Running an investment strategy that aims to balance growth and caution has many complications. These include determining the right time to sell overvalued stocks, maintaining suitable sector and regional diversification, and holding the right kind of defensive company.
And examples of such decisions that Simon Edelsten, manager of Mid Wynd International Investment Trust (MWY), has had to make included whether to sell Amazon (US:AMZN) in 2017. The stock was one of the fastest growing global companies with a sharply rising share price which continued to grow for much of 2018 and more than doubled over the 18 months from the start of 2017.
But due to his strict valuation discipline, in 2017 he sold Amazon along with tech giants Tencent (HK:700) and Facebook (US:FB), some of this decade’s best growth stories. This is a feature of his growth strategy, which also involves being diversified and cautious enough to protect capital in bear markets.
Mid Wynd International has a decent performance record since Mr Edelsten, and co-managers Rosanna Burcheri and Alex Illingworth, started running it in May 2014, with a return of 82 per cent against 62 per cent for MSCI All Country World index. However, selling high-growth stocks has affected performance versus peers. Mid Wynd is seventh out of 20 Global sector investment trusts since the team took over, well behind Lindsell Train Investment Trust's (LTI) and Scottish Mortgage Investment Trust's (SMT) respective returns of 283 per cent and 150 per cent over this period.
And Mr Edelsten says this will always be the case. “It’s not the top fund and we would never expect it to be," he says. "But the risk profile of our fund is significantly more balanced than those of the top performing funds. The difference is that we’re concerned about value. The bull market has matured over the past nine years and almost all the stocks you wanted to buy then are no longer cheap. And when the market has wobbles, those stocks get hammered. I hope we would outperform a falling market by having this balance and keeping the fund’s average price to earnings ratio down. Given how mature the market is, a greater emphasis on caution is warranted, and we don’t mind giving up the upside.”
Mr Edelsten adds that when running such a strategy having a global remit is a great advantage. “You can pick the best stocks in the world, and because you have a huge pool of opportunity you should be able to set your hurdle very high in terms of the growth, or balance of growth against caution, that you want,” he says.
The money he has taken out of fast-growing US and Chinese tech companies has been redeployed into Japanese automation companies. Mr Edelsten says doing this hampered returns in 2018, but should bear fruit soon. Japanese automation companies' share prices almost halved in 2018 because concerns about a trade war caused many businesses to shelve spending programmes and had a detrimental effect on their sales outlook. However, the trade war could boost the sector in the long-run because tariffs on imports to the US market will speed up manufacturers' plans to cut costs via automation to offset the additional tax.
“Businesses are not going close to plants in Japan, open others in the US and employ a load of blue collar workers there," explains Mr Edelsten. "What will happen is that companies will automate [production] more.”
Despite Mr Edelsten’s large global opportunity set, downside risk management is keeping him out of emerging markets, once a haven for growth. Mid Wynd International only has around 5 per cent of its assets in emerging markets, in contrast to around 25 per cent earlier this decade.
“You used to have lots of growth, low valuations and countries which needed foreign capital to grow," says Mr Edelsten. "I don’t think any of those criteria are still in place and this isn’t a temporary phenomenon. China is in its mature phase and India is heading for it – an amazing achievement – but it makes it less interesting for an investor. They both have domestic issues such as social security meaning they don’t need foreign capital any more but do need to tax foreign profits.”
Avoiding problem areas can help with capital preservation, but to run his dual strategy, the trust has to hold a mix of good-value growth stocks and defensive stocks. And it is with the latter category that Mr Edelsten thinks investors make the worst mistakes.
He holds stocks such as Apple (US:APPL) as the cornerstone of the trust's defence. The company's recent profit warning hasn't helped, but he still believes Apple should be viewed more as consumer staple than a tech giant. Underpinning this is research that shows what consumers will change first in a recession. Branded food is often one of the first types of product to be traded down, but items such as broadband and high-value cosmetics are less likely to be. And Mr Edelsten thinks the infiltration of Apple products into various aspects of people's lives will ensure it remains a staple.
“Apple is like Unilever (ULVR) but cheaper," he explains. "Lazy people will never move away from Apple products as everything talks to each other, so price won’t matter. You need to do analysis to know what a defensive stock is. The stock market seems to put companies that have [a reputation for being] defensive on very high multiples. And if they turn out not to be defensive, as we saw with tobacco, then you can lose an awful lot of money."
Simon Edelsten CV
Simon Edelsten is co-manager of Mid Wynd International Investment Trust and Artemis Global Select Fund (GB00B568S201), and has worked at Artemis since 2011. Before this he was part of a team of five with joint responsibility for global equities at Taube Hodson Stonex, which he joined in 2001.
He has also been head of European equity sales at Dresdner Kleinwort Benson which he joined in 1997, and started his career in investment at Phillips & Drew in 1985.
