Occasionally, funds can become victims of their own success, becoming so popular and attracting such inflows that they become harder to manage and their size begins to impact on the investment process and performance.

One way asset management companies seek to dampen down investor demand in such instances is to ‘soft close’ such a collective, which means the fund is technically still open for sales and purchases but it is made far less appealing to new investors.

Usually, the fund provider will levy charges on the fund in order to deter investors, charges that can include the removal of any discounts the manager offers to intermediaries. Regular savers are usually unaffected by a soft closure and normally, they can continue to put money into the affected fund.

Rarer still is a ‘hard close’, where the fund provider will simply not accept any new money into a fund that has grown too popular and is sometimes removed from platforms altogether. 

Fund management companies soft and hard close funds to protect existing investors and these funds still operate in the background.

WHY HAS GLOBAL EQUITY SELECT HARD CLOSED?

On 14 September 2023, Royal London Asset Management announced it had decided to limit access to the five-star Morningstar rated Royal London Global Equity Select (BF93W97) fund, ranked first quartile in the IA Global sector over one, three and five years and offering exposure to tech titans Apple (AAPL:NASDAQ) and Microsoft (MSFT:NASDAQ) as well as US healthcare colossus UnitedHealth (UNH:NYSE) and high-flying pharma firm Eli Lilly (LLY:NYSE).

The hard close followed a sustained period of success for the Global Equity Select strategy, which outperformed the MSCI World index in 18 of 21 years between 2001 and 2022 and has seen strong inflows and interest from investors in the UK and across the globe as a result.

Royal London explained that capacity levels were ‘now reaching a point where we believe it is in the best interest of investors to exercise controls to ensure our investment team can continue to invest in best-of-breed companies that can deliver attractive long-term outperformance’.

In a nutshell, anyone who already has money in the fund will no longer be able to buy new units on the market.

Those already owning the accumulation version of the fund will still have dividends automatically reinvested if they use the AJ Bell platform – investors using alternative platforms should check with their provider. Anyone already holding the income version of the fund will not be able to use dividend payments to buy more units.

The good news is the tried-and-tested investment strategy is still accessible through several of Royal London’s other funds which remain open to existing and new investors including Royal London Global Equity Diversified (BF93WF3) and Royal London Global Equity Income (BL6V111).

These portfolios also employ the Royal London Asset Management Global Equity team’s proven approach to stock selection and portfolio management and have consistently maintained strong records of delivering risk-adjusted outperformance.

Royal London’s head of equities Peter Rutter tells Shares the Global Equity Income fund is the most similar to Global Equity Select in terms of ‘shape and risk budget’. As such, it also provides investors with access to the team’s repeatable ‘Corporate Life Cycle’ framework, which forms the foundation of the team’s winning approach.

Rutter considers that corporate returns on productive capital and growth tend to progress along a life cycle and every company can be located economically in one of five corporate life cycle categories, which include early-stage accelerators and growth compounders as well as more mature returners and turnarounds. This allows Rutter and the team to have ‘five stock picking processes embedded in the same process, because how we pick winners in each category is different’.

Put simply, this tried-and-tested approach enables the team to build ‘a lifecycle diversified portfolio’ which is ‘incredibly balanced compared to the market’ and has enabled the strategy to consistently outperform across multiple market conditions. This includes during the big style rotations seen in global equity markets, when growth managers and then value managers have been in the ascendancy.

Rutter makes the point that if you find a quality growth company that ‘compounds success brilliantly, and better than the market anticipated for the next decade, you will make money as an investor.

‘But the interesting phenomenon to us is you can also make unbelievable money buying a turnaround that turns around.’

But you need two very different forms of analysis to spot that winner, he explains. ‘You can’t apply the same methodology to finding that winner in those two cases. It’s the right process for the right stock at the right time and that’s how we’ve been able to consistently deliver alpha across that whole stock picking spectrum.’

PORTFOLIO PICKS

Compounders are effectively what investors commonly refer to as quality growth companies, says Rutter. These are businesses that generate high returns on productive capital and are growing fast. ‘We are looking at the value proposition, the moat around the business and the addressable market the business can grow into. Really, we are trying to find the compounders which can compound better, longer, faster than all the others.’

Holdings from across the global equity strategies include Old Dominion Freight Line (ODFL:NASDAQ), a North Carolina-headquartered trucking business benefiting from positive network effects. The US company makes high returns on capital, has been growing fast and ‘operates in a sub-set of the trucking market called less-than-truckload’ explains Rutter. ‘Which means customers buy space on the truck by the pallet.’

He describes Old Dominion Freight Line as a ‘super-compounder’ whose network advantages mean it can offer customers the best service at the cheapest price and then recycle the money into improving the network density to offer an even better service and an even cheaper price.

‘This has allowed the company to grow at 15% per year organically for the last 15 years. It has gone up nearly 10-fold since we bought it eight years ago.’

A compounder with what Rutter regards as an ‘immense’ moat is says Paris-headquartered commercial aircraft engine maker Safran (SAF:EPA), ‘a really interesting business because it costs billions of dollars to design a new aircraft engine and it’s very hard for anyone to ever enter this market outside of two consortiums that have 50-year relationships with every airline in the world’. Rutter also points out ‘passenger demand and travel continues to grow at around two times GDP on an international basis, so demand for its products continues to grow’ and the ability for the €65 billion cap company to ‘compound cash flows for a long time is very significant.’

TURNAROUND SITUATIONS

In terms of turnarounds, Rutter and the global team recently initiated a position in American carrier Delta Air Lines (DAL:NYSE), which has been on ‘a long-term move to being a premium airline’.

When the team invests in recovery stories, they like to see ‘some form of differentiated business versus a tough industry, that the industry dynamics are stable or improving and that the management team is turning the business around but also de-gearing a balance sheet, which reduces risk to equity holders but also creates an uplift to equity value as you de-lever’. Delta Airlines is ‘displaying all of those three things,’ says Rutter.

A name that sits within the ‘Slowing and maturing’ corporate life cycle category is Thor Industries (THO:NYSE), the world’s largest maker of recreational vehicles. Indiana-based Thor commands ‘a 40-45% market share in recreational vehicles and makes high returns’, says Rutter.

While the company is seeing a slowdown in demand as a big Covid boom in buying motorhomes fades, the market appears to have ‘priced in a recession forever, so whilst the results are quite weak near term, we think there’s a very significant long-term valuation opportunity opening up here due to an over-fixation with a near-term slowdown around the demand for towable and motorised RVs’.

DISCLAIMER: AJ Bell referenced in this article owns Shares magazine. The author (James Crux) and editor (Tom Sieber) own shares in AJ Bell.

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