Sector characteristics
The FTSE 250 Index illustrates the power of compounding earnings growth and its effect on equity returns. Companies that generate growing free cash flows – assuming balance sheet strength – should provide absolute returns over the long term.
Sustainability is vital. To sustainably grow profits over our investment horizon, turnover growth is at least as important as cost control. Profit growth via simply cost cutting does not sit well with our investment philosophy.
Performance
Volatility, brought about by economic news flow is to be expected when investing in equities. While an awareness of the macro environment is important, the bottom-up fundamentals remain the key driver to corporate performance. One important factor to note is that UK mid-caps are more internationally diversified than many expect; circa 50% of all earnings within the FTSE 250 comes from economies other than the UK.
Current thematics
One ongoing investment theme is ‘ increasing consumer internet usage’ and On The Beach provides a good example of a company benefiting from not only increasing e-commerce, but also an increasingly bespoke service offering to its customers, which should help create commercial longevity.
The largest holding in the AXA Framlington UK Mid Cap Fund remains the plastics group RPC where sentiment over the stock has been hit by negative news flow on the increase in plastics waste in the sea. Management continues to promote recycling and innovate; for example, it has developed and produced a fully compostable non-petrochemical plastic.
Best ideas
AIM and small cap arenas provide a nursery of best ideas, while industry change, management change, corporate activity and a buoyant Initial Public Offering market give the manager further opportunities.
The performance of these funds – and the underlying companies within them – since the Brexit vote is reflective of growth in both, the UK and international economies. Underlying fundamentals have reasserted themselves, since the immediate post-Brexit sell-off, and the equities in the various portfolios have benefited as a result.
