Fundamentally focused, long-term and with substantial assets, there are plenty of reasons for corporates to add Standard Life Investments (SLI) to their list of target funds. SLI is the investment arm of UK insurer Standard Life, which was founded in Edinburgh in 1825. Today it manages $400 bn in assets from a global network of offices, including one in Boston.
Gill Newton recently sat down with SLI’s head of global equities Mikhail Zverev. He joined the firm in 2007, has run its Global Equity Unconstrained Fund since 2010 and, in 2012, was appointed head of global equities. He started his career in 1998 with Trigon Capital, an Eastern European investment banking firm.
What percentage of assets under management are in equities?
We have more than $120 bn in equities, including $11 bn in dedicated global equity funds run from Edinburgh and $20 bn in dedicated US equity funds run from Boston.
What’s the relationship between the equity teams based in Boston and Edinburgh?
From a US corporate’s perspective, US and global equities combined total just over $30 bn and we also have a couple of billion in wealth management assets and a large pool of assets run by our multi-asset team, which invests in equity from time to time. The two teams work extremely closely together: we see companies together, conduct our research together and debate our ideas together.
For example, two of the global equity fund managers are based in Boston, to be closer to our US equities team. We cover more than 2,000 stocks worldwide, which we formally review at least every three months. And we monitor those stocks daily from a news flow point of view. The global equity team participates in all these research discussions.
How many fund managers and analysts are based in Edinburgh and Boston, respectively?
There are six global equity portfolio managers – four in Edinburgh and two in Boston – as well as 12 US analysts/portfolio managers. The US analysts are split according to sector while in Edinburgh we are all generalists. Most members of our US equity team have a dual role: they are both sector analysts and portfolio managers. We try to combine analytical coverage of a stock with portfolio decision-making.
Does the Boston office USUALLY recommend US stocks?
The global equity team normally buys the buy-rated US ideas. We can have a different view but it would be rare for us to buy a stock if our Boston office didn’t like it.
Does Standard Life Wealth, the private client division of SLI, have autonomy from SLI?
It is completely connected to our equity research so it takes our recommendations but it has a mind of its own in terms of whether the investment characteristics of a particular stock match its client requirement – so it doesn’t just buy what we tell it to. It sometimes joins our meetings or hosts its own meetings in London.
What size are the 5,000 companies in your investable universe?
Companies need to have a market cap of more than $1 bn and more than $3 mn in daily trade. But there is a global smaller companies team also based in Edinburgh that focuses on companies in the $1 bn-$3 bn market cap and smaller range, and we work alongside that team, too.
What do you mean when you say you look for ‘positive fundamental change’?
As fundamental investors, we believe the market is less efficient at pricing when there is fundamental change because the market might be slow to understand it and price it in.
Change could be of an internal nature: new product lines, new markets (geographic or adjacent) or restructuring. Or it could be externally focused: regulatory, technological or competitive changes that put the business at an advantage.
Does SLI have an investment style?
No. We focus on change, which, in certain circumstances, might look like value or growth but we find opportunities across different styles. We look for unrecognized change.
What screens do you use?
Our only real screen is meeting lots of companies and digging deep into the trends of those businesses in the hope that some might result in material change. We believe that sometimes it is just as valuable for a company to meet a highly informed provider of capital waiting for the right moment to get involved as it is to meet only companies we are invested in. In other words, companies should meet non-holders as well as holders.
Which benchmarks do you use?
Our unconstrained funds are benchmark-agnostic. If we do use an index, it’s the MSCI ACWI.
What’s your active share ratio?
Even for our benchmark indexed core funds it’s high: 90 percent or more; it’s mid-90 percent in unconstrained portfolios. We are very committed to being active – but not activist – investors.
Do you have a target price in mind when you buy a stock?
We tend to look at the materiality of upside but we are not beholden to the price target. We compare the upside on a two-year time horizon if we are right about the change. We are not completely driven by price targets, however, as the share price of an airline may rise or fall due to a fall or rise in the oil price, for example.
What’s your average length of holding?
For the global funds, it’s two years and slightly longer for the US funds. We have the patience to wait for our case to play out. Some stocks we have held for four or five years.
|
What are your sell triggers? There are three reasons we would sell: 1. The case has played out therefore we no longer have a non-consensus view: we no longer know or think what the market doesn’t know or think. It’s not a reflection of the quality of the business or the valuation of the business; it’s just that now everybody else can see what we originally saw. 2. We were wrong about the possibility of a fundamental shift and there has been no positive fundamental change. 3. Sometimes there’s a top-down structural threat and this could be a macro or regulatory issue. For example, we sold Cognizant a few years ago when immigration reforms threatened the whole business model for the outsourcing industry. We are now holders again. |
What’s the typical size of your positions?
It depends on the portfolio. If we have high conviction, it’s 2.5 percent of the fund. In our unconstrained fund we have only 50 stocks; we have 75-100 stocks in our core portfolios. If we really like a US idea and we hold it in the global and US funds, a position could be around $500 mn.
Any sectors you won’t invest in?
No, but we do have some money that has SRI overlays. In addition, we subscribe to the UN Principles for Responsible Investment with regard to cluster munitions.
Any sectors/themes you do favor?
Healthcare is 10 percent of US equities as that’s an area prone to change. We have 8.8 percent of US equities in technology as that’s another area prone to change. Consumer discretionary is a strange sector as it includes retail, media and automotive but there are lots of opportunities there, too; same goes for consumer staples. Regulated utilities are unlikely to be prone to much change.
Can you describe some of your high-conviction positions?
CVS Health, $485 mn (combined global equity and US equity holding): This is a high-conviction position for both our US and global side. We really believe in the effectiveness of CVS’ integrated model, which combines the benefit of having its own retail network with pretty sophisticated packaging of its pharmacy benefit manager for clients.
CVS leads the sector in being innovative and aggressive in cost control and getting the best for its clients/members, and it is expanding its capabilities. There is interesting change going on in the business and the sector overall where bigger, stronger intermediaries are optimizing healthcare plans for better cost control for their customers. CVS is flexing its scale and getting a better deal out of healthcare providers.
Advanced Auto, $299 mn (combined global equity and US equity holding): We like how Advanced Auto is moving away from do-it-yourself to do-it-for-me so margins are set to increase. Also, recent M&A activity will be accretive.
Electronic Arts (EA), $434 mn (combined global equity and US equity holding): There are two changes here that we like. First, the evolution of the computer games industry to digital distribution: more downloads, more follow-on content. To us this adds up to a superior margin profile as EA no longer relies on physical distribution.
Second, it provides more recurring revenues, which improves both predictability and visibility so there’s already a rerating. We also like the cost-control focus.
Do you have to meet management before you buy a stock?
No, though it is our strong preference. We are not likely to have a high-conviction position if we have not met the management team. We like to have an ongoing, regular dialogue.
Where do you prefer to meet with management teams: your offices, their headquarters, investor conferences, group meetings?
A combination of all of the above but the best-case scenario is in our offices where the global and US teams can participate. That way a US company can speak to several pools of capital at the same time and we have a conversation that is led by the person who knows the company best.
Have recent legislative changes in the UK, such as institutions no longer being allowed to pay for corporate access from client commissions, affected how SLI meets companies?
Given how important meeting companies is to our research process, we now engage more with alternative sources.
How many investment banks do you deal with for corporate access?
Our investment banking relationships are driven by research. It is at the discretion of the sector analyst as he/she is best placed to judge that research on a specific sector. We look for authoritative and value-added research.
Why should corporates target SLI?
We are fundamental, fairly long-term investors and really care what is happening in a company’s business. We will bring to the table decision-makers who run more than $30 bn.
We will come to meetings fully prepared, having read conference call transcripts, presentation packs and results coverage beforehand, and focus on the sorts of things that affect the company’s business and that matter to it. Our analysts tend to be experienced people who have covered the stock for a long time. We won’t waste companies’ time talking about the quarter or China macro – we’re looking to back positive change.
Gill Newton is a partner at Phoenix-IR, an investor relations consultancy
This article appeared in the Winter 2015 issue of IR Magazine
