This year has not been one of phenomenal returns, with most funds making losses, but one that has bucked the trend is the £528m JOHCM Global Opportunities fund, managed by Ben Leyland and Robert Lancastle.
The fund struggled over 2019 and 2020 as the market got on the growth bandwagon in a big way – something that the managers were unwilling to join whole heartedly.
However, while it made bottom-quartile returns, it did not make a loss. Fast forward to 2022 and while other funds around it are tumbling (the IA Global sector is down 12.6% on average) the fund has made 4.6%.
Total return of fund vs sector and benchmark since launch
Source: FE Analytics
It is not just been a short-term winner however. The fund has gone through a 10-year milestone, during which time it has made 218.4%, beating both the average peer and MSCI ACWI benchmark, as the above chart shows.
Below, the managers explain why their idea of value may differ from the traditional, how they weathered the storm in 2019/20 and why the current market is unprecedented.
What is your process?
Leyland: We look to harness the power of compound growth by investing in high-quality businesses that can reinvest their high returns to create value for shareholders whilst paying greater-than-average attention to the risks that could jeopardise value. In particular, we look at overvaluation, low-quality franchise and balance sheet or debt risk.
The outcome tends to be a good capture of the upside when markets are strong with strong protection in down markets.
How do you pick stocks?
Leyland: We use metrics such as return on capital, sale growth, margin resilience, cashflow generation, but we are particularly interested in whether high returns are sustainable or if low returns can improve, or if slow growth can accelerate. That has to be qualitative as there are no metrics that you can base that on.
We also focus on looking forward rather than backwards so we use history as a guide as to what might come next.
While we are value investors, you will find us sometimes investing in things that trade at above-market levels of price-to-earnings multiples or lower than market average dividend yields.
We tend to invest in high-quality businesses with a high returns and good characteristics that to buy you would expect to pay an above-average premium for and we are happy to do that whilst arguing that they are at a discount to their own intrinsic value. We focus therefore on absolutes rather than relatives.
Why should an investor pick your fund?
Leyland: We aim to be the only global fund you need to own through a cycle. You do not need to decide what kind of environment we are in or what the macroeconomics will evolve over 12 months.
You don’t need to make heroic calls about whether growth or value will win or if the market is going up or down. We aim to survive in all environments and thrive in several.
Lancastle: The fund has been a top-quartile performer at bottom-quartile volatility, but you need a long-term lens. We take the bumps out of the road but our biggest downfall is when people want 20% returns like we have had for a phase.
The biggest annoyance will be that your mates down the pub might have found the growthiest, jazziest portfolio at a nice time in the cycle.
Is that what happened in 2019 and 2020?
Lancastle: The reason the market had such a great phase was that it was getting very aggressive and on the front foot. It thought there was a macroeconomic uplift phase, whether that was macro getting better or reading the fiscal and monetary policy tea leaves.
You get phases where everyone gets on that bandwagon and we don’t get on it as much as everyone else. We look through the one year and think strategically about the companies we want to own over three-to-five years.
Leyland: During that time we were underperforming by quite some distance because we weren’t prepared to take on the same risks as other people with regard to Covid-related distress or valuations in the growth sector.
What we believed was that the extremes of the market are always more volatile than other parts, but people weren’t interested in that.
Total return of fund vs sector and benchmark over five years
Source: FE Analytics
Things have got better in 2022, do you expect that to continue?
Leyland: Looking forward, we want to make sure that we have a portfolio of businesses that can execute pretty well come hell or high water in the context of a number of macro and geopolitical changes that no one has ever seen before – certainly not in combination.
We don’t know how they will unfold. There are parallels to the 1970s or the early 90s, but none of them are exact.
Total return of fund vs sector and benchmark in 2022
Source: FE Analytics
What has been the best performer year-to-date?
Leyland: Thales is a European defence business with civil aerospace exposure so it was impacted by Covid and lockdowns and the perception of its defence business was affected by the ESG [environmental, social and governance] bans on the defence sector in the first wave of the ESG adoption by mainstream equity funds.
On the airline side, we saw that as an opportunity as it was well managed through Covid and the likelihood was it would grow stronger as the world normalised.
From the defence point of view, it is focused on communications and electronics which is where the growth is and is not related to the harm caused by selling missiles undesirable clients for example.
Also, in Europe we need to reverse three decades worth of underspending on defence, which has been further highlighted by events this year with Russia and Ukraine.
Thales was up 55% in euros in the first half of the year, which is 44% in US dollars or 60% in pounds.
And what has been the worst?
Leyland: Continental. Shares are down 29% in euros which is 34% in US dollars or 27% in pounds. The reason we own it is we believe the tier one auto supplier has invested sufficiently now to reorientate its businesses away from internal combustion engines towards electric vehicles which is the dynamic that the whole sector is going through.
It has done so in a way that reinforces its competitive advantages rather than being undermined by new entrants. That is being masked by three successive difficult years.
The other forgotten element for Continental is the tyres business, which is a solid, cash-generative and predictable part of the business. That underpins a lot of the downside value which we think is underappreciated at the current share price.
What do you outside of fund management?
Leyland: You will get the obligatory family answer as my kids are 10 and 12, but they are at an age where you can do fun things with them and they are self-sufficient enough that I don’t have to do everything with them. When not with them I enjoy board games and cycling.
Lancastle: My kids are younger than Ben’s, they are two, four and six, so it’s nice to live vicariously through them to stay young, which includes playing football, cycling and travelling with them.