April 2021 / INVESTMENT INSIGHTS
Why now for UK equities?
Mitchell Todd explains why he is launching a fund into perhaps the most unloved asset class of the last decade
At the beginning of 2021, T. Rowe Price unveiled the Responsible UK Equity Fund, its first dedicated UK investment strategy. In this quickfire Q&A, portfolio manager Mitchell Todd explains the rationale for launching this fund and the investment philosophy underpinning the strategy, while outlining T. Rowe Price’s long-term commitment to responsible and sustainable investment.
It has taken a long time for T. Rowe Price to launch a dedicated UK equity strategy. Why now?
The UK is the last region where we at T. Rowe Price have a major presence but do not have a domestic offering. For example, we have dedicated products in Australia, Japan and a number of strategies in Europe. However, even though we did not have a standalone strategy, we have been invested in the UK for a long period of time and have an intimate knowledge of the sizeable cohort of world class companies residing here. Like everything we do at T. Rowe Price, we are focused on the client first and we are confident we can generate positive investment returns in this market over the long term.
What gives you this confidence?
One of the primary factors is T. Rowe Price’s renowned 300-strong global research platform, which operates across multiple asset classes. When you look at the UK market, a large proportion of its exposure is global, so T. Rowe Price’s global perspectives provide a real point of differentiation and edge. Collaboration is also engrained throughout the organisation. Having spent 14 years in investment roles and the last six years in leadership, I am well aware of the power of close collaboration.
What is your investment philosophy in a nutshell?
My belief for the last 20 years has been relatively simple – the market often underappreciates the sustainability of returns and misprices the potential to compound value over the long term. Therefore, much of our fundamental analysis is to try to identify businesses capable of sustaining attractive returns on capital and cash flow growth – alongside other responsibility and sustainability drivers.
There is a lot of talk about the composition of the UK equity market. What is your view?
When we look at the UK market, we are seeking to unearth businesses we call ‘durable compounders’. In the UK, there continues to be a focus on so-called old-world versus new-world companies. However, as this strategy is new to the market, we have no emotional bias towards any individual company. As mentioned, the framework we apply simply seeks to identify companies displaying an attractive return profile and sustainable cash generation. Interestingly, this takes us across most sectors – in what are generally described as old-world capital-intensive companies and new-world asset light companies.
The UK has been an unloved region for some time. Is now a good time to be launching a dedicated UK strategy?
It is true, the UK has not been a destination of choice for investors – particularly since the EU referendum in 2016. In terms of asset flows, it has undoubtedly been easier to avoid the market than dedicate major resources to it. However, with Brexit-related uncertainty receding recently, we certainly see opportunity for investors to revisit the UK. While some post-Brexit trade friction is likely, the companies we feel have a superior roadmap to durable value generation will be able to thrive irrespective of how the near-term trading environment develops.
This new strategy is entitled the Responsible UK Equity Fund. Why have you decided to come to market with a solution targeting responsible companies?
We purposefully attached the ‘Responsible’ label to this strategy. As I mentioned earlier, one of the key areas of differentiation of this portfolio is the ability to draw on the resources of T. Rowe Price’s 300-strong global analyst team. The other major component embedded in our philosophy is our focus on the sustainability of returns – which encompasses each of the ‘E’, ‘S’ and ‘G’ elements of ESG. Given the directional push for ESG considerations at a societal level, it is going to be difficult for companies to sustain returns over the long term without embedding ESG dynamics and thinking into business strategy and capital allocation.
Can you provide some insights into T. Rowe Price’s background and philosophy in relation to ESG?
ESG has been at the forefront of our thinking for the better part of the last decade. While we initially utilised Sustainalytics data to feed impartial ESG analytics into an internal research repository, we are now in a position where we have a 14-strong dedicated global ESG team – which works hand-in-glove with our fundamental equity research team and our portfolio managers. The major investment needed to undertake this transition demonstrates the long-term commitment T. Rowe Price has in relation to ESG and to serving the evolving needs of our global client base.
How do you personally coexist with the global ESG team?
When we consider a company for the fund, the first thing we do is take a look at our analyst rating and our ESG rating. If there are any concerns at the ESG level, we do not spend any time on the potential idea. The work of our ESG team also allows us to embed ESG considerations into the financial forecasts from our analysts, as well as enhance the discussions we consistently have with corporate management teams. We want to partner with companies over a very long-term time horizon, ultimately to drive business models towards a sustainable direction. This will undoubtedly aid in unlocking future value.
You mentioned long-term engagement, but what is your view on exclusion?
We have excluded about 10% of the FTSE All-Share Index – which spans areas such as gambling, weapons and mining companies exposed to thermal coal. One of the dichotomies we have in the market currently is mining companies – particularly those exposed to copper, nickel and silver – are going to play a critical role in the continued electrification of economies. However, we will not own groups with thermal coal exposures. This is where we try to engage and use our influence to change long-term behaviours.
Can you provide examples of ESG leaders within the UK market?
The UK is home to many innovative companies leading the way in terms of responsibility and sustainability, and these are the opportunities we are seeking to unearth. For example, National Grid is viewed as a fairly boring utility. However, its ESG/green credentials are powerful, as it essentially owns and operates the UK electric network. The UK will become a far greener country over the coming decades, and we feel the opportunity in National Grid is being significantly underappreciated. Even a simple company like retailer JD Sports has taken massive strides in terms of reusable plastics within its business, while aiming to use renewables to power all of its outlets in the coming years.
How has the Responsible UK Equity Fund been initially positioned?
This is a bottom-up strategy, which is largely benchmark agnostic. We can explore all areas of the market, from FTSE constituents to AIM. We currently have about 50 or so names in the portfolio, with large overweight positions in the consumer discretionary, industrials and healthcare sectors. On the flipside, we have no direct energy exposure and very little materials, while we are underweight consumer staples. Our ambition is to minimise turnover in this strategy and are aiming to keep it in the 10-20% range.
T. Rowe Price has many portfolio managers scattered across the world; can their insights be valuable?
Definitely. Insights from sector specialist portfolio managers is particularly invaluable in terms of obtaining a global perspective on a company or industry. For example, in the lead-up to launching this strategy, a topic of conversation on one of our global calls surrounded accounting software businesses. Insights from the Australian analyst on the New Zealand-based group Xero, as well as insights from our software analysts in the US, provided us with further investment clarity on long term industry drivers and requirements for future success. This helped us avoid a UK group in this arena – which subsequently witnessed a profit warning.
Finally, can you tell us a little more about your path to manging this portfolio?
I began life as a chartered accountant, before moving to investment management two decades ago. I feel incredibly fortunate to be able to work in this industry. The longest part of my career was as an analyst, where I grew up alongside and observed many divisional CEOs and CFOs who would go on to become senior industry leaders. This demonstrated the real power and information edge of long-term partnerships with businesses. I then moved into a leadership role at T. Rowe Price, firstly as director of research in Europe – where we doubled the size of our team over my tenure – before moving to a co-head of division role. My key learnings from leading an investment division included the importance of understanding the motivations of individuals, as well as the value of culture in instilling a collective sense of purpose. After 14 years as an analyst and six years in leadership, this was the perfect opportunity to return to an investment role – where I have always held a strong passion.
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