund characteristics

Sector allocation: 

Source: Fund factsheets, *31 July 2021; **30 June 2021

Top 10 holdings:

Source: Fund factsheets, *31 July 2021; **30 June 2021

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