Launched in June 2011 the aim of the £49m Saracen Global Income & Growth fund is to deliver capital and income growth by investing in a portfolio of global undervalued businesses.
Graham Campbell, chief executive of Saracen fund managers and co-manager of the fund with David Weir, explains: “We expect share prices to reflect long-term cash earnings. We are drawn towards companies which trade on low earnings multiples with scope for long term dividend growth. To identify these companies we try to forecast the profits, balance sheet and cash flow of the company for the next five years.”
The managers take a firmly research based and long-term approach to the portfolio. With Mr Campbell explaining: “We are drawn to businesses that have sustainable revenue growth characteristics, can demonstrate leadership or competitive advantage in their industry and consequently are able to achieve high operating margins and strong cash generation.
“We believe that a five year period is a realistic and analysable time horizon and is frequently in-line with company internal forecasting. We are not concerned with where a business is domiciled or its index or sector weightings. Our focus is on valuation and risk.”
The manager points out that while most analysts use one view of valuation, which is essentially a ‘central case’ of what they think will happen to a company’s earnings, the Saracen team “re-analyse our assumptions aiming to provide a realistic ‘worst case’ and then applying a probability to this event actually occurring”.
Mr Campbell adds: “If a business has a ‘worst case’ that is too unattractive and would likely to lead to a loss in capital if it occurred, or if this scenario had too high a probability, we would not invest in the business, no matter how cheap the ‘central case’. This is also an important tool we use to help us determine the weight of an investment in the portfolio.”
In addition, the team aim to diversify risk by avoiding concentration of income and by limiting investments in sectors with particular style characteristics. For example in sectors that are most alike such as global oil, or healthcare, they allow a lower limit of potential exposure compared to more diverse sectors such as industrials.
Although clear bottom-up stockpickers, Mr Campbell notes the team is aware of the macroeconomic factors that will impact growth, but are focused on long-term trends rather than short-term noise.
“A focus is the identification of businesses that will have exposure to the enormous emerging affluent middle classes in emerging markets. For example we are invested in BMW and Volkswagen both of which have very large manufacturing operations in China,” says Mr Campbell.
It sits at a level of six out of seven on a risk reward level while ongoing charges are 1.03 per cent according to its Key Investor Information Document.
The fund is top quartile in the Investment Association Global Equity Income sector for the three years to April 15 2015. Its three year return of 61.53 per cent significantly outperforms both the IA Global Equity Income sector average of 48.96 per cent and the FTSE All Share increase of 44.96 per cent, according to data from FE Analytics.
In terms of portfolio changes Mr Campbell notes the most significant change has been the reduction in consumer staples and increase in high quality industrial cyclical businesses.
He explains: “This has been driven by valuation and reflects our view that consumer businesses are typically very expensive compared to our expected future earnings growth. In contrast, we are more comfortable that global economic growth is slowly recovering and many industrial businesses, after many years of cost-cutting will benefit from operational gearing into the upturn. We have been investing in many businesses that will benefit from a pick-up in economic growth such as MTN, SKF, and Wartsila. Many businesses are also benefiting from increased competitiveness due to a weak euro.”
Performance in the past 12 months has slipped slightly with the fund’s 16.65 per cent return lagging the sector average of 17.14 per cent, with Mr Campbell noting 2014 had been a tough year compared to peers “due mainly to our relatively low weightings in US companies, where we could not find value.
Looking ahead, however, Mr Campbell remains optimistic, noting that equity markets remain a relatively attractive asset class.
But he adds: “The impact of quantitative easing remains hard to quantify. However there is a clear determination by central banks to stimulate economic growth. Share prices have nevertheless moved significantly in recent years as confidence and liquidity has returned. Many businesses have reduced operating costs in recent years and will benefit from operating gearing as growth picks up. We continue to find many attractive investment opportunities.”
EXPERT VIEW
Juliet Schooling Latter, research director, Chelsea Financial Services
VERDICT
This fund is the minnow of the bunch with just over £50m under management. The yield is mid-field at 3 per cent and it has a bit more of a geographical spread than the other two funds at the moment, albeit with a higher weighting to the US, which is more in line with the global index. Performance is slightly less volatile, which has lead to good consistency over time. David Keir became co-manager on the fund last year, but he has worked with Graham Campbell at both Swip and Edinburgh Fund Managers previously, so the managers know each other well. It’s a less well-known fund, but one very worthy of consideration.
