At M&G we are active investors and our specialty lies in generating alpha, or returns ahead of the markets, by being expert stock-pickers. And by being active investors, our fund managers can aim to add value for M&G clients over time.
We are long-term investors. As such, we actively follow the development of the companies in which we invest.
The starting point for our investment process is the belief that markets frequently value companies incorrectly. This may be through poor company research, short-term behaviour or the herd-like following of consensus views.
This mis-pricing of companies can, we believe, be identified through independent, original research, providing opportunities for our fund managers to deliver performance ahead of the market – if they are exploited systematically.
Fundamental research drives the investment process, and portfolios are formed out of those stocks that are the successful outcomes of research projects undertaken by our analysts and fund managers.
Investing with conviction
Our fund managers have full freedom to implement their ideas in the portfolios as they see fit. The key test for the selection of any stock is the depth of the fund manager’s personal conviction in the company’s prospects of long-term success. The greater the conviction, the greater the weighting the stock will have in the portfolio.
In forming these views, managers must have deep personal knowledge of the companies they hold. We consider face-to-face meetings and company visits absolutely essential. The fund managers meet with many of the management teams of the companies in which they invest and conduct telephone meetings with the remainder. It is rare for a manager to hold shares in a company where he has not met the management personally.
Although the fund managers are wholly responsible for taking decisions with the portfolios they run, they receive input from the Portfolio Strategy Construction and Risk Team (PSCR), who examines the portfolios to see whether they are taking the right degree of risk, and crucially, whether they might be taking any unintended risks.
The PSCR team sparks debate on portfolio construction by looking at the collection of stocks in a fund and analysing how they behave in connection with each other. In our opinion, this helps fund managers construct their funds to maximise returns from stock selection ideas.
Equally important is that the team can highlight areas where managers may need to take more risk in order to ensure that a holding can deliver the returns that are expected of it. Thus, the team can assist with the effective allocation of the risk 'budget' of a fund to the highest conviction ideas.
M&G equity funds