“It’s time for us to come out of the shadows,” says Hugh Grieves, co-manager of the Miton US Opportunities fund. He’s speaking after Georgina Hamilton and George Godber announced their departure from the fund house, moving to Polar Capital.
The loss of the duo and the risk it places on the £869m in assets they manage in the UK Value Opportunity fund is a concern for the firm, but Grieves is looking on the positive side.
“George and Georgina did a fantastic job and have been great ambassadors for Miton for the past few years, but we can now come out from under their shadow and take the company forward. We can be more public and get more marketing time,” says Grieves.
Grieves has run the US Opportunities fund with co-manager Nick Ford since its launch just over three years ago, in March 2013, with Ford and Grieves having joined Miton in the months preceding the launch.
The pair previously worked together on the US smaller companies desk at Gartmore before parting ways to work at various other managers, including Swip, F&C and Société Générale Asset Management.
For many UK investors, their allocation to US equities is through passive instruments, with many believing the US market is efficient enough that active managers cannot add much to returns.
Ford and Grieves are very focused on this competitor, meaning they proudly talk of the fund having the third highest alpha in the IA North America sector, with the lowest maximum loss for its peer group.
The returns speak for themselves, the fund having beaten the sector average over the short and long term. It has returned 10.37 per cent against the sector’s 7.19 per cent of the IA North America sector over the past three months. Over the three years of its existence it has returned 51.16 per cent against the sector’s 38.04 per cent.
But beating the index, and its passive followers, is the true test for this fund. And it has done so, returning 10.75 per cent over the past six months against the S&P 500 return of 3.05 per cent.
Getting there has not been easy, says Grieves. “There has been huge uncertainty. It’s like a game of snakes and ladders, but there are lots of snakes and not many ladders,” he says.
He adds that the fund is not going to be the best performer in a bull market, describing it as very much a tortoise fund. “In a roaring bull market this is probably not going to be the best fund, it’s not going to be top of the tree. I don’t have any shame about saying that. In this peer group some are hares, some are tortoises. We are very much more tortoises,” he says.
Grieves and Ford have a large market available to them for stock selection, taking the S&P 500 as their starting point. From there they whittle down their choices by taking out any companies valued at less than £1bn and eliminating sectors they dislike, which currently include airlines, biotechnology, miners and oil. This leaves 1,100 stocks.
From these they generate their buy list of 400 companies, “and then it is a case of buying at the right price, buying quality at the right time”.
“For the ideal stock, the picture we have in mind is a cash machine surrounded by barbed wire and guard dogs,” says Grieves. “We want the company to throw off increasing amounts of cash, regardless of what goes on outside of the wire. These are uncertain times and we want to invest in a high degree of certainty.”
Current examples of this include Ecolab, which Ford admits most people are unlikely to have heard of. The firm is a global cleaning company, whose products are used in every McDonald’s in the world.
The managers’ stance is that Ecolab is protected from the wider economy, as regardless of the number of burgers McDonald’s sells it will still, hopefully, clean its floors every day.
Another holding, which Grieves and Ford see as a steady grower, is funeral and cemetery provider Servicecorp.
“There was a high baby boom after World War Two and those people are now reaching the end of their lives, so there should be a boom in deaths in the next five to 10 years. There is potentially a big tailwind in death rates,” says Ford.
Most recently the manager sold down a position in tobacco behemoth Philip Morris and reinvested the money in BG Foods. The move is an example of the fund’s focus on finding new consumer staple stocks to replace previous good returners. It also marks a shift from a large-cap stock to a small to medium-sized company.
The fund has no set bias to domestically focused companies versus globally-focused firms. Most recently it has been more skewed to domestic firms, with the managers wary of the impact of the shifting value of the dollar on company earnings.
Taking the example of Microsoft, a 2.6 per cent position in the fund, the company’s profits before the dollar’s slide were up 10 per cent, but after it they were flat. The story is the same for Coca-Cola, a 3 per cent holding, with its profits going from 8 per cent up to 5 per cent down.
“[The shifting dollar] is a big headwind for US companies,” says Grieves. “But it is one of the reasons to be optimistic. If the dollar stays where it is then that headwind dissipates and earnings growth looks much better in the next 12 months than the past 12 months.”
Looking ahead, the US is approaching an interesting time, politically and economically. On the US election the managers are fairly relaxed, believing a Hillary Clinton win for the Democrats to be the most likely outcome. If that proves the case, healthcare stocks are likely to be the only companies to feel an impact, following Clinton’s comments on the cost of drugs and treatments being too high in the US.
However, they are cognisant of the risk to markets of a Donald Trump victory, and the risk of his “very strong fanatic following”.
Political risks aside, the duo are focused on growing assets and ensuring the fund holds up against its mainly passive rivals.
“Lots of people invest in the US through passives through frustration,” says Ford. “They can’t find a US active fund that can deliver consistent performance. Our main competition is passive rather than any particular asset manager or funds.”