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Nov 28, 2023

Sanjiv Tumkur of Rathbone Investment Management on virtual meetings, thematic evolutions and life post-Investec merger

‘We never let management sit there and just talk through its presentation’

Sanjiv Tumkur joined Rathbone Investment Management in 2016 as head of equity research, becoming head of equities in 2022. He is responsible for developing and promoting Rathbones’ equity investment philosophy and process.

Tumkur joined from Investec Wealth where he was a member of the research team and provided equity analysis and recommendations to the firm’s investment managers. After reading philosophy, politics and economics at Oxford University, he spent nine years at Morgan Grenfell, followed by three years at AllianceBernstein.

Rathbones Group is a leading independent provider of investment and wealth management services for private investors, charities and trustees, including discretionary investment management. In September 2023, Rathbone and Investec Wealth & Investment (IWI) UK combined to create the UK’s leading discretionary wealth manager with $125 bn of funds under management and administration. Within the group, Rathbone Investment Management (discretionary management) is a fundamental investor that combines top-down asset allocation and sector analysis with stock-picking.

Sanjiv Tumkur of Rathbone Investment Management
Sanjiv Tumkur of Rathbone Investment Management

How have things changed since the merger?

Post-completion, we are working to align Rathbones’ and IWI UK’s approaches, looking at both organizations and incorporating the best from each. We are similar businesses, with similar client bases and client objectives, and we are excited about the opportunity to create the UK’s leading discretionary wealth manager.

Does Rathbone Investment Management (discretionary management) share meetings with the unit trust team?

We do share meetings and it is a very co-operative and collegiate environment but the unit trust team has its own investment processes for the specific unit trust strategies.

What is the geographic split of your equity investments? 

There is still a slight bias toward UK holdings but that’s definitely shifted in the last two to three years. When I started seven years ago, we had a lot more ownership of UK equities and a decent list of overseas companies, but we’ve built up that list, improved the quality and breadth of it and had a lot more buy-in to non-UK ideas. And that’s a major driver of the business: increasing exposure to direct overseas equities.

How would you describe your investment style?

We are a broad church, supplying ideas to tens of thousands of clients with differing risk profiles so we’ve got 128 stock recommendations across UK and overseas equities. Some are value, some income, some growth, but quality and competitive advantage are the common threads. Our ideal company is a ‘quality compounder’ with a leading market position, a defensible competitive advantage, high return on invested capital (Roic), high margins, strong cash flow, a sensible balance sheet and appropriately incentivized management.

Which screens do you use? 

Firstly, to help the sell discipline, we have a ‘suspect screen’ and that’s where companies have consecutive months of underperformance and downgrades. We are now developing a positive ‘suspect screen’ for when companies have consecutive months of outperformance and upgrades. We have a number of other screens as well that look at quality factors, earnings momentum and those sort of things.

What is the minimum market cap you will invest in?

For the US and Europe, it’s $1 bn but it is relatively rare that we look at companies below $5 bn unless they have a really interesting niche or growth opportunity.

What is the average time a stock is on the recommended list? 

A lot of the names have been on the list for the seven years I’ve been here. Longer holding periods cut down dealing costs. We focus on quality companies with durable competitive advantage, and these tend to be consistently attractive as long as they do not become overvalued. Our significant increase in direct overseas equities (rather than investing in third-party funds and paying management fees) has very much been toward these quality long-term holdings.

How do you allocate capital per sector?

We have top-down asset allocation guidance and a strategic asset allocation committee. We also have a sector committee that gives guidance on which sectors we should be overweight and underweight.

Are there any sectors you won’t invest in? 

As part of our bespoke proposition, individual clients can ask us to exclude specific sectors from their portfolio if they have particular requirements. We also have a group responsible investment policy covering investments exposed to activities that fail to meet certain minimum climate or responsible investment standards based on applicable UK legislation, international treaties and other initiatives.

Of the nine analysts in the equity research department, are all sectors covered? 

All sectors are covered. Each analyst has two to three industry-level sub-sectors – such as, within financials, coverage includes banks, insurance and diversified financials – and they look at UK, US and European names.

How does a stock make it on to your recommended list? 

Analysts already know any company of a reasonable size in their sector. We then use screens and thematic work to get a stock onto the ideas pipeline. We try to generate new ideas all the time as we like to expand the recommended list, so we have more choice for our investment managers. We look at the fundamentals of a business, whether it is growing in a certain way that makes it interesting. Thematic: does the company play into climate-change mitigation – for example, by having the technology to reduce a building’s carbon footprint or emissions?

Once in the ideas funnel, the analyst does bottom-up due diligence and produces a detailed note that is updated annually. The note covers the investment case, the growth drivers, market position and sustainability of that market position as well as risks to the central view. Financial analysis includes structure of margins, growth drivers, cash flow and so on.

We also like to make sure there’s no accounting shenanigans, ascertain whether the level of debt is appropriate for the type of business, and other issues. Valuation is the last consideration, and we use a common discounted cash flow methodology alongside other metrics.

How are new ideas communicated to investment managers?

We have weekly meetings where new ideas are communicated to our investment managers. Analysts try to generate as much buy-in as possible, based on the strength of our conviction. Analysts maintain a consistent dialogue, updating when there is news flow – results or acquisitions – to remind investment managers why the stock is interesting.

Can you discuss some of the stocks on your recommended list?

Microsoft – There are so many reasons why it’s on our recommended list, such as global leadership with a sustainable competitive advantage. We really like the software products and how they are integrated and the way the firm is now integrating AI into them. We like Azure as it is very high growth because Microsoft is one of a very small number of global leaders in that space.

Cloud software services penetration is still quite nascent so there’s a long runway of growth there. Management strategy is very sensible. Basically, we really like the characteristics of the business, high profit margins and high Roic, and it’s a capital-light business, although it needs to invest in hosting infrastructure. It has high growth (greater than average corporate growth) with a long runway, and the recurring nature of revenues gives great visibility.

We seek companies investing in the future of their business and, a year or two ago, we might have been worried about artificial intelligence (AI) and how that might affect Microsoft, but it was clearly investing a lot in both its own AI and OpenAI (which developed ChatGPT). And this investment has been borne out in spades. This is an example of how it is investing mindfully so its business is as future-proof as it can make it.

We think technology is a massive long-term growth theme and Microsoft is a really good way of playing that. While the valuation has obviously gone up in the last five years, it’s one of those companies that clients can buy and hold for the long term with a reasonable degree of security.

HoneywellThis is a very well-managed US industrial conglomerate with some strong market positions in pretty much all its areas, such as building automation and aerospace. And it is investing well for the future, including to improve its ESG position. Decent margins, good Roic, good cash flow and management is doing the right things.

The issue for Honeywell is that its end-markets are not as defensive as Microsoft’s because it is selling to customers with particular cycles but it is performing well at the moment. It’s a longer-term holding. If you want something in industrials that you can lock away and leave forever, Honeywell is a very strong candidate. But there might be stages in the cycle where it does better or worse whereas Microsoft is more a steady compounder if you look at the earnings profile.

NextEra Energy – A utility at the forefront of transitioning to clean energy, which we think is a durable investment theme, NextEra is investing heavily in alternative energy sources. It does have a conventional power generation business in Florida Power & Light so does have fossil fuel, coal and nuclear exposure, which will be gradually phased out. It’s not a totally green investment but it is transitioning more and more, and it is one of the biggest – if not the biggest – US investors in renewable infrastructure. It has generally done well over time for us, and we think it is well positioned.

Do you like to meet management before you put a stock on the recommended list? 

In an ideal world yes, but sometimes ideas are compelling and you haven’t had the chance to meet management. Compared with five years ago, you can now see management presenting online, get a sense of conviction in what it is saying and whether it is convincing. You can also read transcripts so with the combination of those we generally have enough conviction to put a firm on our recommended list before meeting management – but we’d want to meet it soon afterwards.

What is your preferred method of meeting management? 

Because we are servicing such a large internal investment manager population, one of the things we like to do is give them access to meetings as well so they can hear from the horse’s mouth what the company’s strategy is and what the challenges are. What is ideal is management coming into our offices in London or Glasgow (where we have three analysts) and stream it live on Teams or Zoom, giving managers in other locations the opportunity to ask questions or interact live.

Our equity analysts are very experienced, with an average investment experience of around 16 years each, so we always have an agenda of questions. We never let management sit there and just talk through its presentation as not only is it not stimulating for anyone, but we also don’t learn much. We ask managers questions about what we think really matters to the future of the company, their competitive position, strategy, and so on.

The way we interact with companies has obviously evolved due to Covid, as we spent 18 to 24 months meeting companies virtually. Prior to that, we might have felt that virtual meetings were not as good as face-to-face ones, but we now recognize they have their uses. As we have 15 offices around the country, virtual meetings give everyone, in all the offices, access to management meetings.

Why should companies meet you? 

We are long-term fundamental investors – an ideal investor for companies with a long-term ethos. We’ve got positive inflows over time as we are a growing business. Also, in terms of engagement, we take our fiduciary duty very seriously and co-operatively engage with management on ESG, strategy and remuneration. That makes us ideal investing partners.

Gill Newton

Gill Newton

Gill Newton of Phoenix IR
Partner at Phoenix-IR
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