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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 30 June 2015
F
ollowing a strong start to the year,
particularly in Europe, some uncertainty
has recently returned.While monetary policy
remains extremely accommodating, and
central banks are doing all they can to instil
con dence, the fundamental outlook remains
challenging in many areas.The UK market
enjoyed an uplift with the Conservative
election win in May, and here it seems as if
economic momentum has improved in the
past few weeks; however growth elsewhere
in Europe is more muted and the Greece
situation continues to rumble on.While
some companies are bene ting from better
conditions, particularly in the UK, many
are struggling and corporate pro t growth
overall has decelerated. In an environment
of lower growth and ultra-low interest rates,
many companies are attempting to grow their
earnings, either by borrowing to buy back
their own equity or by borrowing to buy the
equity of others.This is illustrated by the fact
that share buy-backs and M&A activity have
both reached record levels, while levels of
organic investment are low.
We continue to be concerned that
valuations in some areas of the market are too
high and often predicated on unsustainable
levels of pro tability.Accordingly, we think
that, where possible, investors should focus
on industries in which valuations are most
in line with historic averages and pro ts are
relatively stable.
RWC
Equity Income
M&A activity hits record highs as
companies look to boost earnings
Valuations in some
areas of themarket
are toohigh
Nick Purves
I
t has been a volatile quarter for markets.
Investors have been caught between the
positive impact of a continued recovery in the
global economy and concern about the
impact of impending rises in US interest
rates, along with ongoing tension in the
eurozone as the Greece crisis came to a head.
Against this background, the Managed
Growth fund has seen positive returns in its
equity investments (especially in the UK,
where the result of the general election was
received positively by the market.) However,
this has been o set by negative returns from
xed interest investments as bond yields have
risen sharply from their lows.
The fund’s UK equity portfolio continues
to adopt its strict focus on valuation.The
reason value investing is such a powerful
strategy is that it has more than 100 years’
worth of history to show that it is a process
that outperforms. However, a value strategy
can underperform over shorter time periods,
and this is what makes it a di cult approach
for many to adopt; but such periods are
simply too short for the strength of the
process to outweigh the impact of pure
chance.We invest on a ve-year time horizon
and it is over these longer periods that value
investing can really demonstrate its power.
That is what underpins the good long-term
results of the fund.
F
or several years, we’ve maintained
the view that China’s‘Big Pivot’ – the
structural shift from an investment-driven
economy to one that is propelled more by
consumption, services and productivity –
will be successful.While this transition will
likely result in slower GDP growth relative to
the fast pace of the past 20 years, we expect
future growth will be more stable, which
should help the middle class grow even larger,
over time.A healthy and growing middle
class enhances the overall attractiveness of
the macroeconomic environment for the
kind of leading businesses we seek to own.
Against this backdrop we primarily focus
on identifying Chinese businesses that are
positioned to bene t from the Pivot, such
as those that meet the needs of growing
consumer demand. Portfolio holdings
bene ting from this shift include Naspers
(ecommerce, media and social networking),
Nike (sportswear), LasVegas Sands (gaming
and vacations), and Prada (luxury consumer
goods).We believe each company has strong
business fundamentals.While their growth
trajectory will rarely be linear, we are willing
to accept short-term volatility in order to
participate in what we believe are wealth-
creating opportunities over our long-term
investment horizon.
SCHRODERS
Schroder Managed
Managed Growth
History shows that value investing
will pay off in the long term
SANDS CAPITAL
Satellite manager: Global Equity
Honing in on Chinese businesses that
could benefit from ‘Big Pivot’
ManagedGrowth
fundhas seenpositive
returns in investments
Future growth should
help themiddle class
grow larger, over time
David Levanson, Sunil Thakor and
Perry Williams
Kevin Murphy and Nick Kirrage
