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 Richard Saldanha, portfolio manager for Gold-rated Aviva Investors Global Equity Income.
Which Sector Shows the Biggest Promise in 2023?
Healthcare is pretty attractive right now, there are lots of companies offering resilient earnings across a range of industries, from health insurers through to life science and diagnostic companies. With the sharp rise in tech stocks this year, these types of companies have been largely ignored despite appealing valuations.
What's the Biggest Economic Risk Today?
The recent slowdown in China is certainly worrying – there was much anticipation going into this year that we would see a resurgence of the consumer but that has certainly not been the case. What is even more concerning is that some of the issues appear more structural in nature, which simply providing further liquidity will not easily solve.
Describe Your Investment Strategy
We focus on companies where we see strong free cash flow generation, a track record of dividend growth and sustained high returns on capital. We look for resilience and the ability to compound free cash flow through economic cycles – ultimately this gives the potential for strong income growth as well as capital growth. Unlike other income funds, we source our income from what we call ‘non-traditional’ dividend paying sectors such as technology and industrials – this gives us a broad opportunity set to build a diversified and high conviction portfolio.
Which Investor(s) Do You Admire?
Aside from Warren Buffett, perhaps less well-known is Nick Sleep, who founded the Nomad Investment Partnership along with Zak Zakaria. He was an early investor in the likes of Amazon, and I’d highly recommend reading his investor letters where he outlines interesting aspects of business models (such as scale economies shared) which ultimately provide a strong flywheel for durable growth.
Name Your Favourite 'Forever Stock'
Visa, which is one of the main global payment processors. The competitive advantage they have is greatly enhanced by network effects – in this case having a vast number of consumers and merchants using their platform. This makes it hard for others to disrupt and has led to an excellent track record of free cash flow growth. It also has an incredibly capital light business model with high returns on capital and plenty of tailwinds for future growth.
What Would You Never Invest In?
Companies with low returns on capital or unpredictable cash flows would be high up on the list to avoid. This tends to be industries that are tied to a commodity (where they are dependent on future prices which are inevitably hard to predict) and capital intensive so would be sectors such as energy and mining.
Growth or Value?
Value but for me that does not mean a low P/E – that doesn’t give you any indication of a companies’ future growth prospects. Ultimately, value comes from the ability of companies to compound free cash flow consistently over an extended period of time – in that sense we look for companies that can do this but try and be as disciplined as we can on the price that we pay – using free cash flow yield as our main barometer.
House or Pension?
Pension – having the patience to invest for the long-term can be extremely rewarding, especially letting those returns compound through time. In that sense a pension is a fantastic investment vehicle for achieving this. Of course property has shown the ability as an asset to grow through time but in many cases even owning a property can be a major hurdle, so a pension would be a must for me.
Crypto: Brilliant or Bad?
The technology behind blockchain is undoubtedly useful and crypto has been adopted widely as a payment form (even the likes of Visa, Mastercard and Paypal have embraced it). That said, it has also led to a large amount of speculating, which is far more unwelcome.
What Can be Done to Improve Diversity in Fund Management?
There has been a lot more focus on entry-level roles and whilst this is certainly welcome, I think one of the areas that gets overlooked is recruitment at other levels of an organisation. I’m very proud of our “Return to Work” programme at Aviva that has been operating since 2018 for those who have been out of the industry for an extended period and keen to return. It has certainly brought a huge breadth of diverse talent to the firm.
Have you Ever Engaged With a Company and Been Particularly Proud (or Disappointed) of the Outcome?
NXP Semiconductor is a semiconductor manufacturer that covers a wide range of end markets from automotives through to industrial and consumer electronics. We have been engaging with the company on their supply chain management, an area that remains a challenge across the sector. Given the importance of navigating supply chain challenges, we have been encouraged by their improved disclosure of material risks from supplier audits and assessments, as well focusing on supplier training programmes which should help sustain their impressive growth.
What's the Best Advice You’ve Ever Been Given?
“Keep your head when all about you are losing theirs” – you may also recognise this one as the first line from Rudyard Kipling’s poem “If” but I find it valuable advice not just in investing but in life in general! Fear and greed tend to be a recurring theme in markets and being able to stay calm and make rational decisions is vital.
What Would You be if You Weren’t a Fund Manager?
I’m a big sports fan – either playing or watching – there are certainly lots of interesting comparisons to investing here too! Sadly, I never had enough talent to play at a high level, but I would have loved to pursue a career in sports journalism or broadcasting.
