Trustnet Magazine Issue 12 November 2015 | Page 22

INVESTMENT STRATEGY

SCHRODERS

THE MEANING OF

GROWTH

F

or many investors, investment
growth is synonymous with
revenue growth, but for Philip
Matthews, manager of the Schroder
UK Growth Fund plc, growth
requires a more nuanced definition.
This means not simply buying and
holding companies that appear to be
able to grow revenues over the long
term, but looking for growth the
market is missing.
One advantage of investment
trusts is their captive pool of assets,
which allows fund managers to
take a long-term perspective. They
do not have to manage inflows and
outflows and can therefore invest
for sound investment reasons rather
than to manage liquidity.

DISRUPTIVE TECHNOLOGIES

This does not mean investment
trust managers can be agnostic on
price or the shifting prospects of
individual industries. The global
economy is fast-moving as new,
disruptive technologies emerge,
and old – apparently untouchable –
businesses fall away.
This is seen clearly in industries
such as high street retailing,
where the internet has created a
permanent and profound shift in
buying habits in relation to
food, clothes, travel, banking
and more. High street
stalwarts have
seen their

businesses challenged by
companies that may not have
existed 12 months previously.
In this environment, it is tempting
to leap on the next big thing, but
this is unlikely to fulfil a true
growth mandate. In general, this
type of growth is relatively easy to
spot: after all, most investors can
read the statistics on the growth of
e-commerce or the rise of online
advertising. It does not mean it is a
quick and easy way to make money
because the opportunity is
generally already in the price.
The key to achieving
real long-term growth
is to find something
undiscovered or
under-appreciated
by markets. As the
technology bubble
showed, markets
tend to get overexcited about
change, but

Schroders’
Philip Matthews
says that growth
is about far
more than just
an increase in
share prices

may underestimate the ability of
incumbents to adapt. The Schroder
UK Growth Fund plc aims to
recognise and accommodate
structural change in markets, while
not over-estimating the profundity
of that change before it happens.
In adapting to changing market
conditions, Matthews focuses on
the valuation of assets to ensure
that while change is captured, the
price paid for it is not excessive. He
looks at company performance
over the long-term, assessing
what type of earnings might
be expected. This does not

assume that all companies revert to
the mean, but allows for structural
change in individual industries.

THE RIGHT PRICE

Matthews regards valuation as a
key determinant of potential future
returns: there are many reasons why
an investor might over-pay for assets,
but none are likely to have the same
impact as buying the company at
the right price.
Buying the obvious growth
companies tends to lead investors
to overweight certain parts of the
market. In contrast, Matthews’
systematic screening forces a
constant re-evaluation of where he
sees the best combination of value
and quality. The screens penalise
businesses whose profit streams
are cyclically extended, are capital
intensive, and where those profits
do not convert into cash over time.
The market may be focusing
on those areas exhibiting the
strongest revenue growth, but
the real excitement may be found
in companies that are quietly
re-grouping, and rebuilding their
growth strategy, but whose history
has set investors against them.
Stock market history has many
“revival” stories. The housebuilders,
sold off violently after the financial
crisis, were reappraised significantly
as economic re covery unfurled.
More recently, the banks have
undergone their own reappraisal
as greater regulatory controls have
been introduced.
Matthews examines cyclical
risks, structural growth trends and
ultimately cash generation. He
analyses each company’s franchise
and balance sheet strength as well
as relative and absolute valuation

THE KEY TO ACHIEVING
REAL LONG-TERM
GROWTH IS TO
FIND SOMETHING
UNDISCOVERED OR
UNDER-APPRECIATED
BY MARKETS

to build a margin of safety into
the investment. In assessing a
company’s valuation, Matthews
looks at enterprise value, which
helps assess a company in the same
way as a trade buyer.

UNRECOGNISED POTENTIAL

Companies in the Schroder UK
Growth Fund plc should have strong
business models and franchises, and
healthy balance sheets, but this is
not sufficient to build a position.
They should also have unrecognised
potential on a two- to three-year
view. This may be because there has
been a short-term set-back, or the

market underappreciates the growth
potential of one part of the business.
An understanding of the
company’s franchise is important:
its position in its marketplace,
competitive advantage, ability to
take market share, the strength of
its brand and the structural trends
driving its growth.
Although Matthews is a stockdriven rather than macroeconomic
investor, he recognises the fortunes
of individual companies cannot be
entirely disaggregated from broader
themes. Such themes are discussed
with Schroders’ economists and
their views combined with the
research Matthews carries out on
individual companies.
In this way, he aims to distinguish
between earnings or revenue growth
and the opportunity for investors
to achieve capital growth over the
medium term. In aiming to uncover
real, long-term growth in companies,
investors need to be more nuanced
than simply looking for the next big
trend. Often, strong opportunities
can be found when the rest of the
market is looking the opposite way.

What are the risks?
• Past performance is not a guide to future performance and may not be repeated. The
value of investments and the income from them may go down as well as up and investors
may not get back the amount originally invested.
• Portfolios which invest in a smaller number of stocks carry more risk than funds spread
across a larger number of companies. Investments in smaller companies may be less
liquid than in larger companies and price swings may therefore be greater than in larger
company funds.
• The Company will invest solely in the companies of one country or region. This can carry
more risk than investments spread over a number of countries or regions.
• The Company may borrow money to invest in further investments, this is known as
gearing. Gearing will increase returns if the value of the investments purchased increase
in value by more than the cost of borrowing, or reduce returns if they fail to do so. As a
result of the fees being charged partially to capital, the distributable income of the fund
may be higher, but the capital value of the fund may be eroded.

Important Information: We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.
unbiased.co.uk or www.vouchedfor.co.uk. The most up to date Key Features Documents are available at www.schroders.co.uk/investor.
The views and opinions contained herein are those of Philip Matthews, Fund Manager, UK Equity, and may not necessarily represent views expressed or reflected in other Schroders communications,
strategies or funds. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and
information in the document when taking individual investment and/or strategic decisions.
Issued in September 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.UK09758

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