Combined talents in pursuit of the upside

Stephen Watson talks to Will Jackson about Hume Capital’s first fund for the intermediary market.

STEPHEN WATSON is a senior portfolio manager at Hume Capital. Before joining the firm in 2009 he ran pan-European accounts and co-managed the International Growth fund at Northern Trust.
STEPHEN WATSON is a senior portfolio manager at Hume Capital. Before joining the firm in 2009 he ran pan-European accounts and co-managed the International Growth fund at Northern Trust.

Q. Hume Capital plans to launch its first fund for the intermediary market in December, subject to regulatory approval. What is the firm’s history?

A. Nitin Parekh founded the firm in 2007 with three other partners: Mark Baker, David Sullivan and Tim Bassett. They started off with a market-neutral Asia hedge fund in February 2008. We joined last year from Northern Trust – Nitin had worked previously with Stephen Dowds, my colleague at Northern Trust, and we got together because Nitin wanted to build a long-only business to combine with his hedge fund.

Q. Global Opportunities will be a focused portfolio of just 40-60 growth stocks and will aim to produce lower volatility than a conventional equity fund. How do you plan to achieve this?

A. One of the key attractions of joining up with the guys at Hume was that their hedge fund had a volatility of around 5% and we tended to do better in the down markets than on the upside. In that sense, our characteristics were complementary.

While we will look to capture the bulk of the equity upside, we will try to build in shock absorbers to mitigate the downside. At Northern Trust, most of the mandates only allowed us to hold a small amount of cash, maybe 5-10%. Here we’re looking to develop that whole idea, to enhance that – so that if the markets dropped by a significant amount we would be down a lot less. (Q&A continues below)

Q. Will you use derivatives to protect on the downside?

A. Within the mandate we will be able to use up to 15% of the fund as a facility to hedge. But the mandate is fundamentally long-only.

Q. Will Nitin make the top-down calls, leaving you and Stephen Dowds to focus on stockpicking?

A. That’s correct. The money we managed at Northern Trust was industry-based in the sense that we were looking for best-in-breed. We look for best-in-class, in terms of companies where the share prices don’t reflect either their position within their industry or their potential to become significantly stronger players.

At Hume we look at investment from the point of view of companies and industries. So we look at a combination of fundamental analysis and stock screening. We try to integrate our assessment of the key dynamics of the world economy and industries with the bottom-up stockpicking approach.

Q. You will be investing primarily in large- and mid-cap stocks. Will the fund have any exposure to small caps?

A. Broadly speaking, we’re looking at large- to mid-cap. We had market cap cut-offs, dependent on the mandate, at Northern Trust of around $1 billion [£630m]. In this case, although most of the portfolio will be in that bracket – market caps of $1 billion or more – there is scope to have some between $500m and $1 billion.

Q. Are there any other differences between the mandates you ran at Northern Trust and the Global Opportunities fund?

A. We’re keen to emphasise the more unconstrained nature of the way we invest. We look to buy best-in-class companies, and the benefits of that are likely to be enhanced in this global equities fund. It is a subtle improvement on what we were doing before.

Q. Will you meet company management teams face-to-face, or will your research come from other channels?

A. Each one of us on the investment side has between 10 and 20 years of stockpicking experience. We’re very keen on meeting the managements of companies and we combine that with quite rigorous screening techniques.

Q. You have run a model global port­folio, in preparation for the launch, since you left Northern Trust. How has it performed?

A. From inception to the end of September, the global model outperformed the MSCI World index by 2.7%. We were looking to outperform on the upside, which we have done by a small amount. But the key thing is to capture the outperformance in case the indices sell-off again in a major way.

Q. Where is the model portfolio overweight versus the MSCI index?

A. We are about 4% overweight in the industrial sector. And we’re also keen on consumer discretionary – particularly in the Asian markets, where we believe strongly that China is changing from a manufacturing, industrial-led economy, to a retail and services-led economy. We are also very overweight in the core countries in Europe, versus the periphery – particularly in Germany, where we are around 4% overweight.

Q. How long have you held that position on Europe?

A. We had that stance when we were at Northern Trust. One of the key features is how German productivity, in a European context, has improved so subtantially over the last few years – versus Spain, Greece, Portugal and Ireland.

Q. Can you give examples of stocks in the model portfolio?

A. We have Huabao, a Chinese leader in fragrances for food and tobacco; Gea, a German mid-sized engineer with global leadership in cooling technology for refrigeration, and other applications where temperature control is vital; and Autonomy, a UK leader in software services. All exhibit leadership in their fields, with attractive longer-term growth characteristics.

Q. The Hume Capital website displays a quote attributed to a Scottish philosopher, David Hume: “Truth springs from argument amongst friends.” Is challenging each other’s ideas central to the company’s investment approach?

A. Yes, we’re always open to alternative views – and the idea that you should challenge not only each other, but also yourself, in terms of your analysis and conclusions when making investments.

The reason we are so excited about this venture is that the guys at Hume Capital, and ourselves from Northern Trust, have a wealth of experience in analysing companies and picking stocks in growth sectors, industries and countries. That’s what, as a team of seven on the investment side, makes it so interesting. It’s this interaction of ideas, and the chemistry, that will hopefully bring us success in terms of performance.