Royal London Asset Management – London

Mike Fox of Royal London Asset Managers.

Royal London Asset Management (RLAM) was established in 1988 and is a wholly-owned subsidiary of the Royal London Group (founded 1861). The Group consists of the Royal London Mutual Insurance Society Limited (RLMIS) and its subsidiaries, and is the UK’s largest mutual life, pensions and investment company.

RLAM also manages assets to external clients, notably corporate pension schemes, local authorities, insurance companies, charities, endowments, universities, wealth managers etc. It has AUM of £106 billion/$140 billion (June 30 2017).

Mike Fox is Head of Equities and Senior Fund Manager of the Sustainable World Trust and Sustainable Leaders Trust, the latter role he has fulfilled since November 2003. During this time he has been awarded Citywire Top 100 UK Growth Fund Manager of the year (2007) and has a 4* Morningstar rating.

You have £106 billion/$140 billion AUM of which £33.1 billion/$44 billion is in equity assets.  What percentage are actively managed?

The split would be about one third/two thirds active vs. passive.  Nearly all of our equities are managed in-house.

What’s the geographic split?

Historically we’ve been a UK oriented house given our heritage as a UK life assurer.  However, over time as equity markets have internationalized we’ve become more global.

You have an 24 strong equity team – how is it structured?

There are five sub teams. Income, alpha (smaller and mid cap), global equity team, sustainable team (which I manage) and a passive team.

Sustainable AUM?

£1.6 billion/$2 billion – five funds/trusts – two of which are fixed income.

Do you have a recommended list?

The USP from the sustainable team’s point of view is the integration of ESG issues into the investment process.  Most fund managers just think about financial issues but we will integrate ESG issues as well.  We think the two become one – ESG issues become financial issues.  We do financial, corporate governance and environmental and social analysis.

We don’t buy a list of acceptable securities from an external provider (such as EIRIS).  We positively screen rather than negatively screen.  So ask ourselves does a company make a positive contribution to society?  And that’s very different from an ethical approach which is very much negative criteria.  Negative screens work better for external research providers.  Positive screening is a more subjective approach which is why we do the process internally.

Are any sectors excluded?

Tobacco and armaments for example – as we don’t believe they positively benefit society. Commodities and mining we also do not currently invest in.

RLAM’s investment philosophy?

We are trying to understand big long term trends that companies can access so things like healthcare, technology, infrastructure.  Areas where we think in three, five and 10 years’ time, there is going to be more demand for their products and services.  Therefore if we can find companies that have a durable competitive advantage and we can buy them at a reasonable price then we can hold them for the long term.  The process is very growth oriented.  For example, in the portfolio we’ve got themes such as Artificial Intelligence, agriculture, electric vehicles and cloud computing. So that gives you a tangible feel for the areas we are looking to invest in.

Which screens do you use?

MSCI helps us with ESG analysis at a base level.  We also use Credit Suisse’s HOLT.  Due diligence after this is done internally.

Market cap cut off?

Our smallest cap company in the sustainable funds is currently £400 million/$528 million but there is no hard limit.  We could go as low as £100 million/$132 million but we tend to find a larger cap bias in our sustainable investments at the moment.

Average turnover?

The Sustainable Leaders Fund which is equity only is 24 – 25% on a rolling twelve month basis and that includes purchases plus sales.  An average holding period is around 4 years but some stocks we’ve held for 10 years.

Active share ratio?

I’m not sure of the figure but it will be high.  For example, in our UK Leaders Fund we don’t hold any mining, commodities, oil & gas, defense or tobacco stocks and these sectors are a large proportion of the index.  On the other hand, we have a lot of healthcare and technology exposure.  So we don’t have an index oriented approach.

Bottom up or top down?

We aim to use capital for social good so we are very socially aware.  So quite top down in terms of themes but our due diligence is pretty rigorous from a financial and ESG analysis point of view.  Picking themes we want to invest in is top down.  But then there is quite a rigorous bottom up approach when we try to pick the companies so it’s a mixture of the two.  But we start top down.

 Can you discuss some of your larger holdings?

We have holdings in Microsoft, Infineon and Amazon – they are very much in the Artificial Intelligence/cloud computing grouping.  What we like about those businesses is fundamentally they are very innovative – they are developing their own end markets.  Amazon is a world leader in both on-line retailing and cloud computing and they are both markets which we think have considerable growth potential.  Microsoft is very much about cloud computing and AI and the evolution of that market is something we very much like.  Infineon plays into the electric vehicles thematic as cars electrify there is going to be increasing demand for its semiconductor products.

John Deere plays into the agriculture theme given the rising demand for protein and food globally is going to put more strain on resources, particularly farming resources.  We are very much interested in companies whose products and services can help mitigate that and Deere’s tractors roll out what they call ‘precision agriculture’ where they integrate technology which helps yield and productivity at farms to help meet increasing demand for food.

Visa is a very well known franchise.  We like financial services generally.  We think financial services are fundamentally socially positive.  Visa is very much at the core of payment mechanisms which if you take a developing country and embed a payment structure – it is very economically and socially positive.  So that’s the argument for Visa – as transactions become less cash oriented and more electronic, we think that plays very strongly into Visa’s franchise.

Rentokil – the theme is hygiene and pest control.  Urbanization globally and global warming will be good for the pest control industry.  It’s a very fragmented industry so there’s the possibility of organic growth and the ability to consolidate the market.  Particularly the pest control business is very high quality and it’s not a discretionary spend for many of their customers.  If they have a rodent or rat problem – that’s not discretionary spend – especially in the food service industry for example.

 Any recent sales and why?

GlaxoSmithKline – we’ve been reducing our position recently.  We like the healthcare thematic and we like R&D activity in pipelines and in the field of human genomes more particularly.  There is a structural trend to more drugs being developed.  Unfortunately GlaxoSmithKline has been disappointing in terms of its pharmaceutical pipeline and also it has just hired a Chief Executive with no scientific background.  Typically pharmaceutical companies led by scientists tend to perform better – like AstraZeneca.

 Buy backs or dividends?

It depends on the value of the company.  Buy backs must be made in the context of the inherent value of the business.  If a company is undervalued – buy backs are value creative so we prefer them.   In the US, rolling buy back schemes often lack thought.  If you look back 10 years, the price paid for the shares is some way above the current stock price so in that case, we’d prefer dividends.  Buy backs vs. dividends is an important capital allocation decision.

 Average position?

Different funds have different risk mandates.  Maximum positions are in the 3 – 5% range.  Amazon and Rentokil are 5% positions.

 Is Corporate Governance important?

For the sustainable funds, corporate governance is hardwired into our investment process.  Every company we look at we do a corporate governance assessment on.  They have to pass a certain level of acceptability.  We also provide a discretionary service to RLAM as a whole so we vote all the shares we have active positions in.  Fund managers that own shares are made aware of any relevant corporate governance issues.

Do you have to meet management before investing?

We have a very strong UK franchise so we are often a top 10 or 20 holder so often UK companies approach us.  Globally it’s a little different as our asset base is lower so corporate access globally is more difficult and we have to evolve our investment process.  We prefer to meet management but we’ve never met Amazon or Alphabet and I don’t expect we ever will!  So we can operate both models.

 How do you prefer to meet management?

We definitely prefer to meet companies one-on-one.  Any opportunity to meet management and raise our agenda is good.  Group meetings are fine when we are trying to understand companies better and might not be shareholders.  It’s often interesting to hear other investors’ questions.

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

The decision is that research costs will come from our P&L.  MiFID II could be a competitive advantage as we do have the profitability to invest in research on our clients’ behalf.  Smaller entities might struggle to access research if they have to put it through their P&L.  We have not cut back on the number of research providers we use – but this may happen.  Clearly pricing has to change.  We are still in the process of discovery.  It’s a fluid situation and most providers won’t price research by sector or analyst.  Some argue that the cost of access to the better analysts is offset by the broad offering.

Best companies at IR?

Severn Trent, the UK water company, consistently organises events that are differentiated from their peers’.  Every year they try and understand what is most relevant in their business and what is most relevant to investors and organise seminars and site visits accordingly.

On the European side – Infineon and ASML make themselves very accessible.  Our asset base is smaller in Europe and the US than in the UK but some companies in Europe and the US understand the value of meeting shareholders outside the top 20/30 and engage with the next tier to the shareholder base.  Agilent in the US has made a lot of effort to help us understand their business before we invested in them.  They have been very responsive to our enquiries.

A version of this article appeared in the Winter edition of IR Magazine

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