“There is academic research produced by places such as the London Business School that shows to buy last years’ winners works. Winning stocks tend to go on to perform well and losing stocks tend to underperform on average.”
One of America’s greatest business leaders also plays a role in Rowsell’s stockpicking.
“Something else I like is companies that are still run by the original founders or at least very experienced management,” Rowsell continues.
The matrix
“I call it the ‘Steve Jobs effect’. We are looking for businesses that have that sort of creative genius driving them to become the larger companies of tomorrow.”
Global equities funds focused on any cap size all have at least one thing in common: a vast investment universe to cover. This is something Rowsell says necessitates a quantitative filter as a starting point.
“As a global fund we have a universe of around 6,000 companies we can invest in across 20 countries. The advantage of this is having the flexibility to move into areas of the world that are outperforming, and that is where our proprietary quantitative tool comes in.
“We call it ‘the matrix’. It helps us to identify where there has been positive change so we can steer the fund towards parts of the world that are working well for investors and away from those which are not.
“An example of where this has really worked for us over the past 18 months is the matrix showed falling scores for energy, materials and emerging markets, which allowed us to significantly underweight those areas before much of the fall they have seen.
“That has been a key driver of our recent outperformance,” Rowsell says. “The flipside of that is it also helps us in deciding to go overweight Europe, which has outperformed other small-cap markets.”
Rowsell says his fund is relatively light on US stocks at the moment, although it is still comfortably the biggest part of the fund.
“We are underweight the US at 41% against 52% for the benchmark. We are not negative on the US and it is still the largest weighting in the fund, of course, but we feel there is more opportunity in the UK and Europe. We need to fund this from somewhere, so it has come from the US.”
Slice of the action
In these times of Brexit talk and concern over the public finances, Rowsell is relatively bullish on the prospects for UK small caps.
“We are positive on the UK and have a meaningful overweight of 14%. When you focus on the high-quality end of UK small caps, there are some great opportunities.”
In continental Europe, Rowsell says Germany, as the strongest economy in Europe, is where the best companies can be found.
Looking east, and Japan is a mixed bag in Rowsell’s view, leaning just towards the positive side of things. “We were underweight in 2012 but saw a strong improvement in our matrix scores at the end of 2012 going into 2013, which was a reflection of the ‘Abenomics’ policies lifting corporates.
“We have been neutral or slightly overweight since that point. We have started to notice some improvements in corporate governance to bring things closer to western standards coming in, such as more independent members on boards,” he says.
In terms of sector exposure, industrials, consumer and financials are Rowsell’s favourites. “Most of the companies in our industrials holdings are actually services companies rather than capital goods makers, which have been big underperformers recently,” he explains.
“We have a pretty broad spread of consumer companies. Ted Baker is a good example of what we like as it is a very strong brand that is successful in its local markets and is about to take it global.
“Domino’s Pizza is an example of a company that has been very successful in using technology to grow its sales. It has built a website and app that allows people to order online, and that has been very good for the company.”
