Can you give a brief overview of your strategy?
Launched in March 2020, the VT Downing Unique Opportunities Fund, managed by Rosemary Banyard, seeks to maximise returns to investors over the long-term (5+ years) by investing in a concentrated portfolio of quality UK small and mid-cap businesses. The fund invests in opportunities termed unique because it owns stakes in businesses that the manager believes can achieve above average returns on capital, based on sustainable competitive advantages. They are either the only UK listed company in their field, or one of very few and demonstrate a unique strategy or culture.
Rosemary Banyard is a bottom-up stock picker who adopts a long-term buy and hold strategy with a minimum investment horizon of five years. She is not looking to buy and sell for short-term profit. Rather she is investing in quality, robust companies with good growth potential that are trading on valuations that will generate shareholder value over time. Typically, their management teams will have a track record of making sensible long-term decisions, be it on recruitment, marketing spend, investment in technology or capital investment in plant, which will over time reap superior returns on equity and drive-up shareholders' funds.
The Fund is relatively concentrated and Rosemary Banyard's disciplined due diligence policy results in a high-conviction investment strategy where only her best ideas make it into the 25-40 stock portfolio. Holdings are characteristically businesses with clear and sustainable competitive advantages that are difficult to replicate, which can create high barriers for new entrants and generate superior returns on operating assets. In addition, portfolio companies generally possess sound finances, with the majority of companies in the current portfolio having no debt at all.
The investment team includes Rosemary Banyard as lead manager, supported by the wider Downing Fund Managers team of investment professionals.
How are you positioning your portfolio in uncertain times?
The portfolio is substantially unchanged from the original plan at launch, with only a handful of positions added after the initial build period (e.g. Spirent, Ergomed) or exited (e.g. James Fisher, Avon Protection). No new names were added in the first half of this year and no positions sold, and Rosemary is confident on future prospects for the holdings.
This is despite 2022, particularly since Russia invaded Ukraine, being a difficult environment for UK equity funds focused on investing in quality growth companies. There has been a significant de-rating with growing concerns since late 2021 over high inflation and rising interest rates. While the environment will likely be tough through the latter part of 2022 and perhaps well into next year, Rosemary believes that a combination of share buy-backs, special dividends, takeover bids, internally funded acquisitions, and market share gains will see her companies outperform their peers.
Currently, the largest sector weightings are in Information Technology, Healthcare, Communications and Financials, sectors which are typically characterized by high switching costs, network effects, patents, or similar commercial advantages.
Key investment theme - The subscription economy
Increasingly, products and services are not owned - they are rented, leased, shared or accessed via subscription. Not just magazines, newspapers, internet and mobile bandwidth, but music, video, games and TV streaming subscriptions have all been made possible by the digital revolution. The benefits include convenience of payments and delivery; space-saving; access anytime; elimination of obsolescence risk; and lower upfront costs.
The adoption of subscription models in the commercial world derives from similar attributes to those enjoyed by consumers: reduced obsolescence risk on technology; lower maintenance costs; predictability of costs; revenue rather than capital spend; and a saving of resources such as space and technical knowhow.
Alfa Financial Software is a leading global provider of software and services to the automotive and equipment leasing industries. Its software manages the entirety of the life of individual leases, from inception, through changes in interest rates and regulations, to termination or even default. Many of its customers are in the process of rolling out its software globally and it is winning new customers with a "cloud first" approach. Electric Vehicles and Autonomous Vehicles are more likely to be leased than their predecessors, not least because this technology is so new and technological risk is greater.
Videndum, formerly called Vitec, has no.1 or no. 2 positions globally in the production of technology used by broadcasters, content creators, vloggers etc, such as camera accessories, screens, audio and lighting equipment. Videndum also has video compression technology which is world class in minimising delay in video streaming over the internet, with applications ranging from the broadcast industry to surgical procedures shared online.
