Chelverton’s Taylor on a different approach to small and mid-caps

Liontrust John Husselbee

David Taylor is a laid-back character, a trait that seems to have worked to his advantage given the number of industry and company changes that he has absorbed in his career. What is very interesting about his path through the industry, particularly when considering the question of nature vs nurture, is that external and unpredictable factors have played a large role. In turn, this path seems to have also significantly influenced his investment approach, suggesting that in his case nurture has been the more significant factor in his journey to his current fund manager role.

In fact, Taylor recalls a teenage interest in becoming a fishmonger so, if he was born with talents destined to drive him towards fund management, they were not obvious to him for some time. With his parents working for Dunlop in Zambia and Nigeria for much of his childhood, David had few links to the City and after leaving boarding school in Kent he enrolled at Kingston Polytechnic to take Business Studies. This is the first occasion when fate seems to have played a role professionally; his lecturer at Kingston helped him get his foot in the door of financial PR firm Broadstreet, in the second of two six-month employment stints as part of a sandwich course.

This led to a job as an analyst for a market maker, or jobber, at Wedd Durlacher where his experience began at one extreme of the time horizon spectrum, thinking about the direction of a share price over “the next ten minutes”.

One aspect of the job that struck a chord with Taylor was meeting with company management and – although it wasn’t demanded by his role at the time – assessing their progress over a period of six months or more as successive sets of results were issued. He got the opportunity to apply this approach through a move into fund management but this was not a change he had planned. Rather it was one that was catalysed by the Big Bang literally rendering his role redundant. Taylor moved on to the UK desk of Merchant Navy Officers’ Pension fund, where his knowledge of small caps gave him a head start due to the absence of a dedicated dealing desk. Here the approach was markedly different – “very, very long term” – which allowed him to develop an understanding of value investing in a supportive environment. However, he was once again to find himself a hostage of the fortunes of industry developments as the outsourcing era, driven by the rising influence of pension consultants, led the asset management function to be handed to specialist fund management houses. Taylor’s next move was to join one of these houses, Gartmore, where he gained his first exposure to managing retail assets. Following stints at LGT and HSBC Asset Management David joined Chelverton in 2006.

davidtaylor

It seems that Taylor’s investment experience, which covers the time horizon spectrum from very short to very long term and encompasses a broad range of investment styles, has equipped him with the skillset to now manage retail funds.

For example, he now strikes a balance between the very long-term investment approach that he and most other fund managers would like to be free to employ, and the reality of an investment industry that demands analysis and accountability on a monthly and quarterly basis. His contrasting experiences at Wedd Durlacher and MNOPF may have been very formative in this respect.

He works alongside David Horner, formerly of 3i, who naturally seeks out ‘deep value’. It is here that Taylor’s understanding of the importance of a company delivering quarterly progress (while moving towards long-term objectives) in contributing to share price stability can be married with his colleague’s search for deep value, which typically may not emerge for several reporting periods and is unlikely to do so gradually.

In a similar way, Taylor has worked alongside a number of prominent fund managers with differing styles such as Nick Train, Julie Dean, Vivian Bazalgette, Tim Russell and Mike Bishop. He appears to have drawn on these experiences to apply a cashflow-focused investment style to the small and mid-cap sector, which has more traditionally been sought for its earnings growth.

Taylor stresses that he and his co-manager Horner are looking for “dull but worthy” companies with sensible and pragmatic management teams. He thinks it a misnomer to assume that these small and mid-cap companies carry any more business risk than their larger capitalised peers; explaining that the difference lies in their higher liquidity risk.

David Taylor co-manages the PFS Chelverton UK Equity Income Fund and PFS Chelverton UK Equity Growth as well as the Small Companies Dividend Trust.