As every month, we bring to you the highlights and analysis of the Sharing Alpha’s report on European advisors and fund selectors preferred funds. On this occasion we wanted to have a look at Selector’s favourite Global Funds of each category. The funds have been voted by the European fund selectors and advisors on the Sharing Alpha platform.
The Sharing Alpha initiative gives us the opportunity to discover which fund managers and funds are preferred by European advisors and fund selectors. Fund selectors are asked to rate funds according to their expectations based on three parameters (3 P’s):
- The experience and competitive advantage of the fund manager and his team (People)
- The cost of the fund (Price)
- The way the strategy is executed in terms of risk management (Portfolio)
From within the Global Funds, the selectors and advisors have chosen four different funds, each of them in a different category.
|Category||Investment Fund Name||Asset Manager|
|Global Equity Large Cap||Investerum Global Value Fund||Danske|
|Global Equity Mid/Small Cap||Baillie Gifford Global Discovery Fund||Baillie Gifford|
|Global Equity||Nutshell Growth Fund||Nutshell|
|Global Fixed Income||Ardesia SCA SICAV-RAIF ISP CLO Opp Fd||ISP|
Source: Sharing alpha report March
Baillie Gifford Global Discovery Fund
Douglas Brodie, Portfolio Manager
We are ambitious growth investors seeking out companies, wherever they may be, that have a chance of growing to multiples of their current size. We ask what a company can become in 5 or 10 years’ time, and what needs to happen for that journey to unfold.
We engage constructively with companies, encouraging long-term thinking and investing for growth, even in the face of the incessant short-termism of the market.
True long-term investing isn’t easy. Resisting external pressures can be tough, so it’s no coincidence that our firm is a multi-generational private partnership. The 47 partners all work within the firm and have unlimited liability, so our clients’ interests are aligned with ours. We don’t measure success or create targets around AUM or profitability, we measure it by the delivery of meaningful, after costs, outperformance for clients.
Significant wealth creation is, and always has been, the preserve of a tiny fraction of companies with blue-sky opportunities and inspired leadership. Not, for us, seeking ‘market coverage’ or fixating on share prices. We look for real-world opportunities as technology and business models evolve. This means we’re not simply active investors. We’re Actual Investors valuing constant learning, patience and fortitude.
Our Worldwide Discovery strategy aims to produce superior long-term returns by investing in a portfolio of smaller, immature companies with significant growth potential. Its investment philosophy seeks innovative, entrepreneurial, problem-solving companies early in their lifecycle. We believe these unique companies can lead to significantly better long-term outcomes and deliver real change, which if they get right will lead to sizable share-price appreciation.
Our style of investment is well suited to, first, identifying interesting businesses early in their development and, subsequently, backing them with a long-term investment horizon and ability to look through short term volatility. The opportunity for superior returns arises because:
- We routinely observe that it is the less mature, more entrepreneurial companies that shape the evolution of an industry. It is striking how little innovation originates directly from large businesses, and how often bigger corporations are bad at dealing with change.
- Smaller companies are therefore interesting not because they are small, but rather because the stage of development of their business can offer significant upside potential with regards to profit growth and, ultimately, share price appreciation.
- Bottom-up research is at its most valuable when assessing immature businesses. The businesses are often simpler and yet it is typically during this early stage that the market’s understanding of a company’s growth potential is at its least developed.
- Inefficiencies and valuation anomalies are more common further down the market cap scale.
Our Worldwide Discovery team has a dual role: managing specialist small-cap funds; and co-ordinating Baillie Gifford’s search for small-cap ideas globally. Historically the team have produced numerous investment ideas which have gone on to feature in Baillie Gifford’s large-cap strategies. Therefore, their insight is additive to Baillie Gifford’s investment capabilities as a whole and is beneficial to the Firm’s broader client base.
Please note the Worldwide Discovery strategy is currently soft closed.
Nutshell Growth Fund
Mark Ellis, CIO
At Nutshell we invest globally in quality, ethically sound companies at reasonable valuations. We are high conviction investors who make meaningful allocations to a concentrated portfolio of upto 35 companies. Our investment process is bottom-up: we deploy a proprietary model-based system to analyse the global investible universe according to more than thirty different financial and non-financial factors that our own academic research has shown to be important.
Then, on a discretionary basis, we focus in on the rare exceptional companies which have a persistent comparative advantage over others in their sector.
Unlike many of our peers we incorporate ESG fundamentally into our investment process, and have done since inception in January 2019. We exclude certain sectors which we feel uncomfortable about such as the tobacco or fossil fuel industries. In addition, we positively reward or punish companies according to their ESG performance, using data collected from independent, third-party providers. Centring ESG considerations at the heart of our process is not just the right thing to do, but research has shown that companies with strong ESG scores can outperform those without. Recently our portfolio was awarded 5 Globes from Morningstar for its ESG credentials having been in the top 2 percent of funds in its sector.
Markets year-to-date have been turbulent, leaving few stocks, indices, or funds unaffected, especially in the global quality/growth space. Despite this, the Nutshell Growth Fund has continued to outperform many of our peers. Our process’s attention to valuation and our rigorous adherence to holding truly high-quality companies – preferring those businesses that have shown resilience in times of market stress, both in terms of share price and earnings – has enabled us to defend capital relatively well compared to many longer-established, household names in the quality/growth space.
From here, as we approach the end of 1Q22, it is certainly too soon to speculate on likely geopolitical outcomes, inflation, or monetary policy normalisation, but what we can say with certainty is that the discount for global quality/growth right now is real and profound. Currently the market is demanding little premium for the superior set of fundamental characteristics represented in our portfolio, exemplified by the fact that the P/E of our portfolio is comparable to that of the S&P500 itself. For the investor looking to allocate in the quality growth space, we believe now could represent a very attractive entry opportunity.
Ardesia SCA SICAV-RAIF ISP CLO Opp Fd
Ron Zeltzer and Simon Gold Portfolio Managers
The global Collateralized Loan Obligations (CLO) market reached $1 trillion in size last year. The attractive risk-adjusted returns and floating rate coupons with an inherent Euribor floor pulled both new and veteran investors to the asset class. However, the investors’ base is still limited to a tight and sophisticated community of investors.
CLOs still suffer from affiliation to CDOs that are considered to have triggered the 2008 financial crisis. The high entry barriers in the form of expensive systems to analyse the product’s cash flows and underlying risk make it even harder for a typical investor to invest directly in the product.
Much has been written on the differences between CDOs and CLOs. Many CDOs had poor collateral and structure. Take a pile of the riskiest assets off a bank’s balance sheet in the form of sub-prime mortgages, add conflict of interest of the originator, mix it with exotic swaps, leverage and loose documentation and the recipe was a disaster.
None of these can be found in CLOs. In fact, CLOs have shown a resilient track record since the early 2000s with mild modifications and adjustments to the structure as part of investors’ evolving needs, such as the inclusion of ESG criteria. The collateral in a CLO is a reflection of the HY universe in the form of senior loans that are rated single-B and double-B. A typical CLO has over 100 loans issued by companies such as Altice, Netflix, Breitling and Dorna Sports.
The CLO finances the collateral purchase by issuing liabilities (rated tranches) and a residual class (equity tranche). Each tranche has a different level of subordination and priority in the cash flow waterfall, offering a different risk-return profile. The coupons in new issue currently range from Euribor + [1.2%] on the AAA to Euribor + [9.6%] on the single-B, as of the time of writing. Euribor is floored at zero. Equity receives the residual cash flow, targeting mid-low teen IRR in base case scenarios. These liabilities and equity tranches are the investment universe of Ardesia’s CLO Opportunity fund.
Ardesia’s seeks to create attractive risk-adjusted returns by investing in different classes of CLOs, optimizing risk and return in the context of market conditions and macroeconomic risk factors. The fund is managed by veteran CLO traders and is currently invested in 50% equity tranches and 50% mezzanine tranches, varying from BBB down to B. Its uniqueness lies in the flexible mandate to invest across the capital of the CLO. The fund managers proved their ability to shift the risk-return profile as the market environment changed. During the early days of COVID the fund turned over its portfolio over 200% as the relative value of the different CLO tranches changed. The fund was awarded by GlobalCapital and SharingAlpha and was shortlisted in CreditFlux, as it delivered over 40% in the past two years.