The manager focuses on long-term opportunities in what he believes are high-quality companies with a typical market capitalisation of more than $5bn (£3.3bn).
“It is a relatively cautious strategy that at its heart looks for a margin of safety in the valuations it pays for its investments,” says Mr Radcliffe, who uses a screening process to limit his investment universe to around 150 stocks. He distils the market on the basis of several attributes, including “market capitalisation, characteristics that tend to indicate underlying quality such as high and stable cash return on invested capital, and valuation”.
He adds that while there are many more variables that feed into the screening process, such as leverage and accounting quality, the most important is the valuation filter.
Mr Radcliffe whittles down his pool of potential investments by looking closely at quality and cash return on invested capital in particular. By quality, he means companies that operate in industries with high barriers to entry. He continues: “Cash return on invested capital – this is the main metric to see if a firm is adding value for its shareholders. Growth in earnings per share and profit margins are the focus of mainstream research. They are clearly important but can be misleading, as growing earnings by 10 per cent, for example, may have taken 15 per cent asset growth where it might be failing to earn its cost of capital.”
Macroeconomic factors do play a part, “but more to manage risk in the fund”. One example was when he began selling firms two years ago that were “unduly reliant on China’s faltering capex boom” on the basis that “its sustainability was looking increasingly unlikely”.
Investors in the fund will note its ranking at level five on a risk-reward spectrum, with ongoing charges of 1.79 per cent on the income unit share class.
Mr Radcliffe adds: “Portfolio activity has been modest over recent months with few wholesale changes in holdings.” That said, he took profits in Avery Dennison, Bristol-Myers and Kroger in the belief that shares were looking fully valued.
“The fund has underperformed the recent upsurge of the past few years,” the manager admits. “Its focus on not overpaying for its investments means it has not participated in some of the more aggressive areas that have been especially favoured by growth and momentum investors, such as biotech and social media.” In the 10 years to March 4, the fund outperformed the IA North America sector to deliver a top quartile return of 159.12 per cent, beating the sector average of 134.05 per cent. However, performance has since dropped off. According to FE Analytics, it just lags the sector over one and three years. In the 12 months to March 4, it returned 19.89 per cent, a little behind the sector’s 20.73 per cent.
Mr Radcliffe picks out healthcare holdings such as CVS and Medtronic as having made the greatest single contributions to relative performance recently. He says: “The sort of value stocks that the fund tends to invest in suffered in 2014 relative to growth stocks, which outperformed. For example, the fund does not hold fickle consumer electronics stocks such as Apple, which outperformed over the period, having added hundreds of billions more to its market cap on the astounding run of its phone franchise. Generally speaking, aggressive growth areas such as biotech have gone up a great deal, which has been a relative headwind.
“As in the past (2006, for example), we have not been afraid to lock in gains and build up cash when valuations have not given us enough of a margin of safety. While it has been a short-term drag, it has been a valuable tool for longer-term performance to be able to be opportunistic.”
Taking the macro outlook for the US into account, the manager is adopting a cautious stance. Using the fund’s cash position, he plans to take advantage of “disruptions” to pick up quality multinationals at lower values and notes that “anticipated volatility makes it all the more important to focus on valuations”.
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct
With this fund, Sebastian Radcliffe has a record going back to 2001 and I consider it a solid choice in the sector where consistent outperformance tends to be elusive. He adopts a pragmatic approach, neither strictly value nor growth, ultimately aiming to seek out companies with unique business models and barriers to entry. With a yield of around 1.3 per cent, this is definitely a growth and income fund rather than pure income.
