The history books show that owning a concentrated portfolio of what fund managers call “quality” shares has proven a very successful investment approach.
Looking at data going back to 1999, data group FE Analytics finds that the MSCI World Quality index has delivered a 700% return compared with 415% for the vanilla MSCI World index and 348% for its value equivalent.
This style of investing is centred on picking companies that have established themselves as leaders in their business areas, with high profit margins and years of growth ahead of them, even in difficult economic environments.
Famous practitioners of this approach include Terry Smith and Nick Train – but for investment trust fans, there are a lack of options to own a concentrated portfolio of high-quality global shares.
But a manager change at Mid Wynd International is helping to plug that gap: Lazard Asset Management is now in control of the £400 million global trust and is currently reshaping the portfolio after taking over this month.
Previously run by Artemis, fund manager Simon Edelsten took a “thematic” approach to investing, picking winning stocks from emerging themes, such as automation, online services and a lower carbon world.
The approach was successful, with net asset value total returns of 193% (12.2% a year) compared to 178% (11.5% a year) for the MSCI All Country World index since Artemis took over from Baillie Gifford in May 2014.
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Now, under Lazard Asset Management, it will invest in 40 to 50 companies, with position sizes between 2% and 5%. It will invest along the same lines as the Lazard Global Quality Growth fund, which has limited availability for retail investors in the UK. Lazard has typically served larger investors.
Since inception in February 2011, the Lazard Quality Growth fund has returned 12.85% a year compared with 10.03% for the MSCI All Country World index.
The new strategy is to “invest in compounders” by buying quality companies that generate sustainably high returns on capital and that have the ability to reinvest at similarly high returns to drive future growth. Stocks expected to be among the top 10 holdings include Microsoft, Alphabet, Accenture and Coca-Cola.
I caught up with the new managers Louis Florentin-Lee and Barney Wilson to hear their pitch to investors considering whether to stick with Mid Wynd, or invest for the first time. In particular, I wanted to know how their strategy compares with that of retail favourite Fundsmith Equity.
For investors who like the Fundsmith approach, they said that there were a number of differences in how they manage money.
The first is that their criteria for investing has some differences to Terry Smith’s, with “financial productivity”, which is a measure of how successfully a company can reinvest its own profits, being more important for Lazard than Fundsmith. However, Florentin-Lee and Wilson said that Fundsmith puts more attention on the stability of a firm’s cash flows and therefore favours the consumer staples sector more than they do.
Another big difference, they say, is that Fundsmith is a more concentrated fund, with few holdings (27) and therefore larger position sizes.
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Fundsmith is also far larger, with £23 billion in assets, which means that it is limited to investing in larger companies so that it does not end up controlling too much of a firm’s shares.
“Fundsmith is now very large and concentrated and so can only invest in the very largest shares in the market. We can offer a more all-cap exposure and find smaller businesses that fit our approach,” the managers said.
A smaller company that makes the cut is Toei Animation in Japan, a £4 billion firm that makes and licenses anime content.
Another difference is that Lazard draws on insights from around 70 stock market analysts, while Fundsmith has just a handful of researchers working with Terry Smith.
However, the managers say that it is not either Fundsmith Equity or Mid Wynd. “They can be complementary. Diversify quality exposure rather than replace it,” they said.
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Investment trust analyst Numis said it was impressed by the Lazard fund managers.
It said: “We were impressed by the team in a recent meeting who highlighted a focus on companies with high financial productivity (cash flow return on investment) that can often be sustained for longer than market participants expect.
“They are differentiated from other quality-growth approaches through ensuring the sources of competitive advantage are widely diversified, including brands and technology, as well as other factors such as scale, strong position in niche industries, providing critical low-cost components or regulation.”
Mid Wynd under Lazard won’t use gearing to try and time the market, and the board has a discount control mechanism in place to prevent stubborn discounts or premiums. The trust has cut its fees, to a blended rate of 0.38% a year, down from 0.49%, with no fees charged for the first three months of management.
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