Staying the course because of COVID-19

COVID-19 has offered us the opportunity to reassess our investment values. It is pleasing that, despite or indeed because of COVID-19, we remain very happy with our investment process.

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  1. Will Dobbs

As a private client Investment Manager and co-manager of the Charles Stanley Equity Fund, I consider looking after clients’ hard-earned investments a huge honour and responsibility. This is especially the case during the recent difficult period, which has included one of the most violent falls in global stock markets we have ever seen. Whilst our portfolios have, inevitably, experienced losses during this troubled time, I am encouraged that some of our central investment tenets have held true, and indeed been reinforced, by this crisis.

Firstly, although I would not wish to pigeon-hole ourselves as investors, we would identify broadly as quality growth investors. This means being willing to pay up, to a degree, for companies that are growing in a controlled, profitable and visible way, and this approach has offered something of a cushion against the worst of the falls seen in the UK stock market in recent weeks.

Of course, we like rapid revenue growth, but not at the expense of actual profits. If a company doesn’t generate profit, it is difficult to value. If it doesn’t generate cash, it is even more difficult to value. ‘Value’ investors are often tempted into investing in ‘cheap’ companies but often find themselves holding heavily indebted, low margin, mature businesses. Broadly, the quality growth label can be attached to companies in sectors whose revenues are much less interrupted in these times: Healthcare, consumer staples and technology. It is companies in these sectors that are most likely to survive, if not thrive, without additional help.

Secondly, the COVID-19 crisis has reinforced that investing in heavily indebted companies comes with greater risks. I have sat in front of countless company management teams since the Global Financial Crisis who have said they have been encouraged by shareholders to take advantage of low interest rates to take on more debt to invest in their companies. A year ago, a CEO sitting on cash could be accused of running an “inefficient balance sheet.” Today, you would be congratulating their prudence whilst companies with more efficient balance sheets are seeing their debt ratings downgraded and equity holders biting their nails. Debt is sometimes a very valuable resource, but only when you generate, or anticipate, sufficiently strong cash flows. We are wary of companies with high levels of debt relative to their profits because even successful companies have bad patches. We would rather sleep easy knowing our investments can survive a downturn than be lured into a quick, debt-fuelled buck. We feel confident our investments meet this principle.

Another key importance for us is risk management: we want to take on risks where we understand them, but we will be more careful about risks we feel are harder for us to control. We currently own 32 holdings which is more concentrated than many of our peer group funds and equates to less than 10% of the potential companies we could own in our FTSE 350 benchmark. But we know our investments very well and we are not trying to over-diversify and become yet another open-ended UK equity fund that is a closet index tracker. Our benchmark is the FTSE 350 but the core of our portfolio is in larger and medium-sized companies which we feel provides some safety and resilience. We are underweight heavy cyclical sectors that we feel are more volatile (Oil & Gas, Financials, Mining) and prefer to be concentrated in more defensive sectors. But we are not averse to buying smaller companies, which tend to have higher growth potential. For instance, Avon Rubber shares are up around 25% in 2020. The company is expanding into the defence sector, having traditionally been a general rubber products manufacturer. With strong earnings growth, net cash on the balance sheet, and perhaps helped by the fact it makes breathing apparatus, the shares have held up well. discoverIE is another smaller company which makes specialised electronic components. It has fallen 10% this year but with a very strong management team and a good track record of acquiring other businesses, we remain confident in its valuation and growth prospects. The diversity of the company’s end markets are attractive, which include renewable energy, ventilation and X-ray scanners amongst others.

The COVID-19 crisis has already accelerated trends which we already knew about and we had already gained exposure to through various investments. There has been a consistent shift by shoppers to make more of their purchases online as opposed to on the high street, hence why we own Segro, which is focused on flexible business space, as opposed to some of the more traditional property trusts. DS Smith, a paper, packaging and recycling company, also benefits from increasing online shopping as well as a move to more sustainable packaging. On the topic of sustainability, Greencoat Wind offers exposure to the renewable energy market and specifically a collection of wind turbines. A sector COVID-19 has immediately benefitted is the technology as more and more people work from home, socialise over the internet and play games. We took the view last year that the FTSE 350 did not have enough quality technology companies in it, and so we decided to boost our exposure with a holding in the Allianz Technology Trust which gives us access to Microsoft, Amazon and Apple (amongst others). 

Finally, it has been interesting seeing how many fund managers have been hastily repositioning their portfolios because of this crisis, often incurring additional trading costs and receiving poor prices. Whilst we are certainly not ruling out further falls, we have been, and remain, broadly happy with our portfolio positioning. We feel the prudent approach is to not panic. Running a UK equity fund means we can hold little cash, so we cannot hide there. Instead, we must ensure the investments are the right ones in the first place, and we are happy with the current portfolio.

Will Dobbs is a private client Investment Manager and co-manager of the Charles Stanley Equity Fund. For the latest factsheet, please see here:

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal. The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to the future.

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