We talk to a Scotland-based fund management house that puts big stress on what it regards as genuine active control of its portfolios.
In this uncertain investment climate, firms that make a big point about their active pursuit of “Alpha” without compromise appear to be making more of a noise. One such business is Walter Scott, an Edinburgh-based firm that sits within BNY Mellon Investment Management.
The eponymous Walter Scott, founded in 1983, oversees $79.3 billion in assets under management as at 31 March. It follows a long-term, bottom-up approach, with portfolios comprising 40 to 60 high-conviction, quality growth stocks. The firm has a "buy-and-hold forever" mentality, and their team-based approach means that each new stock requires the entire team’s buy-in before being added.
“If you hold them for a long enough period and haven’t overpaid then the investor will get a return commensurate to rates of internal wealth creation. It is about identifying sustainable above-average wealth creation over the long term,” Roy Leckie, executive director at Walter Scott, told WealthBriefing in a recent interview.
As the US-growth “unicorn” story of the last 10 years is closing, Walter Scott is now well positioned to consider international equities, in Europe and Asia, for the next opportunities. (“Unicorns” are $1 billion-plus startups – a sector that has been hit by rising US interest rates.)
The firm targets returns in the region of 10 to 15 per cent per annum over the long term.
A quality that Walter Scott has is the longevity and stability of its team and its client relationships. “A critical KPI for us is how long client relationships last. We have clients who have been with us for 10 years, 20 years and even 30 years,” Leckie said.
Leckie doesn’t pull his punches in what he thinks about how many fund managers claim to be active.
Active management today “absolutely has its place…but it has to be true active. There are huge swathes of the industry that call themselves active but they are not. The only active thing about them is that they charge a high fee,” he said. In too many cases, Leckie said, many supposedly active houses had a high “churn” rate in their portfolios, and they are closely modelled on the benchmark.
Leckie said he thinks the asset management industry is moving to a state where there are truly active asset managers at one end of the spectrum, and passive houses at the other.
Signs of just how active Walter Scott is as a business can be seen by how, for example, it conducted 807 company engagements in 2022. Once an investment is made, it tends to be for the long haul. About 60 per cent of firms are held for seven years. There are some companies that they have owned for many decades, such as Keyence in Japan, or Fastenal and ADP in the US, or Novo Nordisk in Denmark. These are great examples of how the patient investor benefits handsomely from years and years of compound growth.
On the macroeconomic side, putting in the work of examining company performance and characteristics is ever more important, Leckie said. There has been a step up in the cost of capital and some speculative excess has come out of markets. “Investment markets have become more discerning about what they look at in terms of balance sheet quality and in terms of cashflows…and that plays into our hands,” he said.
“Issues such as interest rates and oil prices are totally out of our control. We try to bring the conversation back to things that are under our control, such as what companies we like and how much to pay for them,” Leckie said.
“We don’t want to be the biggest [in AuM], we want to be the best,” he added.