Best in Class: Guinness Global Innovators

When we look back on 2020, it will be seen as the year when everything changed.

The pandemic has accelerated a number of secular trends such as e-commerce, automation, and the proliferation of artificial intelligence. In fact, technology and healthcare in general will retain a greater focus in all our lives going forwards.

While the direction of the economy is uncertain – change is not

Transportation will also change, as will the way we work – the days of high rise buildings containing banks of lifts and tightly packed workstations are also under pressure.

While the direction of the economy is uncertain – change is not.

With the dynamics of markets and society evolving, finding a way to access innovative and disruptive businesses which are changing the world in which we live almost becomes the golden ticket to future growth – and that is precisely what this week’s Best in Class has been doing for the past six years.

The Guinness Global Innovators fund has been co-managed by Matthew Page and Dr Ian Mortimer since launch October 2014 (although the strategy has been around since 2003).

Having both studied at Oxford University, they joined Guinness Asset Management in 2005 and 2006 respectively. The pair run a number of vehicles for the firm, including the Elite Rated Guinness Global Equity Income fund.

The managers have identified nine core innovation themes through reading and research.

These themes are: advanced healthcare; artificial intelligence and big data; clean energy and sustainability; cloud computing; internet, media and entertainment; mobile technology and the internet of things; next generation consumer; payments and FinTech; robotics and automation.

Companies with a market capitalisation of over $1bn and with exposure to these themes are included in the managers’ universe. Typically, this gives a list of about 1,000 companies which is reviewed annually.

Ian is keen to point out that just because a company is innovative, it does not necessarily make it a good investment. He says: “We’re not trying to fill up certain buckets, so we have one company in each theme; it’s more about finding the best companies.”

The remaining universe is then screened for quality: return on capital should be more than the cost of capital last year, debt to equity should be less than 150 per cent, and positive earnings growth should be expected in the coming year.

This reduces the universe to around 500 stocks. From here, stocks are assessed on four different metrics: quality (looking at the initial screen in more detail in terms of margins, returns on capital and balance sheet strengths), growth (historic sales and profits and forecast growth for the future), valuation (relative to history, the industry and the market) and momentum (one, three and six month price and earnings).

Companies which look interesting on these metrics will be researched in much more detail including full modelling.

The managers will seek to understand the company’s business model and potential risks faced. Only the best companies will make it into the final concentrated portfolio.

Guinness Global Innovators fund is generally long term, with a low turnover and an average holding period of three to five years.

Like all Guinness funds, the portfolio is made up of 30 equally-weighted stocks. The managers trim winners and top up underperformers. There is a strict ‘one in, one out’ policy. The fund is genuinely index agnostic, although the portfolio is regularly monitored for concentration risk.

The fund has generally had a high weighting in technology companies (historically 40 per cent to 50 per cent of the portfolio) and has almost nothing in financials, utilities, materials, energy, real estate or consumer staples.

Performance has been stellar, with the fund returning 128.9 per cent since launch, compared with 80.1 per cent for the IA Global sector. It is up 21.5 per cent year to date, while its average peer is up 5.2 per cent. The fund has an ongoing charges figure of 0.99 per cent.

Armed with two experienced managers, this fund is well positioned to take advantage in a period of significant change in the global economy by tapping into a series of trends and identifying the businesses which will thrive in the future.

Darius McDermott is managing director of FundCalibre