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 week our interviewee is Jean Roche, Manager of the UK Mid Cap (SCP) at Schroders.
Which Sector Shows the Biggest Promise in 2023?
Consumer spend on holidays and other spend related to this is showing no sign of exhausting its post pandemic recovery, so probably something along these lines. I would however avoid stocks within this theme where balance sheets are stretched.
What's the Biggest Economic Risk Today?
If you can tell me where the oil price is going over the next 6-12 months, I could probably have a stab at answering this! But, war, or further global geopolitical conflict, is probably the biggest risk which will drive other risks.
Describe Your Investment Strategy
With pleasure! At Schroders Towers, within the UK mid cap team, we categorise stocks into 3 types: Unique, Flex and Avoid.
Unique stocks give exposure to a sector or investment theme that you cannot invest in elsewhere (scarcity value), have powerful business franchises, deliver high risk-adjusted financial returns, possess strong management teams and balance sheets. We ask ourselves whether they could be the FTSE 100 blue chips of the future.
Flex stocks are shares in companies which may be undergoing a transition within, or where the sector the company trades in is undergoing a change in capacity (pubs, for example). There might be management change. We’d generally expect to pay less for Flex stocks than we would Unique stocks.
The Avoid category is for stocks where we think management is not creating value or even actively destroying it. This might be through frequent and expensive M&A, for example.
Having categorised our investment universe into these three categories, we seek to construct our portfolios from attractively priced Unique and Flex stocks and, as the name would suggest, avoid the Avoid stocks.
Like anything “live”, we then have to maintain the portfolio by monitoring our positions, and applying our sell discipline as it arises. Our favourite reason to sell is when a stock is promoted to the FTSE 100 as this means that our strategy is working. We have eight other reasons to sell, though, not all of them positive, for example, if we see that a company’s product or business model is being disrupted, and the management team is not responding to this.
Which Investor Do You Admire?
I have been lucky enough to work with Andy Brough, here at Schroders, for the last seven years, and I admire his successful long-term investing record, particularly in UK small caps.
Name Your Favourite 'Forever Stock'
Stocks which have caught my eye by generating very high consistent risk-adjusted returns on capital through internally generated cash include number one homewares company and seller of winter warmer winners, Dunelm, and multi-bagger and the meat producer behind the McDonald’s McCrispy burger, Cranswick. But, forever? That would involve abandoning the sell discipline.
What Would You Never Invest In?
Cars, because I see them as depreciating assets, despite knowing people who have made money on them, and because I don’t know what to look for in old ones!
Growth or Value?
For every season, there is a tilt.
House or Pension?
We crunched some numbers recently, which revealed that property had doubled in value since 2004, whilst the dividend in the UK mid cap investment trust I manage had gone up by a multiple of 9.5.
Crypto: Brilliant or Bad?
There is something brilliantly audacious about crypto. It’s now become part of the payment ecosystem, which in many ways, was against the odds. However, its volatility, the fact that it is a private sector phenomenon and not backed by a central authority and lack of accessibility to many are reasons for great caution. I was interested to see HM Treasury launch a consultation on the Digital Pound in February, similar to the US, China and the Eurozone. It’s open until June 7.
What Can be Done to Improve Diversity in Fund Management?
Lowering the perceived barriers to entry. Doing as well as speaking. Educating. An example of this in the UK is the Pathways Programme, the brainchild of, and launched by, Baroness Helena Morrissey. In the words of the programme organisers: “Launched on the 19th of January 2023, Diversity Project Pathway programme is a world leading programme that focuses on developing the female Portfolio Managers of the future. It has been created by the industry for the industry. The initiative seeks to drive real change by unlocking female talent in order to address the absence of women in money-managing roles, with 88% positions currently occupied by men.”
It’s a yearlong programme with 60 participants in it this year. I’ve been delighted to be involved in supporting it. Gender diversity is not the only type of diversity that needs tackling, clearly, but it’s good to be contributing directly to one aspect of increasing it.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Engaging with companies can be very rewarding, because of the opportunity to learn something new about the company in doing so. It might be something as simple as “do you want to keep on paying that (uncovered) dividend?” or “have you thought about why your Glassdoor score is so poor/good?”. I did engage with one company, several years ago, on its weak Glassdoor score, whose management brushed my concerns aside, which resulted in my not investing, which was a good outcome for the portfolio but, obviously, a pity for the employees.
What’s the Best Advice You’ve Ever Been Given?
In investing: "you can love a stock, but it can’t love you back." Also, "trees don’t grow to the sky". See question five!
What Would You be if You Weren’t a Fund Manager?
I have always been interested in weather forecasting. The mixture of maths, science and potential TV appearances attracts me.
