American slowdown is a healthy, positive sign

Tom Walker, manager of the Martin Currie North American fund, is questioned by Frances Hughes.

Q: What do you feel is the outlook for North America in the face of a slowing economy?

A: The economy is slowing, that is undeniable. Interest rates have risen, but the intention is to avoid a boom-and-bust cycle. When an economy is growing too fast, slowing it down is actually a good thing.

Two years ago, interest rates were at 2%; now they are up at 4.75%. The Federal Reserve does now have some dry powder that it did not have in the last recession in 2001. But in answer to your question, no, I do not believe we are staring recession in the face. We are actually seeing very good economic growth in the first quarter of this year.

Q: Your fund has grown from 20m to 50m in the past three months. Why has it grown so fast?

A: We have a good team of people and it is only in the past six months that we have actively been marketing this fund. There is a lot of demand for a North American fund that can demonstrate a track record of performance. Since 2002, we have been top-quartile in 10 out of 16 quarters.

Another reason is that Martin Currie is like a big boutique – we have a large number of good products to sell. With regard to our retail business, we have a very good story to tell, and we have only over the past six months been telling that story. Some of the best companies in the world are based in North America and the market has been highly receptive to this fund because of that.

Q: Where are you investing at the moment and why?

A: We are a bottom-up fund, but there are top-down themes. We are overweight in commodities, resources and energy areas. We believe that prices are going to remain higher for longer than most people are expecting.

It is also important that a company can pass on these higher costs – retailers find it harder to transfer them. So we are underweight in consumer-facing sectors, including the retailers.

Q: Do you have a preference with regard to the size of the companies in which you invest?

A: We are focused on large-cap companies – those with caps of more than $5bn [2.8bn]. This is an area that we think has underperformed for some time, which means that valuations are now stretched and extreme. We believe that larger-cap stocks are going to have their day.

Q: What is your average holding period?

A: About 18 months to two years. I tend to be quite binary in my measurements rather than adjusting the weightings of the stock. We focus on buying and selling rather than reweighting.

Q: In terms of investment style, you say you are neither a growth nor a value investor, but that you invest in positive change. What do you mean by this?

A: Positive change can be a number of things. It is the most important of the four criteria: quality, value, growth and change.

We like companies that are getting positive share revisions. The Ibes [Institutional Brokers’ Estimate System] consolidates analyst estimates for a company per share and produces a consensus earnings forecast. If that is improving and going up, it is a positive indicator for us in terms of investment.

We also sit down with relative sector managers and look at all the positive factors of quality, value, growth and change. But change is the key dynamic.

Q: You have said that you are absolutely a stockpicking fund targeting 75% of the fund’s outperformance to good bottom-up selection and 25% to your top-down overlay. Why not 100% bottom-up?

A: We are not 100% bottom-up because I do not believe it is possible to construct a portfolio without a top-down view of the world.

You have to have a context in which to do your investment. It would be extremely hard to overweight in energy, for example, if you do not look at oil.

We do spend most of our investment time discussing stocks but it is equally important to have a top-down view of the world. Context is very important.

Q: You say you are a conviction portfolio holding no underweight positions. What do you mean by this?

A: Holding 40 stocks is quite a focused portfolio – that is what we mean by conviction. We have a highly focused approach.

We like to be confident about the stocks that we own and worry less about the stocks that we do not. Our portfolio is focused and confident. Focused could be used as another word for conviction.

Q: Why do you not hold any underweight stocks?

A: I would never feel I had to own a percentage of those stocks in order to manage my risk. If I do not like them, I do not hold them at all.

Q: How do you do your research and what is the Dynamic Stock Matrix System?

A: The Dynamic Stock Matrix system is a global database and screening tool. It screens a large number of stocks on the four factors of quality, value, growth and change, and it gives them scores. Stocks that score lowly are less attractive.

The system is simply a tool that helps to prioritise our research. We also like to visit the management of the companies in which we are thinking of investing. We travel to North America a lot.

The fact that there are 15 people in our team means that on average someone is in North America every two weeks. We also have small group meetings in Edinburgh, which is where we are based.

Q: You narrowed the focus of the fund down to 40 stocks. Why?

A: To produce excess performance you have to take sufficient risk. We think a better way to do this is to reduce the number of holdings in our portfolios.

We need to back our judgements. We have highly talented people on our team and we need to believe in our conviction. However. we are not planning on going any lower; we are keeping it at 40.

Tom Walker has managed the Martin Currie North American fund since May 2002. He also runs the Martin Currie Portfolio investment trust. He has 18 years’ investment experience, covering Britain and other European markets, as well as Hong Kong and China. He joined Martin Currie as head of the Pacific Basin team in 1996 and moved to head the North America team two years later.