Veritas stays true to global themes

Veritas produces \"real returns\" through a philosophy of themed investment based on research by a small team of analysts focused on global and Asian companies, writes Neal Underwood.

VERITAS ASSET MANAGEMENT employs 31 people, and has assets under management of £1 billion, split evenly between its Asia and global strategies. Veritas was founded in 1993. In 2003 Stewart Newton, founder of Newton Investment Management, and Charles Richardson, former Newton chief investment officer, founded the Real Return Group, of which Veritas is a wholly-owned subsidiary.

Veritas Asset Management has built its reputation on what it calls “real return investing” with a long-term focus.

The company, founded by Anthony Rosenfelder in Switzerland in 1993, is now a subsidiary of the Real Return Group, founded in London in 2003 by Stewart Newton, the founder and former chairman of Newton Investment Management, and Charles Richardson.

Richardson, a former chief investment officer of Newton and now chief executive of Veritas, explains the aims that led to the formation of Real Return Group and are pursued through Veritas: “First and foremost we wanted to move away from all kinds of relative approaches. The reason we chose ‘Real Return’ was to make that statement.

“We have a very strong philosophical view on how we should be investing. How that manifests itself is the use of themes in our thinking. What are the key drivers? We’re getting in front of structural tailwinds and away from demanding headwinds.”

Richardson says the way to achieve this is to have a small, focused team of full-time analysts. “We focus on two areas – global and Asia. We have always believed in coming to our own view on intrinsic value. We strongly believe that there is no connection between scale and results.” Veritas has a team of five global analysts and two focused on Asia.

“Charles and Stewart were the pioneers of thematic investing at Newton,” says Andy Headley, director and head of global research, who together with Richardson is responsible for the firm’s global portfolios. “I’ve been investing along those lines for 12 years. We identify themes as a group – it’s a holistic approach.”

Headley says the team identifies companies in three ways. “We aim to identify companies or areas that will be attractive on a three-to-five-year time horizon. We stick to high conviction themes, and keep it down to a list of, say, four to six.”

The other two ways, adds Headley, are more standard. “We do some quant screening, looking for companies that are high quality, with good return on capital, good cash generation and low valuation. We’re very happy to buy things outside – we’re not dogmatic in being thematic.”

In its third approach, Veritas uses proprietary research in the form of industry contacts, as well as following the holdings of niche fund managers and having regular dialogue with companies. It also pays for consultants in specialist areas; it uses an oil consultant, has an Asian consultant based in Beijing and subscribes to a service where it can phone consultants in any industry anywhere in the world.

“Idea generation is a starting point,” says Headley. “From that we get a list of companies we really like, which have gone down the funnel, where we like the business model, where there are barriers to entry. We do a lot of work to get companies on to our universe list; things we’d like to own at Veritas Global Income -24.49 153/804 1 -30.13 0.92 77/622 1 -12.64 Equity GlobalVeritas Global Focus -21.88 121/804 1 -30.13 4.76 56/622 1 -12.64 Equity GlobalVeritas Asian -34.55 38/230 1 -41.99 30.89 7/186 1 2.01 Equity Asia Pacific ex Japana certain price. We then set a sensible intrinsic value. Over three to five years we’re trying to get in the right ball park for free cash flow generation or earnings. We get the analysts to really think about what’s happening to earnings – to be conservative but realistic – then we can put a valuation on that cash flow stream five years out.”

The aim is to buy stocks at a discount with the likelihood of generating a 15% return over five years. Each portfolio of 25 to 40 stocks is then diversified by sector and geography, as well as individual stock risk.

Headley points out that Veritas is not benchmark driven – if it does not like a sector it does not feel any obligation to have holdings in it. “There will be areas where we hold very little or nothing, like financials. We’re not looking at the waterfront. We don’t look at areas we’re not interested in.”

This, in Richardson’s view, far from increasing risk, reduces it. One theme that the team has played for a number of years is what it calls resilience. “It was important that we looked for the same key financial characteristics, such as strong balance sheets with low leverage,” he says. “One example of what this has meant in the last three years is that this detailed research work got us in things with good characteristics and kept us out of, for example, financials.”

Another theme is “in the national interest”, which encompasses areas such as infrastructure. “These are companies that benefit from the government’s desire to grow the economy,” says Headley.

He adds: “Asian infrastructure has been of huge interest for two or three years – for example, toll roads in China, where the attributes of infrastructure are enhanced by growth attributes. It’s an area we’ve been increasing over the last six months. Under the resilience theme we get the analysts to check factors which could act as red flags, such as inventory as a percentage of turnover. We also look at balance sheet debt levels and also when the debt rolls over.”

This depth of research means that when Veritas goes into stocks it generally has a high level of comfort, according to Headley. “We tend to have far fewer earnings warnings or stock collapses. Our level of understanding of companies is very high.”

Taking a three-to-five-year view leads Veritas to be naturally contrarian. “We do tend to find that we look at out-of-favour ideas rather than today’s favourite,” says Headley. “For example, we have looked at renewable energy. Over the next 10 years there will be a drive for it, but it’s not an area we find we can be invested in.”

He gives the example of an Irish company, Kingspan, which makes high performance insulation and which, despite the share price being hit in the short term, will benefit from regulatory changes due to be introduced in 2016. “We’ve got the competitive advantage of not worrying about this year or next year – we’ve got the luxury of a three-to-five-year view.”

Headley is keen to make the distinction between absolute returns, which aim to deliver incremental growth with no drawdowns, and real returns over a reasonable time frame.

“Taking the long-only funds, they are long only, so over a short period of, say, 12 months, we are dependent on equity markets,” he says. “What we say is that over a five-year period our intention is to deliver good real returns. We tend to perform substantially better than markets in down markets, and tend to underperform in very momentum-driven markets. If you benchmark us against what we say we will do, we are doing what it says on the tin. When we talk to clients we do not say it’s an absolute return strategy.”

Veritas runs three long-only funds: Veritas Global Income, Veritas Global Focus and Veritas Asian. Both the Global Income and Global Focus funds are managed by Richardson and Headley. The two are backed up by Felicity House, healthcare analyst, Nigel Stevenson, industrials analyst, Uys van Straaten, resources analyst and Terry Raven, telecommunications and technology analyst.

The Global Focus fund invests primarily in global equities, but can also invest in fixed income, derivatives and cash during short-term periods of equity market volatility. Meanwhile Global Income aims to yield more than the FTSE All-Share index while preserving the real purchasing power of capital. The Asian fund is managed by Ezra Sun, also formerly of Newton, together with analysts Jaewon Bae and Victor Chu.

“The three Veritas funds don’t purport in the very short term to protect the downside,” says Richardson. “There will be some volatility along the way, but over three to five years they will deliver real returns.”

The performance numbers bear this out: all three funds delivered a positive return over the three years to October 10.

Graham Duce, co-head of multi-manager at Credit Suisse Asset Management, has a holding in the Veritas Asian fund. He says: “We had a really good meeting with Ezra about six weeks ago. A lot of our Asian managers at that time were talking about after the Olympics Chinese authorities putting their foot on the accelerator, but Ezra was the only one who wasn’t. He’s been proven right – there hasn’t been any news worthy of those expectations.”

He adds that Sun’s level of realism about the Asian market has stood him in good stead. “I’ve been particularly impressed with Ezra with regard to his conviction.” At a company level, Duce says Veritas is a good example of a boutique and he supports its long-term, real return approach. “The culture there is very good,” he adds.

As well as the Veritas funds there are three Real Return branded long/short products: the Real Return Global, Asian and Alternative Strategies funds. The Real Return Global fund aims to deliver an annualised 6% real return. Alternative Strategies, managed by Ian Fridlington, invests in a range of strategies via external fund managers. As with all Veritas funds, its investments fall under several themes, including the rise of emerging economies, carry trade unwinds, alternative routes to finance, credit in distress, natural resources and rising volatility.

Veritas has a well diversified client base, says Richardson. “From the outset we’ve always believed in having a broad base of clients. The company is built on two historic strands. One is private client, charity orientated. Our collective experience going back to Newton is that these are highly loyal clients. This remains important to us as a business – having a trust, family office, private client part of the client base.”

At the same time, he adds, the firm wanted to build a funds business using its global and Asian expertise. “Within the confines of a privately owned investment boutique, we’ve been building up a broader client base.”

While not targeting the mass retail market, Veritas is having success with discretionary managers on a pan-European basis since the appointment of Richard Meyrick as sales director this year.

“One of the reasons to team up with Richard was that we had critical mass in terms of assets and people, and a five-year track record,” says Richardson. “We’ve built depth and breadth, and it’s important clients know they’re dealing with a robust business.”

On the intermediary side, the focus is on ultra high net work advisers who have the need to get away from the herd, says Richardson. “It’s important not to push a product at people at the wrong time in the investment cycle. People here invest in our funds alongside clients.”

Any future investment products or strategies would have to have some genuine investment appeal as well as building on the firm’s existing expertise, says Richardson. “We have discussed some strategies where we see structural growth in sectoral terms, or this growth appeal could be more regional. It would have to make real investment sense, and the team or individual running the strategy would need to relate the culture here. The partners would need to be comfortable with who is brought in.”

Any new strategy would need the ability to get up and running successfully in terms of, for example, seed capital, says Richardson. Any new offerings would therefore be based on a combination of identifying the right people and the right opportunities, he adds.

The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.