INVESTMENT PROFESSIONALS ONLY
In this series of “Meet the Manager” Tim Kelly (TK), Business Development Associate Director at Davy Asset Management, interviews Jeremy Humphries (JH), Fund Manager on the Davy Discovery Fund (the Fund).
JH: I have worked for large institutional asset managers such as Schroders and Pioneer, which has given me unique exposure to a broad range of products and varying investor demands from a global client base.
I am fortunate to have worked for some very successful active funds which have managed money across a range of strategies including Value, Yield, Environmental, Social and Corporate Governance ESG, Emerging Markets, Growth and Quality. I have a long track record of investing in positions across all markets and size categories, modelling thousands of stocks as part of the investment process. This experience has allowed me to develop both a rigorous bottom up approach to assessing companies while also being able to take the 30,000-foot overhead view.
I believe that working on the Davy Discovery Fund with Chantal Brennan is a great opportunity to collaborate with a very experienced fund manager who has a fantastic track record, especially within the small and mid-capitalisation (SMID Cap) space.
JH: In my opinion and experience, there are two main reasons to invest in the SMID Cap space. Firstly, I believe there is potential for higher risk adjusted returns. Over the long run global small and mid-cap stocks have outperformed other investment styles. The addition of smaller companies to a portfolio can not only increase returns but do so with only a marginal increase in volatility, resulting in better risk-adjusted returns or Sharpe ratio.
Secondly, smaller companies are not only often overlooked by the investment community, but also tend to be less over-covered for their size, according to our research. We find evidence that larger companies are currently more susceptible to herding and sentiment as the world chases growth, jumping on the bandwagon of a few stocks. A good example of this is Salesforce which has the same number of analysts following it as Amazon which is seven times its size. Ultimately, we feel that the lack of coverage and less sentiment-driven nature of smaller companies is a benefit to our process which takes an unemotional approach and operates in a space which has thousands of opportunities.
These two reasons ring especially true in the current low-growth environment where larger companies are struggling to grow. This is reflected in the current Merger & Acquisition (M&A) data which suggests that companies who grow via serial acquisition have performed better than those who have not. While the Fund does not explicitly seek stocks which might be acquired, it is a natural benefit of operating within the space. This acquisition strategy is further reinforced by valuations. While smaller companies tend to trade at a premium to large companies, their valuations have remained static. Simultaneously larger companies have been getting more expensive. Small-caps look increasingly more attractive to their bigger cousins and those large-caps who partake in serial acquisitions.
JH: Given the universe of opportunities for smaller companies is significantly larger than for larger companies, the Davy Discovery Fund takes a systematic approach to investing. Through the combination of bottom-up, fundamental data we are able to assess how globally high quality and growth orientated a stock is at any point in time relative to its peers and its own history. This allows us to unemotionally assess the world and selectively choose those companies best aligned with our Fund’s philosophy. Through rigorous portfolio construction, we further ensure that the portfolio represents the best risk-adjusted opportunity at all times.
The Fund naturally gravitates towards growth-orientated names which can typically be found in the Technology space. Recent positions which have been initiated include names such as TravelSky Technology, providers of technology solutions for the Asian air travel and tourism industry and Cognex, the world leader in machine vision systems for automated manufacturing and robotics.
JH: Owing to our focus on Quality, the Fund has successfully navigated the various bouts of market volatility and has actually reaped the rewards of owning companies with strong balance sheets and high earnings visibility which typically outperform in times of stress. High-Quality stocks like Micro Focus which recently acquired HP Enterprise’s software business, is up 19.6% YTD in euro terms highlighting the benefits of our philosophy.
We feel the Fund’s performance is further driven by its 'best of breed' approach which takes a systematic view to combining both quantitative and qualitative insights, ultimately originating from in-depth bottom-up research. The Fund adopts an evolutionary approach to its process and happily considers insights from a range of sources - we constantly strive to improve the quality of our models and process. We feel this is particularly important in a Big Data world.
JH: The asset management industry in the 21st century is currently seeing a number of evolving trends including technological shifts such as the emergence of blockchain and cloud computing, the rise of smart beta and increasing regulatory pressures.
One of the more immediate trends which directly affects the Davy Discovery Fund however is the massive increase in both structured and unstructured data relating to individual companies. We live in a world where we are increasingly bombarded with more, not less data and this is particularly relevant within the finance industry where new sources of information are being increasingly commoditised. It is now possible to analyse a company’s supply chain in detail, scrutinise the text of their regulated filings and assess sentiment emanating from their social media postings.
I feel that this proliferation of data is actually a benefit for smaller companies which tend to be less scrutinised by the sell side and hence have less research. In a world of increased regulation regarding the use of research spend (Markets in Financial Instruments Directive (MiFID)) it is also important to be able to derive value from different and unique angles. By adopting a systematic process which can handle thousands of companies and incorporate insights from multiple sources, we allow ourselves the most complete view of our investment universe. Ultimately our success is driven by the quality of our process and the questions we ask of the data; we consider ourselves to be data inspired, not data driven.
JH: A global SMID cap fund may be appropriate for a range of investors but particularly those looking to capitalise on the global search for growth. As larger companies struggle to grow organically, smaller companies will benefit. The addition of smaller companies to your portfolio will additionally provide natural diversification benefits versus a portfolio of larger companies alone owing to different regional and sector over-weights. Our emphasis on Quality further ensures we are focused on maximising returns while minimising volatility.