Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The M&G UK Select fund seeks to identify businesses of the future rather than legacies of the past and therefore looks for high quality sustainable growth businesses which will compound economic profit into the future. We run an active and high-conviction stockpicking fund of 30-50 holdings which tend to be businesses with high returns, robust competitive advantages, sustainable growth tailwinds and a disciplined capital allocation, as evidenced by a progressive dividend. We look to take advantage of the market mispricing a company’s future value creation and our bucket approach between cyclical, defensive and future compounders allows a flexibility across the quality spectrum, that can help the fund perform in different market conditions. We take a fully ESG integrated approach to investing with the monitoring of ESG factors conducted pre and post-investment.
The fund has been managed by Rory Alexander since 2019. He has 13 years of investment experience and covered a variety of sectors in his previous role as a research analyst. He is supported by Garfield Kiff as Deputy FM and Kathryn Leonard, who is a dedicated analyst for the UK Select fund. Rory sits within the M&G UK Equities team which is located at M&G’s head office in London. He is supported by extensive resources including investment specialists, fund manager assistants, dealers and risk specialists. M&G’s highly experienced Centralised Research Analysts and the Corporate Finance, Stewardship & ESG team are also of particular benefit to Rory in the running of the M&G UK Select Fund.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
Following the slump in equity markets caused by the Covid-19 pandemic we initiated seven new positions in a matter of a few months. In a normal year we might expect five new investments to enter the portfolio so this period witnessed an elevated level of activity for the fund. We then followed that up with three further investments to the year end. We had been following the likes of Asos, Fevertree, UDG, Games Workshop and Hollywood Bowl for many years, but never found what we considered the right time to buy the shares. We felt that prices seen during the depths of the sell-off last year were perhaps once-in-a-generation opportunities to buy great assets that we believe can fuel the long-term performance of the fund.
For UK Select we believe the long-term dynamics for high quality sustainable growth companies to prosper were perhaps enhanced by the effects of the pandemic. The ‘lower for longer’ interest rate outlook has intensified; the wall of accumulated debt reinforces this low ceiling hanging over the yield curve. Perhaps more importantly the acceleration of digitisation has widened economic moats and driven returns to a smaller group of high quality businesses.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
As a stockpicking strategy it would be remiss not to comment specifically on two of the fund’s new holdings from 2020:
We have been tracking the hydrogen industry for some time and see it as a core contributor in the shift towards a lower carbon society. ITM is the industry leader in PEM electrolysers used to produce hydrogen. Hydrogen as a fuel is rapidly becoming a critical component of our future energy network for power, storage and transportation of energy. If ITM is able to protect its technological leadership, then we believe this could prove to be a very exciting company.
This company is a decent quality compounder and the share price has been decimated as part of the vilified ‘COVID-bucket’. We really like its competitive position and opportunity to expand over the long term. We were confident in its ability to trade through to a post restriction world and we thought the share price massively underappreciated the long-term opportunity and intrinsic value for this company.