Sarasin & Partners – London

Jeremy Thomas joined Sarasin & Partners in 2016 from Allianz Global Investors where he spent 12 years. Prior to this he spent three years at Isis Asset Management (now BMO Global), five years at Schroders and five years as a British Army Officer.  He has a degree in PPE from Oxford University.

London-based Sarasin & Partners LLP manages £14.1 billion ($18.3 billion).  Local management own 46% of the economic interest of the partnership with the remaining 54% owned by Basel-based Bank J Safra Sarasin Group (AUM $154bn).  Sarasin & Partners manages money for domestic and overseas private clients, charities, pension funds, institutions and retail investors.

Describe Sarasin & Partners LLP

“Our process is active, global and long term – we are looking to buy companies on a 10 year view or longer.  We are thematic and value stewardship very highly.  If you are going to be a committed long term investor, you want companies with longevity – and that’s why we think about  where the world is going on a 10 year view. If you are going to invest for 10 years, you need to be very clear about how well a company  is managed and the impact it has on the environment  or people and that’s why the ESG side matters so much.  So, ultimately you need to build trust in the growth of the business and the way the business is going to be managed.”

Is there collaboration between Sarasin & Partners and Bank J Safra Sarasin in Switzerland?

“The way that we manage portfolios is completely arm’s length.  For the purposes of our investment philosophy and investment process, we are independent.   We don’t actually share investment research today for example.”

What’s AUM split?

“Roughly 70% equities (i.e. $12 billion).  We mostly run global money and we think about everything globally.”

Do you have a recommended list?

“We use our thematic process to come up with around 800 companies worldwide that we really care about. They might be companies that benefit from demographics and ageing, from the growth in data, from the inflection in defense spending, or the impact of cyber security.  The list of 800 names is whittled down to a global buy list of ~120 companies from which we construct portfolios.

We don’t want to tilt to one sector or one geography but to have a broad range of good quality companies that we can hold for the long run, where the valuations are reasonable. Two of our strategies are dividend oriented but it’s not just about income, it’s about dividend growth.  We also have a global thematic fund which is unconstrained.  The global dividend fund emphasizes quality companies with dividend growth.  The global higher dividend fund has a ~50% yield premium to the MSCI World Index. If we find a good investment – e.g., we recently bought Enel – and  we hold it  across all the strategies.  So there’s no reason why companies can’t tick the box in all three places. ”

Is there a split between a fund manager and an analyst?

“I expect everyone to be involved in research and modeling companies.  We have specialists and generalists.  The generalists tend to have a portfolio management responsibility as well.  My specialists are in the technology, healthcare and financial sectors.”

Describe Sarasin & Partner’s investment philosophy

“Long term, thematic.    We aim to make an investment in a company and remain investors.  We need a business to earn a return consistently above the cost of capital, a business that can grow.   It’s very difficult for company management to run businesses that aren’t growing.   We are happy to accept some volatility so we do own franchises that are cyclical.  We want a business that is sustainable and likely to be bigger in the future than it is today.”

Which screens do you use?

“Return on capital, if thematically that company is in our universe.  If it isn’t in our universe we do a quick due diligence to see if it was a high returns business; does it have some competitive advantages and is it playing to some of the themes we favour?  But also, importantly, is it likely to be affected negatively by regulation of issues like decarbonisation and climate change.”

Any sectors you won’t invest in?

“Cluster munitions are a clear no go and we find it difficult to invest in tobacco, airlines and cyclical mining companies but it does depend on the strategy of the fund.”

Market cap cut off?

“Typically $5 billion.  If it is a great idea and it’s below $5 billion we’ll make exceptions.”

Average turnover?

“20-30%.  We aspire to have as low turnover as possible subject to keeping the portfolio active, refreshed and interesting.”

Active share ratio?

“90-95%.”

Any themes you favor?

“Demographics which is massively predictable – the future’s already been born!  The next level is the impact of an ageing population on eyeware, hearing aids, skin care, looking after the body, surgical procedures.  The fact that airports and airplanes are being built in ever increasing numbers means there will be an increase in global travel.  The emerging market consumer and the middle class are also themes we like.

Negative themes are decarbonisation, changes in patterns of retailing – we find it very difficult to buy a mall-based retailer and discount retailing is something that we’ve long been interested in.  Data is huge  – you need data sets so the creation of data sets by the likes of Google and Facebook.  The death of traditional advertising.  So positive and negative themes. Broadcast TV in the US as you are going to get more and more distributed via the internet.”

So you are top down and then bottom up?

“Yes.  Just because we find a company thematically interesting, we would not invest in it unless we felt it was a good investment.”

Could you own two companies in the same sector?

“Yes. Around the data theme we own  Alphabet, BT and  Equinix.  We like consumer broadband and we like the unique characteristics of Equinix and its position around data centers and co-location.  We think Google is a fantastically innovative company with  many years of growth ahead of it.   We think about the life cycle of a company.  If a company is a disruptive growth company.  If it’s a more mature franchise company that earns a substantial return above the cost of capital for long periods of time and can extend that fade or if a company is more mature but very cash generative – in a later phase of its cycle – we are happy to own companies in different phases.  People often think of thematic as what’s popular and therefore expensive.  We are more GARP than anything else as if you want to hold a company for a long period of time you’ve got to have some growth.  But valuation matters a great deal.”

Can you discuss some of your larger holdings?

“Hartford – the insurance company.  We’ve owned it for quite a long time on the basis that we thought it was and is restructuring.  They’ve got an old life assurance business which they will dispose of and that will allow a release of capital.  Some of that will come back to us and some will be reinvested in the growth of the core business so we are very happy to own it.  The key thing in special situations that we look at is that they are restructuring to a sustainable business.  We are not looking for something on its last legs and looking to prop itself up for another 4 or 5 years.

Marriott and Samsonite are big positions around the theme of the rise of global travel and the rise in the emerging market consumer.  A consistent theme among many of the companies we buy is that they are cash generative companies with relatively little capex needs, so quite high margin.  They generate enough cash to fund their own growth but they have the long term potential to reward us with dividends, special dividends and/or buy backs.

We also have TMSC in Asia.  We also like AIA and Prudential for the theme of the emerging market consumer and the need for savings and protection in emerging markets and Asia.

Healthcare is another area that we like on the basis of demographics and innovation.  So Amgen, Pfizer, Fresenius Medical Care and Varian are owned.”

Any recent sales and why?

“We owned Nissan as the investment case was that it had leadership in electric vehicles.  But we’ve sold it because the auto cycle has become extended and auto finance is an area of risk.  A traditional OEM has quite a task to evolve to a fully electric autonomous world.  We are seeing the biggest revolution in the transportation market since Henry Ford and we think that is going to offer some challenges for the incumbents.  There is also quite a lot of risk in the sector, well beyond VW on emissions.  Our stewardship work around emissions is concerning us and we don’t think it’s just a VW issue.”

Buy backs or dividends?

“We mostly prefer dividends and special dividends but we like buy backs to offset dilution.  When companies tend to be at their most cash generative, the stock tends to be more elevated from a valuation perspective and therefore we would question the valuation discipline of companies buying back stock.”

Average position?

“About $100 million.”

Large position?

“$250 million.”

Is Corporate Governance important?

“Very  – we vote proxy for overseas companies.  We are very active.”

Do you have to meet management before you buy a stock?

“Meeting management is not a pre-requisite to investing but we very much like to do it.  We are long term and they are stewards of our clients’ capital and we like to understand who they are and their motivation.

We are happy to meet IR to get a better understanding of a company but ultimately we want to meet the allocators of capital to understand how they see the world and what their motivation is.”

How will MiFID II affect you? (UK/European legislation affecting research payments and corporate access)

“We have to be much more focused on who can provide quality research.  We’ve lived in an “all you can eat” world and it’s been very easy to get broad access to research but that’s changing .  We are going to have to develop more of a partnership with a smaller number of research providers.  And not rely on broking relationships so much for meetings.  We need to get to know investor relations and build our own rolodex to help us more efficiently access meetings with companies.  We can’t pay for corporate access.  We haven’t cut back on the number of brokers yet but that’s the likely outcome.”

Why should corporates target Sarasin?

“We are long term, thematic investors who care about stewardship.  We invest in a small number of companies and so like to build a relationship.”

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