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Dec 18, 2017

Sustaining momentum

Royal London Asset Management’s Mike Fox talks positive screening, investing both top-down and bottom-up, and why the future’s bright for the pest control industry

You have £106 bn in assets under management, of which £33.1 bn is in equity assets. What percentage of that total is actively managed?

The split would be about one third/two thirds active versus passive. Nearly all of our equities are managed in-house.

What's the geographic split?

Historically we have always been a UK-oriented house given our heritage as a UK life insurer. But over time, as equity markets have become internationalized, we have become more global.

You have a 24-strong equity team. How is it structured?

There are five sub-teams: income, alpha (smaller and mid-cap), global equity team, sustainable team (which I manage) and a passive team.

How much in assets under management does your team have? 

A total of £1.6 bn, split between five funds/trusts, two of which are fixed income.

Do you have a recommended list?

The unique selling proposition from the sustainable team’s point of view is the integration of ESG issues into the investment process. Most fund managers just think about financial issues but we integrate ESG issues as well – we think the two become one. We carry out financial, corporate governance and environmental and social analysis.

We don’t buy a list of acceptable securities from an external provider (such as Eiris). We positively screen rather than negatively screen, so we ask ourselves: does this company make a positive contribution to society? And that’s very different from an ethical approach, which is very much based on negative criteria. Negative screens work better for external research providers; positive screening is a more subjective approach, which is why we do the process internally.

Are any sectors excluded?

Yes, tobacco and armaments, for example, as we don’t believe they positively benefit society. Commodities and mining we also do not currently invest in.

What is RLAM’s investment philosophy?

We are trying to understand big long-term trends that companies can access, so things like healthcare, technology, infrastructure – areas where we think in three, five or 10 years’ time, there is going to be more demand for those companies’ products and services. If we can find companies that have a durable competitive advantage and we can buy them at a reasonable price, we can hold them for the long term.

The process is very growth-oriented. For example, in the portfolio we have themes such as artificial intelligence (AI), agriculture, electric vehicles and cloud computing. That gives you a tangible feel for the areas we’re looking to invest in.

Which screens do you use?

MSCI helps us with ESG analysis at a base level. We also use Credit Suisse’s HOLT. Due diligence after this is carried out internally.

What's your market cap cut-off?

Our smallest-cap company in the sustainable funds is currently £400 mn but there is no hard limit. We could go as low as £100 mn but we tend to find a larger-cap bias in our sustainable investments at the moment.

What is your average turnover?

The Sustainable Leaders Fund, which is equity-only, is 24 percent to 25 percent on a rolling 12-month basis, and that includes purchases plus sales. An average holding period is around four years but some stocks we’ve held for 10 years.

What's your active share ratio?

I’m not sure of the figure but it will be high. For example, in our UK Leaders Fund we don’t hold any mining, commodities, oil & gas, defense or tobacco stocks and these sectors are a large proportion of the index. On the other hand, we have a lot of healthcare and technology exposure. We don’t have an index-oriented approach.

Is your investment process bottom-up or top-down?

Our aim is always to use capital for social good so we are very socially aware. Our investment process is quite top-down in terms of themes we want to invest in but then our due diligence is pretty rigorous from a financial and ESG analysis point of view [and more bottom-up], so it’s a mixture of the two.

What are some of your larger holdings?

We have holdings in Microsoft, Infineon and Amazon – they are very much in the AI/cloud computing grouping. What we like about those businesses is that, fundamentally, they are very innovative – they are developing their own end-markets. Amazon is a world leader in both online retailing and cloud computing and these are both markets we think have considerable growth potential.

Microsoft is very much about cloud computing and AI and the evolution of that market is something we are very interested in. Meanwhile, Infineon plays into the electric vehicles thematic; as cars electrify, there is going to be increasing demand for Infineon’s semiconductor products.

John Deere plays into the agriculture theme, given that the rising demand for protein and food globally is going to put more strain on resources, particularly farming resources. We are very interested in companies whose products and services can help mitigate that, and Deere’s tractors roll out what they call ‘precision agriculture’ – they integrate technology that helps yield and productivity at farms to help meet increasing demand for food.

Visa is obviously a very well-known franchise. We like financial services generally because we think they are fundamentally socially positive. Visa is very much at the core of payment mechanisms, and if you take a developing country and embed a payment structure, that’s a very economically and socially positive move. As transactions become less cash-oriented and increasingly electronic, we think that plays very strongly into Visa’s franchise.

Rentokil: the theme is hygiene and pest control. Urbanization globally and global warming will be good for the pest control industry. It’s a very fragmented industry so there’s the possibility of organic growth and the ability to consolidate. The pest control business in particular is very high quality.

Any recent sales? If so, why?

GlaxoSmithKline – we’ve been reducing our position recently. We like the healthcare thematic and we like R&D activity in pipelines and in the eld of human genomes more particularly. There is a structural trend toward more drugs being developed.

Unfortunately, GlaxoSmithKline has been disappointing in terms of its pharmaceutical pipeline and also it has just hired a chief executive with no scientific background. Typically pharmaceutical companies led by scientists tend to perform better – like AstraZeneca, for example.

Do you prioritize buybacks or dividends?

It depends on the value of the company. Buybacks must be made in the context of the inherent value of the business. If a company is undervalued, buybacks are value-creative so we prefer them. In the US, rolling buyback schemes often lack thought. If you look back 10 years, the price paid for the shares is some way above the current stock price so in that case we’d prefer dividends. Buybacks versus dividends is an important capital-allocation decision.

What is your average position?

Different funds have different risk mandates. Maximum positions are in the 3 percent to 5 percent range. Amazon and Rentokil are 5 percent positions.

Is corporate governance important?

For the sustainable funds, corporate governance is completely hard-wired into our investment process. Every company we look at, we assess from a corporate governance perspective, and companies have to pass a certain level of acceptability.

We also provide a discretionary service to RLAM as a whole so we vote all the shares we have active positions in. Fund managers that own shares are made aware of any relevant corporate governance issues. 

Do you have to meet managemnet before investing?

We have a very strong UK franchise so we are often a top 10 or top 20 holder, which means UK companies usually approach us. Globally, it’s a little different as our asset base is lower so corporate access is more difficult and we have to evolve our investment process. We prefer to meet management but we can operate both models: we’ve never met Amazon or Alphabet, for example – and I don’t expect we ever will!

How do you prefer to meet management?

We definitely prefer to meet companies one on one. Any opportunity to meet management and raise our agenda is good. Group meetings are fine when we are trying to understand companies better and might not be shareholders. It’s often interesting to hear other investors’ questions.

How will Mifid II affect you?

The decision is that research costs will come from our P&L. Mifid II could be a competitive advantage as we do have the profitability to invest in research on our clients’ behalf. Smaller entities might struggle to access research if they have to put it through their P&L.

We have not yet cut back on the number of research providers we use – but this may happen. Clearly pricing has to change. We are still in the process of discovery: it’s a fluid situation and most providers won’t price research by sector or analyst. Some argue that the cost of access to the better analysts will be offset by the broad offering.

Which companies do you find are best at IR?

Severn Trent, the UK water company, consistently organizes events that are differentiated from its peers’. Every year it tries to understand what is most relevant in its business and what is most relevant to investors, and organizes seminars and site visits accordingly.

On the continental European side, Infineon and ASML make themselves very accessible. Our asset base is smaller in Europe and the US than in the UK but some companies in Europe and the US understand the value of meeting shareholders outside their top 20 or top 30 and engage with the next tier of their shareholder base. Agilent in the US made a lot of effort to help us understand its business before we invested in it. It has been very responsive to our inquiries.

Gill Newton is a Partner at Phoenix-IR, an independent investor relations consulting firm 


Royal London Asset Management & Mike Fox

Royal London Asset Management (RLAM) was established in 1988 and is a wholly owned subsidiary of the Royal London Group, which consists of the Royal London Mutual Insurance Society and its subsidiaries. Royal London Group is the UK’s largest mutual life, pensions and investment company. RLAM also manages assets for external clients, notably corporate pension schemes, local authorities, insurance companies, charities, endowments, universities, wealth managers, and so on. As of June 30, 2017, it had assets under management of £106 bn ($139 bn).

Mike Fox is head of equities and senior fund manager of the Sustainable World Trust and Sustainable Leaders Trust; he has fulfilled the latter role since November 2003, during which time he won the Citywire Top 100 UK Growth Fund Manager of the Year Award in 2007. He also has a four-star rating from Morningstar. 

This article first appeared in the Winter 2017 issue of IR Magazine

Gill Newton

Gill Newton

Gill Newton of Phoenix IR
Partner at Phoenix-IR