On this occasion numbers speak louder than words, with the FTSE 250 producing double the returns of the more internationally-focused FTSE 100 in the past five years (50.2 per cent vs 26.3 per cent). The FTSE 250 has also markedly outperformed since the market bottomed in March 2020 (87.5 per cent vs 44.2 per cent).
The re-opening trade has been a particularly interesting time for UK mid-caps. The FTSE 250 has a number of companies that have faced significant challenges due to Covid-19 – the likes of airlines, travel companies, restaurants and pub chains. Some sectors have already bounced after the vaccine announcement, but others could still make big gains as the economy recalibrates.
Consolidation is inevitable, but this means there will be big winners in all those sectors too, highlighting the importance of an active manager.
This week’s Best in Class is an ideal starting to point for those wanting to back the UK mid-cap story.
AXA Framlington UK Mid Cap manager Chris St John says the attractions of the UK as a place to invest are manifesting themselves most visibly “through the ongoing flow of merger and acquisition activity in the UK-listed space” – something he feels will continue given the additional liquidity in markets at the moment.
St John joined AXA Investment Management in 2005 as a fund manager on the UK small-cap desk. In 2008 he was appointed to run the UK Smaller Companies fund before he took charge of the Mid Cap fund from its inception in 2011.
The team specifically targets high-quality companies (both financially and in terms of their management teams) that can show sustained profitability and that exhibit future growth potential.
The investment process begins with a market overview looking at key themes that should drive growth going forward, such as increasing life expectancy, digital transformation and a low-carbon economy.
The second stage is individual company analysis. St John will look at factors such as the management’s track record in delivering earnings and its funding strategy.
He will also look for positive signs, such as a company experiencing organic growth, exhibiting good pricing power and having high barriers to entry. He will also look at quantitative factors like earnings yield and growth and dividend growth potential to demonstrate how efficient the company is at operating its business.
The next stage is to meet company management. This is a very important part of the process. It allows the team to test its analysis and interpretation against the people who are set to implement it.
Having established the investment case for a company, the team then moves on to valuations. This will include looking at a variety of metrics for comparison purposes. The aim being to find growth, without having to overpay for it.
While benchmarked against the FTSE 250 (ex Investment Trusts), the fund can run into the larger cap FTSE 100 (up to 15 per cent), as well as own some names in the AIM and FTSE Small Cap markets.
The portfolio currently has around 70 holdings, the largest of which is British media company Future plc (3.4 per cent). Grafton Group and Electrocomponents (2.7 per cent and 2.4 per cent respectively) round off the top three. The fund has an ongoing charge of 0.84 per cent.
Returning 65.9 per cent to investors in the past five years, the manager and wider team have proven their ability as outstanding stock-pickers.
We like the robust process and the fact that the manager uses thematic long-term ideas to help construct a portfolio of dynamic growth companies that should benefit from these trends. Add in the flexibility and pragmatism of the approach and we feel the future bodes well for investors.
Darius McDermott is managing director at FundCalibre
