London travel diary by Graham O'Neill, Senior Investment Consultant at RSMR

19 May 2022

London travel diary by Graham O'Neill, Senior Investment Consultant at RSMR

Visiting London in Spring saw the city, like nature, re-opening from winter torpor as tourism and economic activity picked up post the Omicron induced slowdown during the winter months. Office occupancy has increased as workers have returned and with Covid-19 testing requirements eased, tourists have once again begun to flock back to see London’s iconic sights. 

Piccadilly Circus is a road junction and public space at the heart of London’s West End in the City of Westminster, built in 1819 to connect Regent Street with Piccadilly. The word ‘circus’ is derived from the Latin word meaning circle and depicts the round open space at a street junction. The centrepiece -the Eros Fountain - is one of London’s top landmarks. The formal name for the landmark, which is surmounted by a winged statue of Anteros, is the Shaftesbury Memorial Fountain. It was erected in 1892-93 to commemorate the philanthropic work of the 7th Earl of Shaftesbury, the Victorian politician and philanthropist, and his achievement in replacing child labour with school education. It was the first sculpture in the world to be cast in aluminium and set on a bronze fountain. The statue is generally known as Eros, but it was created as an image of the Greek God’s brother Anteros in what perhaps is now known as the most famous square in London.

JOHCM UK Dynamic Fund

My first meeting was with Alex Savvides who manages the JOHCM UK Dynamic Fund, a value orientated strategy focused on business transformation which looks for underappreciated but inherently good quality businesses being managed for sustainable positive change. The process looks to identify companies at low points in their life cycle as they move away from a re-structuring phase to a growth phase. The fund avoids the most highly rated companies in the stock market and struggled during the Covid-19 period when investors focused on stay at home and technology winners, but it has seen a marked improvement in performance since the first vaccine announcements in November 2021. Alex Savvides has successfully identified companies which are at a low point in the stock market cycle but where he and his team have some level of certainty of a catalyst for positive change and then future reappraisal by the stock market as these businesses return to growth. Some of the companies which have seen a strong recovery include Pearson, an education business that has transformed into an online winner, Essentra, and the property company Shaftesbury, named after the Earl, which owns significant assets around Piccadilly Circus. These companies all have long-term growth potential but were purchased when they were de-rated by the market. Essentra is an example of a company that has improved ESG factors after shedding its tobacco filter business to focus on healthcare packaging and components distribution which has led to a re-rating. The return of tourists to London Shaftsbury with its West End presence is an excellent example of a post Covid-19 reopening play. On the financials side, 3i has a significant stake in Action, a European value retailer which has gone from strength to strength. 

Unloved but valued

The focus on unloved parts of the market with inherent value has seen the fund rewarded with several bids for its holdings. These include SDL, acquired by RWS, Urban & Civic which was purchased by the Welcome Trust, Elementis which received several bid approaches, and the takeovers of Aggreko and St. Modwen Properties. The fund has a strong focus on investing in businesses that understand the importance of delivering returns to all stakeholders through improving ESG. The fund now has a record of over 14 years and has delivered strong returns over its lifetime to investors with its fund management team extremely diligent and always looking to improve the process they utilise and gain a better understanding of the companies held within the portfolio. With the return to favour of the value investing style, the fund has had favourable tailwinds over the past 12 months in contrast to the headwinds it has faced over most of the previous five-year period.

RSMR in the City

Part of the week was spent attending the ‘RSMR in the City’ conference in Merchant Taylor’s Hall where many leading fund management groups presented insights on the major trends affecting markets this year and looking further ahead. The Merchant Taylor’s Company was one of the great 12 livery companies of the City of London, regulating tailoring and its related industries within medieval London.  The first hall was actually built on the site in the 14th Century and there are parts of the building dating back to medieval times. The courtyard provides a striking setting, contrasting the old with the modern skyscrapers of the City of London.

The Bank of England

The return to my hotel involved a walk past the Bank of England which was established in 1694 to act as the English government’s banker. It’s the world’s 8th oldest bank and was only nationalised by the Attlee government post the Second World War. Since 1998 it has been independent of the Treasury and solely responsible for setting monetary policy in the UK. The bank’s headquarters have been situated in Threadneedle Street at the heart of the financial district since 1734. Today, the interest rate policy it decides upon will be crucial for the course of economic growth.

JOHCM Global Opportunities Fund

The day after the investment conference I caught up with Ben Leyland, manager of the JOHCM Global Opportunities Fund which operates a differentiated approach combining value and quality with a thematic overlay. Themes are used to help highlight businesses with tailwinds behind them, even when they are often out of favour with the broader market. An example would be companies that are beneficiaries of de-carbonisation, even if only a second derivative beneficiary, which includes stocks in the utility space or engineering/construction rather than more highly rated opportunities in the electric vehicle manufacturing space such as Tesla. For example, Shell in the oil sector has downstream assets which, in addition to reducing its own carbon imprint, can help de-carbonise others. Galp in Portugal has facilities to de-carbonise other industries as well as its own and has been held in the fund for several years.

ESG & improving profiles

The fund is prepared to invest in stocks where the general view is negative, but the ESG profile is improving and Phillip Morris is held in the tobacco space as its heat-not-burn Iqos system is moving, in line with encouragement from regulators, towards more healthy delivery of nicotine to customers.  The fund is not buying the first derivative of ESG winners but is buying businesses that are able to stand the test of time as they are improving their practices. The fund holds a combination of current and future compounders with many stocks on more modest valuation ratings than the overall market and ones the manager believes will be robust in an era of higher inflation. Another favoured name is CRH due to its exposure to US infrastructure spend and energy businesses. The fund also holds European defence stocks such as Thales which are now being re-evaluated in a more positive light post the invasion of Ukraine. Utilities with their regulated inflation plus pricing agreements are also a favoured area of investment. The fund has generally shown resilience in down markets but its emphasis on valuation meant it struggled in the second half of 2020 and the first half of 2021. This year, as the market has become more focused on valuation and the managers have ensured larger holdings have thematic tailwinds behind them, there has been a marked step up in performance and the strategy has an excellent long-term record, especially in challenging market environments.

Graham O'Neill, Senior Investment Consultant

 

 
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This information is for UK Professional Advisers only and should not be given to retail clients.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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