Why is your fund a ‘fund to watch,' and how could it work in an investor's portfolio?
Equity markets have been dominated by a narrow cohort of stocks for some time, lifting overall valuations significantly. This environment demand a more durable approach for long-term return generation. We believe the Nedgroup Investments Contrarian Value Equity Fund is a fund to watch as it offers investors:
1) Durability: We invest in businesses that can stand the test of time, employing a mosaic approach to bottom-up research that allows us to identify companies with long-term potential.
2) Temperament: We have the courage to stand behind our best ideas and are prepared to invest in contrarian times. We build a high conviction portfolio and pay close attention to the margin of safety.
3) Alpha: Our powerhouse is superior stock selection and our value-discipline – an investment framework we have honed over 15 years.
Our success is anchored in a benchmark-agnostic approach to stock selection, driven by a seasoned team of portfolio managers, analysts, and an investigative journalist. Together, we actively seek investment ideas that capitalise on secular trends.
For these reasons, and due to the Fund's value focus, we believe this Fund offers valuable diversification to passive exposure, as well as growth-focused funds.
Can you give an overview of the team running the fund and your investment process?
The fund is managed by Mark Landecker and Brian Selmo, who bring an average of 25 years of industry experience, 15 of which have been together. They leverage different perspectives and expertise to identify opportunities and mitigate risks, fostering a culture of intellectual honesty and humility.
All team members, including managers, have research responsibilities which is divided by industries, not sectors, allowing for deep expertise and idea generation from adjacent industries. In-house fundamental research involves speaking to companies, competitors, industry experts, and peers, as well as reviewing external research to build models.
Nine analysts partner with a portfolio manager for the stocks they cover, enabling direct communication and fluid decision-making. An investigative journalist is embedded in the team to develop qualitative research on company management, crucial for understanding execution risks.
The portfolio managers speak daily about portfolio construction and with traders to ensure positions reflect conviction and the latest valuation analysis.
The investment process starts with a watchlist of around 500 businesses, focusing on dominant players with structural tailwinds, solid foundations, and turnaround opportunities. It takes years of research before investing. Analysts conduct fundamental research, assess management's execution risk with the investigative journalist, and formulate valuations over 3-5 years. They discuss research with managers to calibrate pitfalls and assumptions. Eligible stocks typically offer equity-like growth and a margin of safety in the worst case. Managers determine position sizing based on existing business exposures and outcomes.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio?
One area where we have built strong conviction is in semiconductors and connectors. These businesses are mission-critical, with large R&D budgets, double-digit margins, and benefit from the growing demand for electronics, electrification, and AI.
Despite the current cyclical downturn and low visibility on when it will turn, we prefer focusing on opportunities over the next three to five years, because when the industry rebounds, it tends to do so quickly.
In addition, we seek businesses with durable earnings growth. For example, one of our investments is exposed to autos, driver security, battery management systems for electric vehicles, IoT within industrials, and mobile payments. This company not only sells to developed market manufacturers but also to China given the advanced software integrated into their chips. The management team has also demonstrated commitment to shareholder value by returning nearly all their cash to investors through buybacks and dividends.
In summary, semiconductors and connectors and the characteristics of the above business illustrate the characteristics we look for when it comes to durability: strong management teams, structural tailwinds, favourable long term fundamentals and attractive valuations.
What do you see as the big opportunities and risks for your strategy?
Opportunities:
· Global leaders: We have held several dominant businesses which have exposure to a range of industries ranging from ad revenue, cloud computing, digital entertainment, analogue semiconductors, cement etc. These companies which we have held for more than five years, some even closer to a decade. While valuations have soared, they companies operate successful business models and we believe they will continue to provide reasonable returns in the coming years.
· Out-of-favour consumer stocks: Over the past few years, we have increased our investments in consumer stocks, particularly beverage companies. Share price weakness has provided an opportunity to invest in these businesses with dominant market positions, owner-operator management teams, and diversified revenue streams.
Risks:
· China exposure: Despite recent gains, the high level of regulatory, political, and macroeconomic uncertainty in China makes direct investments challenging for our strategy. We have experienced this firsthand with some internet-related Chinese stocks prefer to allocate capital to other opportunities given our holding period tends to be five years on average. That doesn't mean there won't be rallies but we prefer to have indirect exposure to the Chinese consumer through luxury businesses like Richemont and Shiseido, with iconic portfolios.
· Limited energy exposure: During the pandemic, when oil prices went negative, we invested in a distressed energy company. We prefer select exploration and production (E&P) operators with low-cost operations over service providers due to the latter's cyclical performance and link to commodity prices.
By focusing on durable earnings growth alongside the margin of safety across global companies, we have the potential to offer investors superior outcomes over the long-term.
