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Five things: Constructivist funds

Five things: Constructivist funds

As fund managers continue their search for value in a low yield market environment, some are starting to take a new route to encouraging yield. In “constructivist” funds, managers have begun a more hands-on approach.

It is one thing to monitor the companies in a portfolio, it another to get involved with senior management and make suggestions to improve operations – and therefore, returns. Greater activism in fund management is not only good for investors, but for the underlying companies.

David Coombs, manager of the Rathbone Multi-Asset Portfolios, is one manager who has begun to take on this activist approach. Mr Coombs said after he recently invested in Cramer Rosenthal McGlynn, his first constructivist fund, “We have evolved our thoughts on value investing from stocks on a mere valuation discount to the main index, to a consideration of the discount of the market price to a much more forward-looking intrinsic value. These are companies that can grow their top and bottom lines in a rising rate environment, and the market tends to reward those companies that can do so with low levels of debt and a sustainable dividend policy.”

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So what exactly is meant by a “constructivist” approach? Here are five things you need to know…

1. What is a constructivist fund?

A constructivist fund is one in which managers have greater interaction with the companies they invest in, but in a sense of activism as opposed to asset-stripping.

For example, when the managers behind the Cramer fund call themselves “constructivists”, they mean that they engage in dialogue with their companies to suggest opportunities to enhance intrinsic value. The team seek to improve the returns and growth prospects in the funds they invest in through catalysts such as management changes, asset disposals, and M&A activity.

2. Are there any sector restrictions?

No, managers can invest in any company or sector where they feel that the company should take on a different strategy to improve their intrinsic value. The focus is enhancing a company’s profitability, making it less vulnerable to opportunistic predators.

3. Should shareholders be concerned?

Managers interested in a constructivist approach are looking to step in only to improve a company’s prospects for future growth. If all goes according to plan, the managers give constructive advice, the company’s board takes on the suggestions, the advice proves to be worthwhile and results in an increase in profits, and then all who have a stake in the company benefit.

4. But doesn’t this sounds like a form of private equity activity?

Managers are buying shares in the company, not the company itself. While managers do make suggestions and interact with the company more so than they traditionally would, they do not take over full ownership. It is better to think of constructivism as a new phase of activism in investments – greater involvement and better understanding of what is happening in the companies in a fund’s portfolio.