How this fund manager does things differently
Neil Goddin, manager at Kames Global Equity Market Neutral fund, tells interactive investor how his fund works and where he gets his stock ideas from.
Can you briefly outline your investment approach to running an equities fund?
We have a well-defined and robust investment process. We screen the universe and quintile rank it into five buckets, and we only buy stocks that screen in the highest quintile. We fundamentally research every idea that is bought in the fund. We use portfolio construction and risk management tools to help us build a well-balanced fund.
We are strong believers in "the need for something different". This manifests itself in a fund where we don't buy stocks that have a market capitalisation above $30 billion, and we have a skew towards small and mid-sized companies.
This is because we believe the market is at its most in efficient in mega-caps and adding value over the long term is challenging. Apple has around 100 sell-side analysts pouring over every news article and announcement. Small and mid-cap stocks often have fewer than five analysts, and it is much easier to find true stock picking Alpha in these types of stocks.
With passive investing becoming ever more popular, we also believe that the client fee income we earn is best spent building portfolios with stocks that are not large weights of the passive funds they can buy at much cheaper fees.
We also like to invest in stocks where we fundamentally disagree with the market. If I asked people to name the 10 best companies in the world, we would probably all agree on more than half of them.
I believe fund managers often fall into the trap of buying the best companies not the best investments. For us to buy a stock we are looking to find ideas where we believe the market has got the valuation wrong. This maybe driven by growth rates, margin expectations or incorrect total addressable market assumptions.
Could you talk about some of the stocks which exemplify your approach?
Activision Blizzard (ATVI) is a stock many of you will know and one we bought in December 2016. It was A Kames Rank 1 so fitted our process; but was being sold off heavily by the market. This was because the latest version of their flagship game Call of Duty was suffering from lower than expected sales (it was set in space and not popular with gamers).
The Kames analyst for the stock, Jon Parsons from our US team, had a strong view that the market was misunderstanding changes that had occurred in the Gaming industry.
Historically, gaming stocks have struggled to make consistent returns as revenues have been focused on individual game launches. This model has now changed with what we like to call service revenue.
The easiest way to explain this is an example of my children. They like to play Just Dance; a game from Ubisoft (UBI), another games company. You buy the game but if you want access to the full catalogue of songs you also pay £25 per year (by the way one of my biggest life achievements is having the household top score for "The Final Countdown" by Europe; the wife is still angry that I have better dancing skills than her).
This has changed the economics of gaming; it is no longer just about selling one CD. It is about in-game purchases, memberships to play on line and digital sales rather than just traditional CDs.
In terms of the Activision purchase; we did not disagree with the market that the Space version of Call of Duty was disappointing; everyone could see the monthly sales figures. But we did believe the market was underestimating the company's ability to leverage service revenue from games released previously.
Most pleasingly, when Activision announced results in Jan 2017, they were well ahead of the market's expectations due to the service revenues earned and the stocks reaction was strong.
Where do you get your ideas from?
First and foremost, ideas must pass the Kames screening criteria; this gives us a universe of around 500 stocks that we can invest in during any given month.
We then meet companies, speak to sell side analysts, fundamentally research and read widely on a wide range of subjects to drive idea generation.
Has the risk profile of your fund risen following the recent pick up in volatility?
When measured in absolute terms volatility has certainly increased, and the fund was down in absolute terms during the recent market weakness. But the fund has a high quality and low debt bias, so market volatility when measured against the benchmark we use as a comparator in MSCI All Countries World is generally low, and we expect to outperform this benchmark in periods of market weakness.
What I like about our process is we try to only sell stocks if they drop down the screen. This means when you get market wobbles like this you are not tempted to put on panic trades; you have a robust investment process which you stick too.
Describe the team and resources available to run this strategy?
We have a very experienced team of 28 investment professionals sitting in one location who cover markets across all major regions globally. Most are fund managers and analysts; this keeps communication lines short and enables us to act quickly and act as one.
We do not have overly officious investment committees to decide on whether we buy a stock; we trust our experienced team's judgement and can move fast when research is finished and the decision to buy a stock is made.
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