A change in management is always unsettling for investors, perhaps even more so when the manager has been running the same strategy for over 30 years.
Investors in the Axa Framlington UK Select Opportunities Fund (GB00B7MKM114) will soon be putting faith in a new lead manager, Chris St John, who takes over the fund at the end of the year. Nigel Thomas, current lead manager and mentor, retires next year, calling time on a fund management career that started back in 1984.
Mr St John’s recent experience has been carefully designed for this moment. He has run the Axa Framlington UK Mid Cap Fund (GB00B64W4Q70) since 2011, and since March 2016 he's also run a multi-cap UK equity fund at Axa Investment Managers (Axa IM) for investors outside the UK. The latter has given him relevant experience to combine his mid-cap expertise and blend it into multi-cap investing – all for UK Select Opportunities.
His first task is to restore the popularity of the Select Opportunities fund. Recent poor relative performance has seen its assets under management dwindle –from £4.4bn in 2016 to below £2.8bn now.
Performance has been hampered by the Framlington team’s strategy of seeking companies with higher-than-average revenue growth and growing dividends but that are not reliant on debt. There are also some thematic plays, with a focus on technology, artificial intelligence, healthcare and support services. In reality, what this meant was lower exposure than the FTSE All-Share and the Investment Association UK All Companies sector average to large caps and sectors that have been driving returns, such as mining, oil and gas, and banks.
And so, over three and five years the fund has only returned 22 per cent and 32 per cent, versus 37 per cent and 41 per cent for the FTSE All-Share and a sector average of 32 per cent and 42 per cent.
But will a change in management mean a change in strategy? “There will be no change from a stylistic perspective, and no big bang,” he says. “Some of the biases in Select Opportunities exist in my funds and that will remain the case going forward. However, it is natural to assume the fund will change over time. My instinct is to recycle capital from the FTSE 100 and put it into stocks lower down the market cap spectrum. But this will be iterative, take time and be based on opportunity.
“The Mid Cap fund and Select Opportunities are very similar if you look at metrics such as earnings growth of stocks in the portfolios, also from a return on equity perspective and a return on capital employed perspective. And the companies all have stronger balance sheets than the market and that is something we value dearly.”
The mindset that has served investors in the Mid Cap fund well can easily be transferred to a multi-cap portfolio, according to the manager. He says mid-cap investing has often involved analysing companies higher up the market cap spectrum anyhow.
“Many of the large-cap companies I’m meeting now I’ve been meeting for a long time as a mid-cap investor. Why? Because you think globally even as a UK mid-cap investor. If you have an investment in Cranswick (CWK), [a FTSE 250 stock] which makes premium sausages sold in supermarkets, it’s helpful to speak to Tesco (TSCO).
“It’s always been important to look at supply chains and companies at the top of the food chain – which are normally bigger companies – to get an understanding of the opportunities lower down the market cap scale.”
Mr St John thinks the process and style that has flourished in his mid-cap fund may even be better suited to multi-cap investing. Many of the companies liked by the team initially appear lower down the spectrum, he says.
“We like new business structures, companies that did not exist 20 years ago. Stocks such as Rightmove (RMV), Auto Trader (AUTO) and On The Beach Group (OTB). Businesses that can scale up on low levels of capital, are cash generative and do not need to carry debt. These are equity-friendly investments.
“A multi-cap focus is relevant because many of these types of companies appear lower down the market cap scale, and because they have low levels of capital the equity value can expand very rapidly,” he adds.
Mr St John’s remains optimistic over future fund performance. Yet, overseas investors in UK companies are certainly pessimistic over UK equities in general. His conversations with foreign investors while marketing his UK equity multi-cap fund have focused around currency. Many, he says, buy into the fundamental opportunity in UK stocks, but lose all returns as the currency weakens. And so, many have pulled capital out, hampering market returns and leaving valuations at an interesting juncture.
“The valuation story is very interesting,” he says. "It’s true to say the market is out of favour, but the main issue seems to be sterling. It’s difficult to know what would change sentiment dramatically, I suppose perhaps clarity on trading relations with Europe, sterling stability or a belief that the environment is supportive for businesses.
“What will ultimately drive returns is compounding profit growth provided companies have sufficiently strong balance sheets so shareholders benefit as much as debt holders. There are big drivers out there such as technological change, artificial intelligence, the ageing population and globally increasing disposable income. These are themes that sit outside Brexit and there are many UK companies that are benefiting,” he adds.
Chris St John's CV
Chris St John joined Axa Framlington in 2005 as a portfolio manager on its small, mid and multi-cap strategies. He became lead portfolio manager on the Axa Framlington UK Mid Cap Fund in 2011 and will take on the Axa Framlington UK Select Opportunities Fund in December 2018. Prior to this, Mr St John worked as a UK small cap portfolio manager for ISIS, now BMO Global Asset Management. Before this, he qualified as a chartered accountant and valued unlisted companies for PwC. He has a degree in philosophy and psychology from Durham University.
