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Guinness Global Innovators has a great track record backed by a coherent investment strategy and a high-conviction portfolio
Thursday 16 Sep 2021 Author: Tom Sieber

Sometimes we assume technology and innovation are interchangeable terms and amount to the same thing. They don’t.

After all, a budget tablet computer is a piece of technology, but that doesn’t necessarily mean you would want to invest in the company which has manufactured it.

Shares has spotted a fund which allows investors to access a broad spread of genuinely innovative businesses, which can benefit from long-term, global thematic changes.

Launched in October 2014, the Guinness Global Innovators (BQXX3K8) fund has established a strong track record, underpinned by a clear investment process and high-conviction approach. Over the last five years it has delivered an annualised return of nearly 20% according to Morningstar.

Since inception seven years ago, it has returned 192.7% versus 139.5% from its MSCI World benchmark, states FE Fundinfo, measured in pound sterling.

Past performance is not a guide to future returns, but we believe there are several reasons to believe it can maintain its market-busting returns. The ongoing charge is also a very reasonable 0.89%, which data provider Morningstar notes ‘sits in the second-cheapest quintile’ of its relevant category.

STRATEGY HAS SOLID FOUNDATIONS

The managers, Ian Mortimer and Matthew Page, have been at the helm since inception. Fundamentally the strategy they employ comes from the wider Guinness Asset Management playbook which focuses on four different factors:

Quality, as measured by cash flow and return on investment

Value, which is determined by comparing the market valuation against a valuation derived from a discounted cash flow analysis (working out what a company’s future cash generation is worth in today’s money)

Earnings forecasts, analysed over the short term to gain insight into market sentiment

Momentum, looking at relative performance of a stock over three, six and 12 months

Building on these foundations, Mortimer and Page look for growth trends and themes, identifying anywhere between 10 and 15 themes at a time. These are updated annually, and current themes include artificial intelligence, robotics, advanced healthcare as well as clean energy and sustainability.

They then identify innovative firms with exposure to these trends, valued by the market at $500 million or more. They specifically filter out companies which in the last 12 months didn’t generate a return on capital greater than the cost of capital, have a debt to equity ratio of more than 150% and are not forecast to generate earnings growth in the year ahead.

As a result, the fund does not invest in so-called ‘blue sky’ outfits, where there is the potential of significant rewards but also much higher levels of risk.

In common with other Guinness products, Guinness Global Innovators has no constraints in terms of hugging any benchmark, meaning you are paying for genuinely active management.

KNOWING WHEN TO SELL

Typically, investments are held for between three or four years but there is significant emphasis on being disciplined in selling when the situation demands it. The fund gives six core reasons for getting rid of a holding.

These include the company no longer qualifying as innovative, the balance sheet becoming stretched, the valuation no longer offering compelling upside, the original investment thesis no longer applying, or a better idea being identified.

This process helps the fund arrive at a concentrated portfolio of 30 names, each of which has a roughly equal weighting in the portfolio.

Some of the top 10 holdings will be familiar to most investors, like Google-owner Alphabet, Microsoft and Facebook. However, the likes of science and technology conglomerate Danaher and high margin and niche-focused industrial group Roper Industries are less high profile.

Information technology dominates from a sector perspective and the fund is also heavily skewed towards the US which accounts for more than three quarters of the portfolio.

Evidence of the avowed sell discipline practiced by Mortimer and Page came with the exit in July from a position in Chinese tech firm Tencent.

This was attributed to ‘increased scrutiny from the Chinese regulator on monopolistic behaviour, data security and financial stability’ which ‘adds an inherent level of risk to investments within the region – particularly in large, mega-cap tech stocks’.

A RECENT ADDITION

The one-in-one-out policy saw Connecticut-headquartered Amphenol, a manufacturer of fibre optic kit which allows power or data to be transferred between devices, join the Guinness portfolio.

The fund managers see a significant runway for growth based on the fact Amphenol is the market leader despite only having a 5% share. They also believe it has a ‘strong economic moat’ given the equipment it makes is often mission critical for its clients.

The biggest recent contributors to the fund’s overall performance were graphic processing unit firm Nvidia and semiconductor expert Infineon.

Mastercard and Visa were the most significant detractors, with both suffering in the fall-out from the anti-competitive court battles the former is embroiled in. Despite this headwind Mortimer and Page remain positive on their longer-term potential citing the transition to a cashless society.

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