In this week’s episode of Opto Sessions, Guy Ellison, head of UK equity research at Investec, explains why the UK market is in a better position than some of its peers and outlines how his team identifies quality growth stocks amid the current backdrop of high inflation.
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As part of a team of 10 equity researchers at Investec, a wealth management firm responsible for £41.7bn in client assets, Guy Ellison is tasked with “[identifying] the best-in-class opportunities in each sector on a global basis”.
“Our starting point is to build a core equity proposition within a client’s portfolio that can be held for many, many years” - Investec head of UK equity research Guy Ellison
“Our starting point is to build a core equity proposition within a client’s portfolio that can be held for many, many years,” he explained. Ellison says that there are four key characteristics his team looks for when identifying a standout business. “We want businesses that are value creating. That’s a business that is growing that has the opportunity to reinvest in itself, but importantly that earns a positive return,” he said.
“[Stocks] must be high-quality, value creating and we look for a strong management team,” he added. “Within that, we’re looking for managers who demonstrate high levels of integrity, management teams that can make very convincing and consistent capital allocation decisions, but also management teams that are focused on the long term… And finally, we want them at a fair price.”
The emphasis for Ellison and his team when looking for equities is on “quality growth”. “We are looking for businesses that stand out within their respective industries as being the global leader”.
As Ellison points out, on some occasions, “those names present themselves within the UK opportunity set”. His team’s top picks include beverage company Diageo [DGE.L] and Covid-19 vaccine maker AstraZeneca [AZN.L]. “I’d argue that Diageo is probably the world’s leading spirit group and happens to be domiciled in the UK,” Ellison said. “We have an excellent pharmaceutical name in the form of AstraZeneca,” he continued, adding that the UK is also strong in the mining sector.
Ellison’s team also incorporates thematic investments into its client portfolios, both through ETFs and direct exposure. “One example [is] the energy transition theme, where we can invest through the whole value chain of the energy [sector’s] transition, from upstream commodities and metal producers to manufacturers, such as Vestas [VWS] or SolarEdge [SEDG.L], all the way through to downstream renewable operators, like the UK’s SSE [SSE.L] or the Iberian business EDPR [EDPR.LS].”
“We're looking for managers who demonstrate high levels of integrity, management teams that can make very convincing and consistent capital allocation decisions, but also management teams that are focused on the long term” - Guy Ellison
While the outlook for the future is looking somewhat shaky, with returns likely to be weaker than in the previous decade, Ellison and his team are slightly more optimistic about the outlook for the UK equity market. “As it happens, after a decade of underperformance of its international peer group, the medium-term potential for the UK market is starting to look more favourable compared to [its] peers,” he said.
As Ellison explained, this is due to a healthy starting dividend yield on the UK market, with the FTSE All-Share Index seeing close to a 4% forward dividend yield compared with the S&P 500’s 1.5% return. In part, this is because UK oil majors and mining companies account for around 20% of the FTSE All-Share, and these firms have experienced “supernormal” profits as commodity prices continue to soar. “It seems at least for the near term, that the tailwinds are more supportive of the UK market than they have been for many years,” he said.
To hear more insights from Guy Ellison and Investec’s investment approach, listen to the full episode on Opto Sessions.
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