In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This time our interviewee is Gerrit Smit, manager of the Morningstar 4-star rated Stonehage Fleming Global Best Ideas Equity fund.
Which Sector Provides The Biggest Investment Opportunity in 2022?
We remain optimistic about the strong fundamental investment opportunities in technology. We believe the fourth industrial revolution is still in its early days and that many companies in this sector are essentially creating different future economic growth drivers around things like artificial intelligence, the internet of things and 5G, as well as augmented and virtual reality, advanced robotics, and cyber security.
We currently enjoy quite a unique situation, in which major corporations drive new "blue-sky" technological developments while they are already very profitable and creating vast amounts of free cash flow to finance new developments. We think it's especially attractive.
What's The Biggest Economic Risk Today?
It's easy to be somewhat theoretical about economic risks, none of which we can ignore. In reality, though, we are not yet rid of the pandemic virus. While we have learned to live with it, there is risk that we have a stop-start global economic recovery, and prolongued supply chain problems. This can both hamper economic growth and fuel inflation, which may result in a dreadful stagflation environment.
We have an interesting analogy in the US currently. Consumption drives its economy--it makes up 70% of GDP. The average consumer’s balance sheet is currently the strongest it has been over decades. The recent high virus infection levels have nevertheless kept their confidence levels from recovering as well as expected. While this may well happen soon, there is also risk of new virus variants holding it back.
Describe Your Investment Strategy
We invest for sustainable growth in the highest-quality companies that have particular competitive advantages over their peers. We focus specifically on top-line organic growth, the quality of management, and the business culture in respect of sustainability, confining ourselves to businesses that are already very profitable. We look for strong balance sheets and good reinvestment opportunities.
Our preference is to own global operators that can utilise good organic growth opportunities also in emerging markets (rather than us accepting higher volatility risks of owning pure emerging markets businesses). We would not buy a business if we have to consider economic cycles or if the business was dependent on a single factor over which management had little influence--they should be able to control their destiny.
Which Famous Investor Do You Admire?
Anthony Bolton. He is a man of different talents. He also invested very strategically on the basis of in-depth research and a full understanding the business. He generated outstanding returns of more than 23% per annum over more than 25 years.
Name Your Favourite "Forever Stock"
Microsoft is one of our favourite best ideas. It keeps reinventing itself all the time and is on the front foot in creating its own future through new technologies. To illustrate the result of its success, the share has compounded in double digits since its peak, preceding the burst of the technology bubble in 2000.
We have also held Accenture since our fund’s inception. It focuses on assisting businesses with new technologies, and therefore remains ahead of most in this context. With its consulting business model, it is a strong cash generator, sharing handsomely in the evolvement of a growth in the industrial revolution.
What Would You Never Invest In?
Anything I do not understand, or anything where factors beyond management's control determined the destiny of a business. I also do not want to capitalise on anything that is destructive to humankind.
Growth or Value?
Easy. Growth outperforms handsomely over time, and with longer stretches than value, and more so under more difficult economic circumstances. You have much less risk by owning sustainable growth.
Pension or Property?
Half of both!
Cryptocurrency: Public enemy or Pioneering Proposal?
I do not understand it well enough, fear potential regulation and new technology may continue disrupting it in some form or another.
What Can Be Done To Increase Diversity In Fund Management?
Examples of actions include setting mandatory diversity training and recruitment goals, followed up with diversity workshops and quarterly reporting obligations. Industry-wide initiatives such as the Women in Finance Charter and the 10,000 Black Interns programme are also crucial in moving the dial. We've signed up to both.
Give Us An Example Of Engaging With A Company You Invested In Where You Were Particularly Proud (Or Disappointed!) Of The Outcome?
We are not an "activist" investor but act as permanent shareholders, and often engage with our businesses on a confidential basis.
What's The Best Bit Of Advice You’ve Ever Been Given?
Think strategically.
What Would You Be If You Weren’t A Fund Manager?
Architect! I love Grand Designs.
