Obe Ejikeme: “Anti-growth rotations are often short and valuable companies tend to peel off”
Companies that can grow on their own are where Carmignac fund manager Obe Ejikeme wants to put his money. And by “his money,” Ejikeme does not mean figuratively.
Most Carmignac employees have some sort of long-term investment in the business, “but I take it a step further,” he says. When investors are interested in the FP Carmignac Global Equity Compounders Fund, “I want them to know that I am fully aligned with them”.
To this end, Ejikeme has invested his entire self-invested personal pension (Sipp) as well as his and his wife’s (Isas) individual savings accounts and their children’s junior Isas into it. Such is his belief in the way the fund, which he co-manages with head of equities Mark Denham, is managed.
From science to SICAVs
Becoming a fund manager was not always on the agenda for Ejikeme, who studied computer science at university. “I got into finance through an unusual route because they usually hire people with MBAs and business experience.”
His career path veered into financial services when he joined financial data and software company FactSet after graduating. He then spent seven years at Bank of America Merrill Lynch, where he was responsible for European equities and quantitative strategy.
“At Merrill Lynch, my day job was to talk to portfolio managers and all the big fund managers about equities: where to invest, in which regions and in which styles – value versus growth, etc.”
Ejikeme’s background in technology has served him well. As fund management companies increasingly rely on screens and filters, tech-savvy people are in greater demand.
He joined Carmignac in 2014 as a quantitative equity analyst, then partnered with Denham to co-manage a trio of funds: two SICAVs and global equity aggregators Oiec. “We think very, very similarly, which is why the partnership works so well.”
Sicavs will hit a three-year high in May this year, with the UK-domiciled compound growth fund hitting the two-year mark in the same month.
First rule: don’t panic
Compounders are defined as companies with high sustainable profitability that reinject these gains into future growth. The £53million fund holds 40-60 shares. The objective is to invest in these companies between three and five years. The annual turnover was not more than three shares per year.
According to the February 2022 fact sheet, the largest stake is Microsoft (6.64%), followed by US medical device maker Resmed (3.59%) and Danish pharmaceutical giant Novo Nordisk (3.35%) .
Between them, IT and health account for just over 58% of assets. Since inception in May 2020, the benchmark independent fund has generated a return of 30.35%. For context, the MSCI World Index rose 37.3% over this period.
But growth investing and tech stocks both started 2022 with a bump, so it’s no surprise to see the fund underperform at the start of the year. This, combined with rising inflation and the Russian invasion of Ukraine, saw the Oiec compound down 13.61% in the two months to the end of February. The MSCI World index fell by 6.81% over the same period.
“As fund managers, the one thing you absolutely don’t do is panic,” says Ejikeme. “We had a difficult start to the year due to this rotation from growth to value, with investors looking for cheap commodities and stocks.
“We had three last year: the first peaked in March, the second in May and the third in October. But, at the end of the year, these same companies were trading at relatively low levels.
“These “anti-growth” rotations are often short. You have to be careful because of the style of these valuable companies, they always seem to come off. But investment style is far from the only concern of investors today.
“Today, there is a lot of fear that inflation is high. But Rule 101 of investing is that inflation is always a lagging indicator of the cycle. The time when you worry about inflation is usually when it’s not the thing to worry about.
Growth prospects, “which have been an issue for the past 10 years and will continue to be an issue,” are a much bigger topic of conversation, he says.
drown in debt
Beyond understanding a company’s growth prospects, Ejikeme wants to know how that growth is funded.
With borrowing having been incredibly cheap over the past decade, investors in leveraged companies with weak growth prospects should be concerned. “As a simple metric, we look at the percentage of S&P 500 companies that have net debt greater than four times EBITDA. This gives us a measure of the percentage of the market that will be in distress if interest rates start to rise. .
He adds: “The overarching philosophy of the fund is that we only invest in companies that can grow on their own and have done so over the past five years. Second, we are careful not to invest in companies that have very high levels of debt. »
Currently, the net debt to Ebitda of the fund is around 0%, he says. “In fact, 40% of the companies we hold are net cash, versus a market that’s around 1.5%.”
Keep it sustainable
The Global Equity Compounders fund was also created with sustainability at its heart. “We focus specifically on businesses that we believe will have a positive impact on society.”
A total of 82% of the stocks in the portfolio generate more than half of their income from one of the United Nations’ Sustainable Development Goals, Ejikeme said.
“Investors in the UK are getting into it, but in Europe it’s essential. When investors see sectors that we don’t own performing well, for example energy or materials, they understand because they know that investing in these companies does not meet our sustainability criteria.
The fund will not invest in companies with an MSCI ESG score equal to or lower than CCC. Just over 30% of the fund’s holdings are rated AAA, and a similar number are at AA.
Want versus Need
Ejikeme says the “biggest anomaly” in the market this year “is the massive disconnect between what the credit market is doing versus the equity market.”
“The equity market rewards companies for indebtedness, while the credit market penalizes them for it.”
He adds: “Despite all the stories of rate hikes, we haven’t seen the equity market adjust in the same way as the credit market. But I think that will be a different story for the rest of the year.
This inconsistency, in a macroeconomic environment littered with conflagrations of varying sizes, all competing for attention, strengthens the case for investing in sustainable high-growth companies that are not significantly leveraged, adds- he.
“You will be better positioned for times of uncertainty, like the one we are heading into now.”
Beyond sustainable growth and low leverage, another stock-picking filter the fund is currently deploying is whether a company is making a product that meets a genuine need. Since the global financial crisis, there have been four downturns, “all of which ended the same way,” says Ejikeme.
“With defensive stocks doing very well. When times are really, really tough, people focus on the businesses we need rather than the businesses we want.
Consumer staples make up just over 10% of the fund, which includes a 2% position in Colgate. “It provides products and services that we believe consumers will need rather than owning, say, a car company.” The fund has no exposure to hypercyclical sectors such as energy, banks and materials, given their “significant sensitivity to the global macroeconomic cycle”.
“Three to four year cycles traditionally give you 18 to 24 months up and the same down, on average,” says Ejikeme.
“I think we are just five months after things went downhill. So using my analogy of 18 to 24 months, we have at least six to 12 months, if not potentially more, of the market to get used to a slower growth environment.
Work to make the compound fund more defensive began last summer. “We are making subtle changes to ensure we are positioned where investors need to be in the next six to 12 months.”
US-led global slowdown
Earnings growth across the S&P 500 was 50% last year and is expected to drop to 10% this year, he says. “This is the biggest slowdown in US earnings since emerging from the financial crisis in 2010. This kind of slowdown requires a very different portfolio, which is why we started repositioning as early as last June.”
But moving away from the US to, say, the unloved and “cheap” UK is not necessarily an option.
While the most skilled part of the equity market is on track for a significant slowdown, Ejikeme says investors should expect other parts of the markets to “slow much more.” “You can buy a cheap set of tyres, which is good until it rains. Then you would have liked to pay more.
“Most low valuation companies are generally cheap because they are cyclical. They are very sensitive to global growth cycles and if growth slows down you will find out why they are cheap at the bottom, probably because they have large debts.
The steady deluge of negative headlines has managed to push consumer and retail investor confidence to levels not seen since the global financial crisis.
“My peers in the professional investment community have never been more optimistic about the prospects for growth than they are right now. When I talk to clients who are considering investing, it sounds like a huge opportunity to purchase for those who focus on the long term.
“If you are a long-term investor, now is the time to increase your exposure.”
This article first appeared in the April issue of Portfolio Adviser magazine.