Approach
The investment process is based around searching for stocks that have “future quality.” To achieve the investment objective, the analyst’s undertakes bottom-up fundamental research seeking quality of franchise (competitive advantages), quality of balance sheet (low debt), quality of management (strong stewardship), and quality of future valuation (sustainable but growing cash flow). The first step is developing stock ideas; the analyst’s makes use of third-party research, personal insights, company meetings, site visits, conferences, and input from other Nikko AM investment teams. Ultimately, the investment universe is restricted to companies with market caps above USD 1 billion and daily traded liquidity of more than USD 10 million. The next step is thorough fundamental bottom-up research on the firm’s business model, management and balance sheet. Detailed financial models, based on long-term cash flow forecasting, are built to establish a future quality valuation. The individual portfolio managers summarise the company research in a standard template and present stock ideas formally at a weekly meeting, where open critique is undertaken by the analysts. The investment philosophy is high-conviction, with the analysts adopting a largely index-agnostic strategy, which slightly favours growth and results in an active share of 90%-95%. Ultimately, stock selection plays a key role in the process.
Portfolio
The portfolio construction methodology is disciplined and repeatable, using a proprietary ranking tool to grade stocks in terms of expected alpha and risk. The resulting portfolio contains the analyst’s highest conviction 40-50 stock ideas. The investment process typically leads the team to construct a portfolio with a higher weighting in defensive sectors, including healthcare and consumer staples, and typically a lower weighting in cyclicals, namely, consumer discretionary and financials. However, these allocations depend on stock opportunities and economic conditions. At 31 Oct 2021, the portfolio had an active underweighting in defensive sectors, with healthcare heavily favoured and an active overweighting in cyclical sectors, with industrials and consumer discretionary stocks favoured. Regional allocation typically tends to be similar to the index. However, at 31 Oct 2021, the portfolio was only overweight in two regions: the United States and Hong Kong/Singapore. A comprehensive risk-management process is implemented to ensure no unintended sector, geographic, or commodity risk is included in the portfolio. The portfolio is also monitored from an environmental, social, and governance risk perspective. Risk-management guidelines include that no more than 10% of net assets may be invested in any one stock.
People
The investment team includes five highly experienced portfolio managers (William Low, James Kinghorn, Iain Fulton, Greig Bryson, and Johnny Russell) who operate as global generalists but with sector-specific responsibilities. In addition, two portfolio analysts, who mainly undertake thematic or project research joined the team in 2019. Low leads the team; he joined Nikko AM in mid-2014 as a portfolio manager with overall responsibility for the global-equity team (the team moved across from Scottish Widows Investment Partnership where they previous managed global equity strategies together). He has more than 30 years’ experience in the investment/finance industry, previously working for BlackRock and Dunedin Fund Managers as a portfolio manager and investment manager. Kinghorn and the other team members joined Nikko AM in mid-2014; Kinghorn had been at SWIP since 2011. Fulton joined after previously working at SWIP as head of research since 2005. Bryson joined after working at SWIP since 2007. Russell joined Nikko AM after working at SWIP since 2002. The team has access to the extensive global resources of Nikko AM, which boasts more than 100 portfolio managers and 50 analysts.
Performance
In mid-2015, the existing Nikko AM global-equity fund was restructured from a multimanager approach to its current structure of direct investment in stocks in the MSCI ACWI, under the guidance of the incumbent five portfolio managers. This team arrived at Nikko AM in 2014, having previously worked at Scottish Widows Investment Partnership. Since the strategy and personnel changes, this fund has outperformed its Morningstar Category index (MSCI World Ex Australia NR Index) and most peers in the five years to 30 Nov 2021, on a trailing returns basis. Individual calendar-year results have been strong from 2015 through 2020, with standout 2018 and 2020 years, and 2016 the lone blot against the team. In 2017, outperformance was relatively slender,
and positive contributors included Sony and Tencent. The strategy had a stronger 2018 with positive attribution from LivaNova. Returns were again solid against the index and peers during 2019, with Chinese sporting goods company Li Ning Company and US software giant Microsoft among the top contributors. Both the index and peers were thumped in 2020 by the team, which managed a softer drawdown during the first-quarter correction and adding alpha each of the remaining quarters. In the 11 months to 30 Nov 2021, the strategy have struggled, as style headwinds had an impact on performance, despite solid attribution from SVB Financial Group and Bio-Techne Corporation.
About Fund:
Nikko AM Global Share is a strategy with sturdy foundations, thanks to its highly experienced team of portfolio managers and well-structured investment process. The Edinburgh-based investment team functions in a very cooperative, transparent, and mutually respectful manner, adopting a flat operating structure, with individual portfolio managers having specific sector responsibility on a global basis. The resulting portfolio of typically around 40-50 stocks is slightly growth-orientated and high conviction, with around 35% of FUM in the top 10 stocks. The strategy benchmarks to the MSCI All Country World Index, giving it rein to venture into emerging markets, but this allocation is rarely more than 10% of assets.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
