Video ID:
10126
Job Number:
7550
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Description:
Smith & Williamson North American Trust with Robert Royle, Co-fund manager & Tana Focke, Co-fund manager.
Bookmarks:
0|Smith & Williamson North American Trust
24|A major review
120|Flexibility
175|Portfolio construction
205|Portfolio shape
237|Stock selection
284|Working together
419|Succesion management
448|Confidence
487|Attributes
623|Aims & objectives
641|Risk
740|Invester profile
788|Pivital points
Duration:
00:16:53
Recorded Date:
5 September 2013
Video Image: 
Transcript:
PRESENTER: To talk about the Smith & Williamson North American Trust we are joined by the current co-fund managers Tana Focke and Robert Royle. Let me begin with you first of all Tana I understand you have carried out a major extensive review of the Fund. I thought that that was something that a fund manager did all the time, why did you feel the need to have an extensive review?
TANA FOCKE: Well we have been running the Fund together for four years and I have run the Fund for 16 years and really the process hasn’t changed all that fundamentally. It is just that we decided that in particular there were too many filler stocks in the portfolio, which was actually dragging down performance instead of giving a solid base. So we decided to take away the 1.5% active, which was actually holding us back, and then we decided to take away the one billion in market cap so that we could actually buy something that was slightly below £900m, £800m, £750m, and so took away those two restrictions. And then we looked at our best picks that we had over the last few years, and if we had those rather than some of the fillers we would have done much better, and the ETFs is another reason why we had this fundamental review. Because time has moved on, I mean when we started and when I started running the Fund there were certainly no ETFs, and people were putting money into ETFs instead of a core fund which was very steady. We need to do a bit more. We need to be a bit-
PRESENTER: A bit more active.
TANA FOCKE: A bit more active, a bit more positive, a bit more concentrated.
PRESENTER: And this review has given you a bit more flexibility would you say?
ROB ROYLE: Yes, so as Tana mentioned the removal of the 1.5% active rate, which essentially means that say if Exxon was 3% of the index we had to hold 1.5% on Exxon at all times. Now that has gone we do not have to hold Exxon at all, and it has been stocks like that that sort of held us back over the years, having to hold things we have sort of relatively low conviction in, and it is now allowed us to have larger positions in other stocks. So Boeing for example, Boeing’s around 1% of the index, but we now are able to have more than 2.5% of the Fund in Boeing, and we have actually got almost 3% in Boeing now. So it has enabled us to have high conviction ideas, which we think will help us outperform over the long term. As Tana mentioned, some of our highest conviction stocks over the past few years have been fantastic performers, but the performance has been held back by the stocks we’ve been forced to hold because of the 1.5% active weight policy.
PRESENTER: So you have reduced the number of stocks, what is the current portfolio construction then?
TANA FOCKE: Well we are in the process of reducing the stocks, but we are not doing it very quickly, we are not doing it overnight. So we have gone down from 90 stocks and I think we are at about 60 now Rob?
ROB ROYLE: Yeah, just below 60 and the aim obviously is to get that 40 to 50 level, so I would say we were just over halfway there. And so far it is going quite well, but it is going to be a sort of slower transition as we want to sell the stocks as and when as opposed to making sort of any kind of enforced changes immediately.
PRESENTER: So how would you describe to somebody who may not have come across you before the shape of the portfolio?
ROB ROYLE: So the portfolio is really going to be made up of good quality businesses that we aim to hold for the long term, so our view is going to remain on a three-to-five-year view, which we believe we can get rid of a lot of the short-term noise in stocks and invest around the long term. So for example I mentioned Boeing, when they had their battery issues it meant we were able to add more to Boeing when the stock was underperforming, because we just believed that would be a short-term issue, and since then it has been a fantastic performer.
PRESENTER: The process by which you select your stocks, the screening that you do has become more refined, more rigorous?
TANA FOCKE: I think it has become more rigorous, and I think part of that is that we have added another person to the team. We have Joseph Bond, who was a graduate with us, and he came for two weeks as the graduates do when they go round the firm, and both Rob and I decided that he was a real star and that we wanted to have him on the team and we have been allowed to keep him and he does a lot of original research for us, because we did not have actually the time to be able to do that. So now we have somebody that we can rely on to do quite a lot of in-depth research, which we did not do so much before, and I still do not do. I mean Rob does original research, but I tend not to.
PRESENTER: Now you are both co-managers on the portfolio, how does it actually work?
TANA FOCKE: Well, that again has been a process that we have worked on over the last year, because a year ago we divided the process down the middle, and then we decided that actually we missed each other’s input, because we both come at things from different ways and we like to work together. So Rob has expertise in technology, which I do not have and I would not second-guess him on that, and I do healthcare, which Joe quite likes, but Rob does not particularly like, and so that is two very definite. But over the rest of the sectors we tend to sort of thrash it out between us, and it really depends who knows the company best, who has seen them last, what you can bring to the table, and then we sort of thrash it out between us and decide.
ROB ROYLE: As Tana said, and if I can circle back to that screening question as well, we have got a new quantitative screen in place, which allows us to refine down our universe of stocks. I mean our universe of stocks is roughly 2,600, and so trying to refine that down to sort of 40 to 50 names is quite difficult, as you can imagine. So we have got Mike Pascall, who works on the European Fund, and all he does is quant all day. So he has built us a screen to our requirements, and it is great, it is a really great resource. As well as that we have got some of our own screens basically looking for mismatches between return on capital and valuation. And then sort of circling back to the sector allocation, it is really very much split down the middle and there is interaction on all stocks and the final decision sort of ultimately is -
TANA FOCKE: Yours.
ROB ROYLE: - mine.
PRESENTER: So in a sense there are decisions made on a collegiate basis?
TANA FOCKE: Yes, frankly, yes, because I think that it was important. Most of the shares are held within the firm, was really important for the succession that people had confidence in Rob, and there comes a point when over the next, and I am not saying immediately at all, but over the next three years I will probably retire, I mean most probably retire, therefore we want everything to be running really smoothly and that people have confidence that Rob is leading the Fund.
PRESENTER: That is a very important step for a fund manager to take, but it does seem morally right from an investor’s point of view for succession management to be in place.
TANA FOCKE: Well, I hope so, because when we look at companies it is one of the questions we ask, you know, will you be retiring, the CEO has a few grey hairs, and you say, you know, how long are you going to go on – I mean it is a natural question, you want to know who is leading the business. You see what happened when Microsoft top men retired. I hope the same does not happen when I retire.
PRESENTER: What confidence should we have in you Rob that taking over from Tana is good from an investor’s point of view?
ROB ROYLE: Well as I said I have worked with Tana for four-and-a-half years and learned a huge amount, and really there is no fundamental change in what is going on in the Fund, there is just a reduction in the number of holdings and much higher conviction. And the other changes that are going on, as I said we are talking about this sort of three-to-five-year view, which is a view we have always had as we look to sort of try and take advantage of that time arbitrage. And if you look back at as I say our highest conviction holdings in the past they have outperformed very well, and we think that without the fillers that is just going to allow us to move further ahead.
PRESENTER: So, let us go back to stock selection, what attributes Tana do you look for in a company? You mentioned grey-haired senior management.
TANA FOCKE: Well we do not necessarily look for that really, it sometimes happens. No, I think we look for what we have always looked for, which is, you know, a good management team, a solid balance sheet, a company that can produce a stream of cash flow and not necessarily does not have to pay a big dividend, but as long as the potential is there to produce cash on a long-term basis and something that perhaps has a niche in the market or not too much competition. You have to be careful of things like Amazon coming along and taking away from the stores and, I do not know, Rob what do you think?
ROB ROYLE: I think really I mean it sort of focuses around one core factor, which is we want to invest in good quality businesses for the long term, and we see ourselves rather than just renting the equity for a short period of time we actually think about buying a stake in the business. So the first thing we look at is the economic moat, and by economic moat I mean what are the long-term defensibilities of this business model? So we spend a lot of time looking at the sort of competitive environment and the industry that they are in and where their niche is and what has brought about that niche, whether it be size, brand, patents or a network effect similar to sort of Facebook or something like that. So that is a sort of first part, and then we will sort of drill down, have a look at the management and as Tana mentioned I mean we want good quality management there.
So we will look at how they are compensated, their track record, how they are incentivised going forward, and then after all that has happened and we think we have got a good company here with good management, we will actually run down and do the valuation work, which is mainly sort of around free cash flow metrics and trying to discount that free cash flow and also looking at free cash flow multiples. Because as we drew ourselves as part owners of the firm we would like to know what free cash flow would be available to us, and if that firm then trades at sort of 70% of what we think it is worth, we will make the purchase; if it trades above that we will think well this is a great quality business that I would like to own one day and we would sort of set an alert on it, and as that comes back to sort of offering us a greater margin of safety we will look to invest in it.
PRESENTER: Rob, have the aims and objectives of the Fund changed in any way, shape or form?
ROB ROYLE: No, I do not think so. I mean the long-term goal of the Fund has been to outperform the benchmark, and that is still very much the goal. And I think with the change we have made, we have got much more tools now and the ability to actually go ahead and do that, so it is quite an exciting time for us.
PRESENTER: What about risk then Tana, has the risk profile of the portfolio changed?
TANA FOCKE: Well, I think it will a little bit, but what we are hoping is that because we know the companies better and we have got more time, because if you have got half the number of stocks, you know, you are going to know them better and you are going to have greater conviction. These are our greater conviction ideas as opposed to some of the companies where we did not have so much conviction. So it is quite easy actually to have got rid of well a third or more of the stocks that we had without too much sadness. Now it gets a slightly more difficult stage, because we like all the companies that we have got left, but we need to shake them down a bit.
PRESENTER: So you tend to fight for them, the positions in the portfolio.
TANA FOCKE: Exactly! So, I mean hopefully not. There are no guarantees in life, but I mean I would say that possibly marginally - what do you think Rob?
ROB ROYLE: Well, I think the risk profile will change slightly. Partly because we have got fewer stocks, so it may be slightly more volatile, and also because now with the restrictions lifted we aim to outperform the index by a little bit more to be honest and be a bit more active in what we are doing. So your standard risk statistics will show risk going higher, because hopefully the outperformance above the benchmark is higher. So we are sort of happy with that. But from the view that we are investing in good quality companies over the long term trading at a discount to what we believe is intrinsic value, I think that sort of limits the risk somewhat for us. And even when you look at how the Fund has changed, I mean the weighted average market cap of the Fund is still £80bn, so we have not gone small cap or anything like that even though we have lifted the one billion restriction.
PRESENTER: Do you have a typical investor in mind? Will that investor profile change in any way?
TANA FOCKE: I do not think so. I think that is for them to decide really, not for us to decide and for the marketing team to see who they can - I would say that again I think because of the risk controls we have, because of the kind of companies we are investing in that probably it could be a core Fund.
PRESENTER: Is that what you are aiming for?
ROB ROYLE: Yes, very much so. I would see it as a sort of core Fund for an adviser who is quite happy to invest in the US for the long term as opposed to just taking a trading position. And similarly on a three-to-five-year view that we buy stocks that is how I would like to think people will buy our Fund and judge us on our performance. And it still as Tana said remains a core holding we think, and that is the sort of niche we are trying to operate in.
PRESENTER: Tana, when you look back over all your years of investing in North America do you remember any pivotal point such as the pivotal point that we seem to be at with North America today?
TANA FOCKE: I think it has always been an important place to invest in because of the size of the American market and because of the weight in the world index. So the great thing is it will always be a place. There is also a huge number of stocks to choose from. I think a great advantage is that you can read in your own language all the research material. You know, I would be very pushed if I had to read Chinese and things like that. We do have somebody who is mainland Chinese, so we have got that covered. But from our point of view it is a very well researched market and in answer to your question about pivotal it always feels like pivotal in a way. It is always a sort of moment of when you do not really know, you know, you are not absolutely convinced, are we going to fall back into a little bit more of a recession, are we not?
There are people that say we are, personally we do not believe that, but there are always moments of when you have doubts. It is never absolutely plain sailing and clear. However, I think for the very long term the United States is better positioned than it has ever been because it is going to have cheap energy, and that I think is a fundamentally important point that a lot of people have overlooked when they run down the United States and say that Europe’s on the up or whatever it is, because I think this will give them a huge advantage. You have got a very young and dedicated workforce with cheap energy and I think it will give the rest of the world a good run for their money, don’t you?
ROB ROYLE: Yes, I think if you look over the next 30 years I think America is in a fantastic position, mostly actually because of this cheap energy, and in terms of sort of the American stock market no other market in the world has got the sort of depth and breadth of companies, and you can find amazing companies that just do the most random things. I mean you can find companies that just do for example conferencing and interviewing and such small niches and such wonderful companies that have huge returns on capital that are to a certain extent, as Tana mentioned it is a very well researched market, but if you dig down and you are looking at all these special situations and things like that it is just really, really interesting, and I do not think there is a more interesting market in the world.
PRESENTER: Excited about taking on the stewardship of this Fund Rob?
ROB ROYLE: Very much so. I think especially with the changes we are making. I think we have got a really great product here to go out and really try and grow, and hopefully the performance will come, but only time will tell, and as I say I think we should be judged on a three-to-five-year view, and we will come back then and sort of see how it has gone.
PRESENTER: Tana Focke and Rob Royle thank you very much.
TANA FOCKE: Thank you.
ROB ROYLE: Thanks very much.
Key risks
• Investment does involve risk. The value of investments can go down as well as up and investors may not receive back the original amount invested.
• Equity (stocks & shares) investment is subject to specific risks relating to the performance of the individual companies held, the market’s perception of them and systematic risks such as general economic conditions, interest rates, foreign exchange rates and industry sector risks. In general terms, equities tend to be more volatile than bonds.
• The Trust will invest in substantially in stocks in North America and will therefore have greater exposure to the market, political and economic risks of that region than if it was more diversified across a number of countries.
• When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
• Investments in smaller companies may involve a higher degree of risk as markets are usually more sensitive to price movements and therefore more volatile.
• Past performance is not a guide to future performance.
• Investment is subject to documentation (Prospectus, Key Investor Information Document (KIID) and Terms & Conditions), copies of which can be obtained free of charge in English online at www.sandwfunds.com
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