Equity IncomeMay 22 2017

Interview: Investec's Hutchins on keeping to his philosophy

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Interview: Investec's Hutchins on keeping to his philosophy
Blake Hutchins

While he now manages the Investec UK Equity Income fund and co-manages the Global Quality Equity Income portfolio within the firm’s quality investment team, Mr Hutchins recalls: “Growing up I probably wanted to be a professional tennis player. I’m from a crazy tennis family: my dad was a professional tennis player, and me and my siblings all played to a good level. My brother did become a professional tennis player, and I spent all my time outside of school playing tennis. 

“Up until I was about 16-17, I was dual running academia with aspirations for something bigger in the tennis world. After it became increasingly clear that my tennis was good but not at the level it needed to be, I started to think about other [career] paths.”

An ongoing interest in businesses led him towards equity investment as a career path. Work placements at companies such as Thurleigh Investment Managers followed, before landing a place on the graduate scheme at Aviva Investors. 

“In this [industry] you always need a bit of luck, and on the graduate day I met up with David Lis, who ran the UK equity team. I happened to sit next to him at lunch and it was a perfect match: I only ever wanted to work in equities and David ran the UK equity team. We hit it off and I developed from there,” he says. 

Mr Hutchins’ first rotation was in the UK equity team, and having focused on doing the “best job I could for those three months” he stayed put, leading to “a lot more responsibility [earlier] than a lot of graduates got”. 

 It is so important that we stay true to our investment philosophy because ultimately that’s what our clients want

After four years at Aviva Investors he moved to Threadneedle, which was “looking for someone with analytical responsibilities to step up and be a junior fund manager as well”. In the following three years he ran institutional money alongside Simon Brazier, and managed a UK retail Oeic, the UK Overseas Earnings fund. But in 2014 Mr Hutchins decided to move to Investec. 

“I’d always admired [Investec] from afar, because they’re quite distinctive in their investment approach,” the manager says. 

“I liked the idea of joining a company that is brave enough to let fund managers be very explicit about the way they want to manage money. At Investec we manage the capabilities by investment philosophy and your distinctive style, so you have Alastair [Mundy] running the value team and Simon [Brazier] and Clyde [Rossouw] leading the quality team.” 

Having always had a tendency towards being a quality investor with a big emphasis on cashflow, Investec appealed because its culture “would allow me to explicitly follow the investment approach that I believe”, he says. 

While he was considered an “up-and-comer” at Threadneedle and likely to take on a big fund, he explains: “It was either wait for that or build something for myself, for ourselves. That’s what we’re trying to do. The quality team is still reasonably young, and the fund that’s been in existence for the longest is only 10 years [old].”

One of the highlights of Mr Hutchins’ career so far has therefore been the launch of the UK Equity Income fund in 2015. “Investec was one of the few large equity managers not to have a UK equity income fund when I joined. Being entrusted, supported and ultimately backed to manage that fund from scratch was a real draw,” he says.

More recently his role has expanded to include global equity income, joining Mr Rossouw and Abrie Pretorius on the Global Quality Equity Income fund in 2015. “I’ve always been very interested in global equity income as it’s a natural transition and I think there are multiple years of growth ahead in [the space],” he says. 

But he doesn’t have a “favourite” portfolio. Instead he highlights the differences between the two, with the global team taking a very “purist” approach to a portfolio of 30 to 40 of the best businesses that meet its characteristics. 

“We have a little bit more flexibility on the UK [fund]. We invest in around 40 to 45 companies and roughly two-thirds of that are based on pure quality. But we also have a proportion of the fund that is looking for change situations,” he says. 

“The UK has that extra element where we’re looking for these slightly contrarian change ideas, albeit through companies that are ultimately good quality – so the variety the UK brings is quite exciting.” 

While he clearly enjoys his wider role, Mr Hutchins acknowledges being an equity income investor includes responding to market challenges, such as the global financial crisis. “Just being a sponge and soaking up those times was very important and it has held me in good stead. Those days in the credit crisis, when you literally didn’t know if companies were going to survive, were very instrumental and very challenging,” he recalls.

He highlights the markets in 2016 as a different kind of challenge. His fund was among the top-performing vehicles following the EU referendum “through no skill of my own”, he says, adding: “We invest in solid and dependable businesses that come to the fore in very difficult markets.” 

But three months later the companies that had been in vogue were being sold off seemingly, regardless of fundamentals and underlying performance. “Those are the challenges I quite enjoy. The psychological test that gives you and the reaction to this volatility is really important. You learn things about your colleagues, about other investors and about yourself in these markets.” 

With such tricky market conditions it can be tempting for investors to change their philosophies, but Mr Hutchins points out the team looks for companies that can grow, that make sustainable high returns on capital, and which are very cash generative – three things that “won’t change”. 

“People shouldn’t expect us to invest in capital-hungry cyclical sectors that don’t have that ability to compound cashflow and therefore dividend distribution,” he says. “[But] there’s no point being the best business in the world that generates cash and can grow, if you’re paying a price that’s implicitly too high and it can’t live up to the growth embedded in the share price.

“That’s one of the things I like about income investing. By trying to maintain and attract a dividend yield, you’re implicitly buying companies on higher free cashflow yields and recycling out of companies with low free cashflow yields.”

But he admits “it takes some bravery to do that” as not every investment house can run money this way. “There is that obvious tendency of fund managers to chase performance and therefore deviate from their investment philosophy, and suddenly buy banks or oil companies or miners because they can perform and hurt your relative performance over a short period of time. It is so important that we stay true to our investment philosophy because ultimately that’s what our clients want,” he explains. 

“If we can be clear to our clients and explain why we’ve underperformed and performed in the way that we have, that’s what makes those long-term relationships much better.”

Looking ahead Mr Hutchins seems content with his current portfolios, noting that for him “building the quality income franchise within the quality team at Investec is all I want to do for the long term”. 

With UK and global already under his belt, is it time to focus on a different region? The manager appears reluctant, however, suggesting it is “not for me, but within the team; never say never”. 

He continues: “We could in time think about having a quality Asian fund if it so works, and maybe in time get some more regional income products, and I’m more than happy to consult on that and give guidance with my experience. But running UK and global is all I need and it keeps me busy enough.”