Meet the fund manager: Finding the best ideas in the world
In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund.
How does your fund stand out from others in the same market?
Stonehage Fleming Global Best Ideas Equity Fund is a concentrated portfolio of only the world’s best-in-breed businesses that are attractively valued.
Such high quality businesses provide sustainably attractive returns, at a lower risk and less volatility level than the overall market. The portfolio is specifically directed to share in the strong structural grow areas of the modern world, doing so with a conservative cash generating approach in each holding. It therefore offers the ideal combination of strong and sustainable organic growth at a lower risk level.
The portfolio is ideally suited to investors seeking a core equity exposure to hold for a long period, rather than trying to time the market. It is about investor confidence in strong franchises to keep growing the underlying value of business.
Which of your holdings are you most excited about?
We are spoiled for choice in numerous excellent candidates all over the world, most of them being truly global operators exploiting the growth potential in most major countries.
Along with the inherent quality of the business, we also opt for the best management teams that steer the business for strong and sustainable growth. The combination of innovation, entrepreneurship and governance is a standard pre-requisite for us.
When we buy a business, it is a strategic decision, with an orientation to hold it indefinitely. As it is a concentrated portfolio, we have the luxury of being very selective, and having many other candidates should a holding become overvalued or when its merits may change.
On this basis, we are excited about all our holdings. It is also our responsibility to have a well-balanced portfolio spread over different sectors. We therefore apply certain maximum exposures to all sectors, still holding only best-in-breed quality businesses in each sector.
Alphabet is a long-held position. We believe Eric Schmidt has laid an outstanding foundation with its founding partners, and created a very entrepreneurial and well-governed business, today diversified over multiple business units each in their own right.
With the more recent AI developments, it is becoming clear that, with DeepMind, they have been ahead of the AI curve and are now in the position with their technology, the capacity and the financial muscle to be one of the world leaders in this category. Visa is also a long-held position, the world leader in electronic payment systems. Their technology and security is expected to keep them ahead. The upcoming potential release of the remainder of the original sponsoring bank’s shares may offer structural buying opportunities.
What is the biggest mistake you’ve ever made in the fund?
We have missed some excellent buying opportunities of outstanding franchises because of perceived high valuations. We have not invested in Apple, with uncertainty about their sustainable organic growth and therefore their valuation. The stock has performed well over time, with shareholders’ belief now that they are incorporating AI on their devices to reinvigorate their organic growth.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
The most recent introduction to the portfolio is AJ Gallagher. It is an American casualty insurance broker, and today operates quite globally. They have over time bought out numerous small operators, building scale to negotiate more competitively priced insurance cover with the underwriters.
The casualty insurance industry has good structural growth potential, supported by cyber security and changing weather conditions. Their business model as agent is ideal in the sense that they effectively earn a commission on a growing premium, it is very cash generative, whilst they do not carry the underwriting risk. We first followed it for a while to fully understand the casualty insurance industry cycles and the pricing changes within that. It is difficult to project such cycles, but the business keeps generating excellent cash flows.