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 Simon Steele, portfolio manager and head of Fiera Atlas Global Companies – which is rated Gold by Morningstar – a sub-fund of the Magna Umbrella Fund plc at Fiera Capital.
Which Sector Shows the Biggest Promise in 2023?
As long-term investors, we don’t take a specific sector approach. Our edge, and how we generate long-term alpha, is in understanding the corporate drivers that create long-term shareholder value and identifying companies that have enduring and stable sources of long-term demand growth, and the ability to meet that demand with sustainable and high levels of profitability regardless of sector.
We find interesting companies that can profitably exploit structural long-term trends across many end markets, such as the increase in production of biologic drugs, the adoption of robotic surgery, the integration of software and automation in manufacturing and the rise of electronic payments and trading.
What's the Biggest Economic Risk Today?
Globally, the high cost of capital to control inflationary pressures is a large risk that could reduce demand, increase the need for corporate restructuring and create a challenging earnings environment. Companies that are low in profitability and heavily reliant on external capital – particularly debt – are most exposed.
We actively avoid investing in companies with high cashflow volatility driven by macro sensitivity, favouring companies that have strong profitability and a robust financial structure, with little or no need for external capital. Additionally, we prioritise companies that face non-cyclical sources of demand growth, as this helps shield us from the fluctuations of the economic cycle.
Describe Your Investment Strategy
Our investment strategy focuses on two main criteria. Firstly, we target companies that can consistently generate a strong economic surplus, exceeding all costs including the cost of capital, resulting in shareholder value and high economic profit. Secondly, we look for companies with sustainable, profitable, enduring structural sales growth, allowing them to continuously reinvest at a high economic profit and expand intrinsic value over time.
As equity investors, we aim for above-average returns, but achieving returns higher than the risk-free rate involves taking on risk. While risk cannot be avoided, it can be managed. Equity investment risk arises from uncertainties surrounding long-term assumptions about future profitability and growth and each company faces unique risks that may impact its cash flow and share price performance.
Our role as fund managers is to diversify these risks and reduce the size of each position's required leap of faith. We achieve this by assessing companies against our strict wealth creation framework, which considers a company’s strength in terms of competitive advantage, capital allocation, growth, and predictability.
Which Investor(s) Do You Admire?
Peter Lynch, who managed the Magellan fund from 1977 to 1990. Like us, he recognised that markets are typically short-term focused, and that patient, long-term investors who focus on thorough research and gain a deep understanding of each investment, have an edge.
Name Your Favourite 'Forever Stock'
I have many, but if I had to choose one it’d be IDEXX Laboratories. IDEXX manufactures diagnostic equipment used in veterinary practices and generates reliable recurring income and high profitability through the sale of recurring tests.
Of course, it’s important to recognise and act when the characteristics that underpin a stock are compromised. Selling disciplines are as important as buying disciplines.
What Would You Never Invest In?
Oil and banks. Both industries are cost of capital type returns through cycle and over the long term, their cashflows are highly cyclical and volatile, and offer limited opportunities for differentiation due to standardised products. In the case of oil, it is extremely difficult to imagine long-term, sustainable demand growth given the backdrop of climate change and the need to decarbonise the economy.
Growth or Value?
Growth, but only when backed by high levels of profitability. Growth below the cost of capital will destroy rather than create value.
House or Pension?
Consider both housing and pensions as crucial financial decisions for your future. Owning a house helps avoid rental inflation, especially in retirement, while saving into a pension protects your later life's living standards. Start contributing to a pension early to benefit from compounding and maximize your rewards.
Crypto: Brilliant or Bad?
As an economic construct, brilliant. As an investment idea, terrible.
What Can be Done to Improve Diversity in Fund Management?
It's a complex question and I'm not sure I have all the answers, but a more inclusive industry will improve the quality of investment outcomes. Recruiting from diverse and underrepresented backgrounds is an obvious target for change, but I support all forms of broadening the talent pool and providing alternative routes into our industry.
Have you Ever Engaged With a Company and Been Particularly Proud (or Disappointed) of the Outcome?
Engagement outcomes are often subtle and difficult to measure. We are currently engaging with a company around executive pay and the link between rewards and long-term shareholder value creation that balances the interests of all stakeholders. I'm proud of my team’s efforts so far but it will take time to demonstrate progress.
What's the Best Advice You’ve Ever Been Given?
Don’t sell your winners. Running winners is often inked to momentum, but I believe it’s credibility is due to persistent excellence. Excellent companies often remain excellent. Bad companies rarely become good.
What Would You be if You Weren’t a Fund Manager?
My deep love for cricket would likely lead me to become a cricket coach. There would be few things greater than promoting the game in places where cricket is not widely accessible.
