After the extraordinary events of 2020, you would expect Colin McLean to be somewhat circumspect in his predictions for the new year.
However, the founder and chief investment officer of SVM Asset Management does not demur when asked to assess what lies in store over the next 12 months.
Looking beyond the latest set of restrictions, the arrival and roll-out of vaccines “will unleash a strong global recovery as the year progresses”, he says.
“There is a pent-up demand from consumers and a high level of savings currently available to spend. Government stimulus is likely to continue until the recovery is secure,” he goes on.
The turnaround will be encouraged by restocking as inventories are currently low, with the weaker dollar helping boost emerging markets. Asia is already benefiting from China’s strong recovery, while Japan should be lifted by further stimulus.
All of this will come with a “small pick-up” in inflation as the year progresses, though high levels of unemployment will restrain “runaway pricing”, says McLean.
“For the UK, many international investors have reduced exposures and it has also seen reduced allocations from UK wealth managers,” he explains.
“It has some attractive sectors, a dynamic economy, an open market for takeovers and the potential for some currency recovery.”
SVM, which McLean set up 30 years ago, manages five equity-focused funds and an investment trust.
The group, whose strapline is ‘independent thinking’, allows its managers to pursue their own strategies while sharing ideas with the team.
ESG integral to SVM's analysis
Scrutiny is provided by an independently chaired fair value, liquidity, risk and compliance committee. Environmental, social and governance (ESG) scoring is integral to SVM’s analysis.
“Particularly good governance,” says McLean, who points out that sustainability has been at the heart of the group’s philosophy since the outset.
It started with the UK Active and Global funds before SVM added further heft in 2006 when it recruited the socially responsible investment team from Dutch asset manager Kempen, which brought in Neil Veitch, Hugh Cuthbert and Craig Jeruzal.
The group has signed up to the United Nations-supported Principles for Responsible Investment and “gets a good annual rating on this”, and it is in the process of submitting itself to the Financial Reporting Council’s Stewardship Code.
“We exclude very few investments but believe more can be achieved by active engagement with companies and will hold the shares as long as they make progress in line with those discussions,” says McLean on how SVM applies this approach practically.
This is supported by a flurry of independent research that has revealed a link between ESG and superior investment returns.
Data from Fidelity, for example, showed stocks at the top of the fund house’s ESG scale outperformed those with weaker ratings in every month from January to September last year, apart from April.
McLean believes the pandemic has accelerated investor interest in environmental and sustainability issues.
“We expect government policy, with an increasing emphasis on fiscal policy, to restore the economy in 2021 to focus on restructuring for sustainability and environmental improvement,” he says.
The asset manager has investments such as the hydrogen fuel cells specialist Ceres Power that “will be operating with the following wind of government incentives and encouragement”. Legislation will also force the pace of change.
SVM’s five funds – UK Growth, UK Opportunities, Continental Europe, All Europe SRI and World Equity – have comfortably beaten their benchmarks during what has been a tumultuous year for stock markets.
Their performance since inception reveals there is a role for active fund management in this era of trackers and exchange-traded funds (ETFs).
For example, the UK Growth fund, which McLean co-manages with founding director Margaret Lawson, has grown 263% since inception, substantially outperforming its benchmark.
Lawson also manages the investment trust, the SVM UK Emerging Fund PLC (LON:SVM), which McLean describes as a testing ground for businesses that are smaller but “sometimes less liquid” than those that found in the long-established UK Growth fund.
“Much of Margaret’s style is about regular contact with companies and building up a deep understanding of their edge and checking they are still following the same strategy,” he explains.
Overall, SVM’s funds proved more than resilient as they navigated their way through the treacherous investment waters of 2020, though they underperformed in February and March.
Investors held their nerve in the early months of the pandemic and recently there has been a net inflow of new money.
Since the summer, SVM has increased its exposure to businesses with recovery potential in 2021 in the hope that we will see a V-shaped bounce-back in the UK and “good growth globally”.
Looking ahead, we should see a bout of takeover activity that has been noticeably absent from on these shores save for the odd example, says McLean.
The Sage of Edinburgh adds: “Strong businesses impacted by the pandemic such as Ryanair and Wizz Air should come through strongly as should IWG in office property.”