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Opposites attract. Or do they?

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Judith MacKenzie
Judith MacKenzie

Partner and Head of Downing Fund Managers

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Oil and water repel. Yin and Yang are – Yin and Yang. Introverts and extroverts rarely end up chatting happily in the corner at parties.

As in life, fund management likes to pigeonhole. Growth and Value being the most regular sparring partners.

In fund management you have one thing to do; buy at the price that equates to a discount to the earnings potential of a company. Then one of two things happen – the stock goes up because you bought an undervalued asset that everyone else loves, or the earnings exceed expectations.  Or they don’t. That’s it. A judgement call based on fact.

Or is it? The wild animal introduced into the equation is the stock’s reaction to everyone else making that judgement – so you may also need to understand how others might value the entry point (share price) and the earnings potential. I like the first part (based on fact), but I don’t like guessing how another human (or algorithmic trader) might view the stock. 

Because of that, we don’t buy ‘stocks’ – that is a unit of something that’s been dissected.  We look at every share we buy as being the company itself.  If we buy one share in a company, we would be prepared to buy 100% of it. These are not objects or synthetics. These are companies with sales, marketing, people, manufacturing. They do stuff. Markets merely speculate.

If we take the common view that trying to time markets and think about other investors’ behaviour is a fools game, then why do we try and ‘guess’ what style should be in favour, and when?  As Charlie Munger said, “Our predictions and judgements are better than most, because we make fewer of them.” Therefore, sticking with a view and not tampering with it should be a rule of thumb for investment success.

Simon Evan-Cook, one of the managers in the Downing stable who we work alongside, keeps it really simple in his multi-manager strategies. He buys the best growth manager he can find, and the best value manager and ‘pairs’ them. And leaves it alone.

This means that returns are less volatile, smoother, and he isn’t left with the unenviable position of having to decide when to switch horses. The graph below illustrates the point eloquently.

Source: FE Analytics 29/12/2017 to 30/12/2022

The blue line is a growth fund and the orange is a value fund. The graph shows performance over five years, a period when growth was largely in favour, up until the last quarter of 2021.  At this point, value started to outperform. If you invested half your monies in each one of the mandates, you arrive at the red line. You would have endured less volatility and benefited from the best of both worlds – without the pain of trying to time markets. Simple.

Downing AIM Estate Planning Service

The Downing AIM Estate Planning Service (AIM IHT portfolios) has a value tilt. We are value investors, and this is evidenced by the valuations of our holdings (PE and EV/EBITDAs) being not only lower than the index, but also the majority of our peer group.  

Why do we like investing like this? Mainly because we believe if you buy a stock when it is value, or ‘cheap’, you are less dependent on it having to get ‘everything’ right in its growth journey. If you buy it when it is on a PE of say 25x, you are buying forward years of predicted growth. If these long-dated cash flows don’t come home to roost, then share prices tend to remind you that you called it wrong. This was experienced in technology growth stocks through 2022, and we think that it will continue.  That said, we looked ok - but boring - in momentum markets that favoured growth when growth managers shot the lights out.

Our primary goal in our Downing AIM IHT Service is to NOT ERODE CAPITAL. The typical age of an IHT investor is over 70 and they tend to be investing to pass down value to the next generation. It’s worth noting too that Downing offers downside protection insurance as standard for investors under age 90, which protects the initial net investment of a loss of value of up to 20%.

Steady and reliable is what these investors tend to look for – and therefore we feel that buying long-dated future earnings adds a degree of risk and volatility to a portfolio. I would rather buy earnings that were more certain, and perhaps get a steadier journey, than pay heavily for what might be uncertain dramatic growth.

However, we also realise that some investors want the best of both worlds – the excitement of a growth stock, but the reliability of a value approach.

So – why not do it! Pair the Downing AIM IHT Service with another – go 50:50! And then leave it alone. Let the growth portfolio benefit in momentum markets and the value portfolio benefit in more challenging times. Given our differentiated strategy and focus on the smaller end of the market where there is an abundance of choice for diligent stock-pickers, the Downing Service will also likely have little cross-over with stocks investors already hold.

The most reassuring thing for a fund manager is seeing your portfolio perform as you would expect it to in volatile markets. For us, that was typical of 2022. We don’t aim to shoot the lights out when the AIM market is outperforming – that would likely mean that we had changed our philosophy and were chasing performance by buying growth that might be years away from maturing.  But conversely, we tend to perform well relative to sector and peers in more challenging markets.  With a 11 year track record (up 143.91% against the FTSE AIM All Share TR index up 24.26%) we know that we do what we say we will do.*

We are boring and hopefully predictable. If you want something more dynamic then pair us with something growthy and enjoy the excitement of the equilibrium that doing nothing brings.

* Downing Fund Managers and FTSE AIM All Share as at 31 January 2023

Judith MacKenzie - Manager, the Downing AIM Estate Planning Service

Find out more information on the Downing AIM Estate Planning Service

Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs depends on investee companies maintaining their qualifying status. Investments in smaller companies will normally involve greater risk or volatility than investments in larger, more established companies. Return is the value of investments, plus cash, including income, after deducting all charges, excluding any initial fee. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies.   

Important notice: This document is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. You should only invest based on the information contained in the relevant Product Literature available from Downing and your attention is drawn to the charges and risk factors contained therein. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.


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