VT Garraway UK Equity Market Fund - An Update from Tim Hall

The VT Garraway UK Equity Market Fund is managed by Malcolm Schembri, who began working with the incumbent team at the end of March 2021, officially taking over as lead manager on 1 May 2021.

As co-manager of the Fund, I am well aware of Malcolm’s qualities, having worked with him on his successful Global product since 2017.

Malcolm brings his significant skills and distinct process to running our UK equity product, and both are having a significant impact on the Fund. Since the lows of March 2020, the Fund has recovered much of the first quarter 2021 losses, up 40.65% against an index move of 31.44%.

Portfolio impact

As pre Malcolm’s taking over the helm, the Fund is multi cap, including small cap/AIM, distributes all income quarterly, with a conviction list of some 30-35 stocks. But as with his broader philosophy, there is now a greater focus on a company’s free cash flow, and the ability to generate superior returns on investment under the helm of strong management.

In Malcolm’s pursuit of ‘quality’ it is unlikely that the Fund will have exposure to energy, raw material or banking stocks, with their history of destroying capital, and exposure to significant cyclical pressures. Reflecting high stock conviction, turnover is low.

With a move away from holding too many cyclical companies, a number of new stocks have populated the portfolio, including Treatt, Tristel, Genus, Fevertree Drinks and RWS Holdings at the smaller end of the market, with Diageo, Smith and Nephew, Experian and London Stock Exchange Group at the larger end. Of the original portfolio, some twelve long-term, high-conviction holdings have been retained such as Ashtead Group, Barratt Developments, JD Sports Fashion, Segro and AstraZeneca.

His top 10 positions reflect his process emphasis, and breadth of company size and industry (see the latest monthly fact sheet).

Characteristics of the stock list include strong cash generation, growing margins, management with a positive reputation for effective investment, distinct product and/or market share, and a good dose of ‘self- help’, to help steer them through various cycles. There is less focus on share price momentum, although price matters, and a greater focus on genuine earnings growth, and repeatable returns. The quality of the portfolio has shone through over the last year through the quarterly earnings reports, with the majority of companies beating expectations, earnings highly resilient to the Covid impact, or in many cases, beneficiaries of the structural changes given added momentum during the pandemic. (See the Investment Process document).

Some examples that bring his style to life would be the London Stock Exchange Group (LSEG) and Treatt.

LSEG is a leading global financial markets infrastructure and data company. The group is vertically integrated from pre trading data and analytics over trading venues down to post trade clearing and reporting. Its assets are strategically linked, so that the intellectual property generated within the group’s ecosystem strengthens the offering of the overall group.

LSEG’s management team have a knack for identifying trends early and creating shareholder value by strategic acquisitions. The latest acquisition Refinitiv has significantly increased the Group’s overall capabilities in market data and analytics. Its data solution business for traders, banks and funds and the leading Foreign exchange benchmark WM/ Refinitiv all have strong competitive advantages.

The major coup did not come without its issues. LSEG disclosed that the company will have to incur a £ billion in capex, integration and operating costs. This led the share price to fall by about 25%. Following careful analysis, we felt that the investment thesis was not broken and the drop in share price offered a rare opportunity to buy a great business operated by a highly competent shareholder friendly management team at a very fair price. We responded by essentially doubling down on the position.

Relatively minnow Treatt is not a household name. Yet the ingredients manufacturer and solutions provider to the global flavour, fragrance and consumer goods markets has been established since 1886. This long-established company has built longstanding relationships with its consumers, no doubt cemented by the collaborative and customer focused culture ingrained by the firm’s CEO Daemmon Reeve who took over in 2012.

Focusing on the increasing consumer demands for more natural, clean label products, Treatt is winning significant new business. Its “healthier living” categories of tea, health & wellness and fruit & vegetables grew 57.1%. These products tend to be highly profitable and this has led to gross margin expansion of 880 bps. Top line growth of 13.5% lead to operating profits to grow by 73.9%. With the wind firmly in its sails, the company has once again upgraded year end forecasts.

Going forward

While Fund returns over November 2020 and February 2021 have lagged, with significant market rotation into value, over the longer term, Malcolm’s results remain very positive, and importantly, the Fund offers protection in weaker markets, significantly evident over March/April 2020.

Sector rotation towards value rarely lasts more than a couple of quarters, but exceptional times can see this extended, as with the Dotcom Bubble, and now the pandemic. Malcolm’s performance, with his focus on quality companies, is all the more encouraging in this environment. But it also highlights a timely opportunity to invest in a portfolio of undervalued high-quality names, justified by the strength of their results, and resilience in an uncertain environment. Malcolm has carved out a strong positioning for his Global Fund; he is bringing that focus on buying companies with repeatable returns to the VT Garraway UK Equity Market Fund.

Tim Hall