Graham Campbell and Bettina Edmondston, managers of the Saracen Global Income and Growth fund, discuss why they are heavily invested in the industrials, financials and materials sectors, rather than “defensive” consumer staples companies, such as Coca-Cola, Pepsi and Nestlé.

Graham Campbell, from Edinburgh-based Saracen Fund Managers, highlighted in a recent interview with WealthBriefing that they have got "the most industrial-cyclical portfolio that they have ever owned."

“When we first launched the Saracen Global Income and Growth fund in June 2011, we had a lot of consumer holdings like Nestlé, Unilever and McDonalds, but they became more expensive so we sold them,” he told WealthBriefing in an exclusive interview.  

“We are always viewed as value investors but we also buy growth. We are very disciplined about the price we pay,” he added. “The value approach has come back. It has worked well in the last 12 months, compared with other styles.”  

“We are heavily invested in industrials. We’ve got the most industrial-cyclical portfolio that we have ever owned and we expect a big pick up in industrial capital expenditure,” Campbell said. 

“Our investment philosophy is based on the three Rs,” he added. “Recovery – households and corporates are now in good shape post-Covid-19, with people spending money and with more resiliency in the market place than expected,” Bettina Edmondston (pictured) said.

“Secondly, Replacement is badly needed. CapEx spending has been very depressed, below the norm, in the past years. Everything is getting old – cars, infrastructure – nothing has been replaced. The government and corporates have to invest, to get ahead of competition, and replace old assets, which hasn’t happened for decades. Tractors are the oldest we’ve ever seen,” Edmondston continued. The firm cited that 42,391 US bridges, for instance, were recently classified as structurally deficient. “We think there will be a pick-up in the CapEx cycle. There will also be tech advances, for corporates to stay competitive, a long-term trend,” she added.

Finally – tRansformation is the third “R.” The firm believes that there’s a huge upgrade cycle, with continued investments in areas such as semiconductors, electric vehicles and renewables, as well as a general focus on automation. “Many of our industrial holdings are becoming higher quality and less cyclical. Replacement and tRansformation will last probably for about 10 years. This portfolio will do very well, if we are correct in our assumptions,” Campbell said. He expects to see a shallow recession, and believes that it will pass quite quickly, without too much pain.

“It’s about firms adjusting to the new environment out of Covid-19,” Edmondston added. “Things force them to change. Supply chains were disrupted during Covid-19 and weren’t as secure as we thought, like China. There’s talk about onshoring and bringing manufacturers closer to home."

“There was also a shortage of labour, with not enough skilled labour out there, increasing the trend towards automation, rather than relying on manual labour,” she continued. “ESG is another long-term trend, with governments and firms needing to meet the targets in the Paris climate agreement. Investment is required to reduce carbon dioxide emissions and improve automation. It’s a trend that has a long way to go,” Edmondston said. “CapEx investment spending has been at the bare minimum, but going forward, infrastructure spending will increase. We are confident that coming out of Covid-19, there is a different environment. Markets will move towards more cyclical firms. We’ve performed well over the past 18 months." 

“We invest in firms with good growth prospects and help them to transform. We invest in Schlumberger, for instance, which provides products to the oil and gas industry,” she continued. It has good prospects during this period of energy transition and volatile oil prices. “They seem old fashioned but there’s a change and that’s what we want,” she said.  

“We also invest in Glencore, which is a powerful mover in power plants and steel mills and has been involved in several M&As recently. It does still own coal assets, but its more sustainably managed than others and they have said they will come out of coal. They are also in copper mining which plays a key role in electrification,” Edmondston said.

St Gobain, a material and solutions company, is the biggest holding in the fund and delivered solid results, in spite of a challenging environment and declining sales. She also invests in Cisco, a computer hardware firm, that delivers networking, cloud and security solutions.

Edmondston doesn’t believe that investing in consumer staples companies, such as Pepsi, Nestle, and Coca-Cola, is all it’s cracked up to be. They did quite well during Covid-19, she said, but the environment has changed now. Today, yields of between 2 to 3 per cent seem mediocre, she added. See more here. 

However, Edmondston's views are not shared by everyone. Other investment managers such as UK-based family office Sorbus Partners favour investing in consumers staples, such as Unilever and Diageo, as they are companies that people will continue to spend money on, even if there is an economic downturn, and work well in volatile markets. "Unilever is our top pick to navigate the current inflationary environment and also to provide investors with a long-term growth opportunity," Richard Farmiloe at Sorbus Partners told WealthBriefing. He bought it last year when prices were down. "It is a growth stock and it should be valued at much higher than that," Farmiloe added. Nearly 50 per cent of the Sorbus Vector Fund is invested in consumer staples, followed by consumer discretionary. See more here.

Saracen Global Income and Growth fund
The fund, worth £145 million ($176 million) with 43 holdings, invests in high quality businesses, with good long-term growth prospects, using a low risk approach. It has performed well recently and has mostly been in the top quartile over the past three years. The managers try to find global businesses that are low risk with share valuations which underestimate their prospects. The fund invests heavily in the industrials, financials and materials sectors, mainly in Europe-ex UK and the US. Although Edmondston likes emerging markets, she said she struggles to find the right firms there, as they tend to be behind in governance.

Top 10 holdings include Cisco, St Gobain, HSBC, UBS, Roche, Glencore, and Schlumberger. “We also invest in US agriculture machinery manufacturer John Deere. They are becoming more automated, with self-driven tractors helping farmers cut costs,” she said. John Deere recently announced two new technologies, ExacShot and an electric excavator. ExactShot uses a sensor to register when each individual seed is going into the soil, allowing farmers to reduce the amount of starter fertilizer needed during planting by more than 60 per cent. The electric excavator, powered by a Kreisel battery, reduces jobsite noise, enhances machine reliability, and produces zero emissions.