Welcome to episode 66 of the Investing Matters Podcast.
Podcast host Peter Higgins chats with Schroder UK Mid Cap Investment Trust's Jean Roche.
Jean won Europe's Best Retail Analyst award in the Wall Street Journal Survey of May 2013, in this episode hear about her fund management career, working with Andy Brough and James Goodwin, companies in the portfolio, characteristics of 30 baggers and much more.
London South East 00:01
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Peter Higgins 00:18
Hello and welcome to the Investing Matters Podcast.
My name is Peter Higgins, you can find me at Conkers3 on Twitter.
And today I have the absolute privilege of speaking with Jean Roche, one of the leading fund managers in the UK and the lead manager of the FTSE listed at Schroder UK Mid Cap fund (SCP).
And also third of Schroder's UK Small Mid Cap team with Andy Brough and James Goodwin. Welcome, Jean.
Jean Roche 00:45
Thank you very much, very accurate introduction.
Peter Higgins 00:49
No, it's fabulous to have you on here Jean today.
And you've been an absolute delight to listen to over the years, and you've as a performer, regarding the fund management team, and fund managers, per se, you've absolutely smashed it for long-term investors.
So very well done in what you've achieved so far. And you've got plenty more years of delivering good value for everybody. So I'm thrilled to have you on here. So thank you.
Jean Roche 01:14
I've been very lucky to work with some of the best in the industry, you know, brought into Hargreave Hale initially and then, which is now part of Canaccord.
And now working with Andy Brough, who I think said a few words in the podcast for you, you know, a year ago. So you know, and I stand on the shoulders of others in many ways, but many of us do.
Peter Higgins 01:36
As we all do, and you're absolutely right, Andy was here on here a little while ago, and we spoke about the Heineken index, which I'm sure will go into a bit later on.
But I wanted to talk briefly, you mentioned there about your first experiences, and you're a graduate of the Morgan Stanley programme.
So tell us about that, because it's also linked in to what you first studied at some degree and master's level as well, because you are a bit of a person that loves your numbers, aren't you, Jean?
Jean Roche 02:08
Yes, well, actually, I was I was thinking about this, it kind of stems back to my dad who always said he did a degree in mathematics in the National University of Ireland, Galway.
And, you know, he kind of said to me, we'll do if you can do maths, then you know, you'll always get a good job in maths because lots of people don't like maths.
And then there was, you know, in there was a general thing about doing what you like, what you enjoy, as well.
So I did maths and French was a joint, undergrad.
And I really enjoyed the difference between those two as well, actually. And the fact that I got to live in France for a year as part of doing that undergrad.
So you know, that was that was very enjoyable.
And then when it came to doing a Masters I had to decide. So I was signed up actually, for a master's in French literature that could have been very different.
And also a master's in financial and industrial maths. And I went on, I chose it was literally the last moment I decided, if I want, you know, the lifestyle, I would like, I probably need to do the Masters in maths.
And so I went and I did that in Dublin, Dublin City University, and that really opened doors to many of the milk rounds.
But I'll tell you how naive I was really, although I really enjoyed you know, games, like I liked a betting on the horses and I’m from the West of Ireland and down the road from a racecourse. I really liked playing with a roulette wheel and all the normal stuff that kids play with as well not you know, Barbies and things like that too.
But you know, I quite like numbers, games, probability breaking codes, things like that. But I decided that when Goldman Sachs came to our university, I wouldn't try there because that was too famous, you know, but I thought when Morgan Stanley came along, I never heard of them.
So I'd applied to Morgan Stanley, and I applied to a few others.
And I got a couple of offers and I thought, I'll get to go to London, and I go for two years.
So here I am 25 years later, after that graduate job at Morgan Stanley, and that I joined there as a tobacco analyst.
And actually so interesting having that experience in the market, because on the radio this morning, I was hearing about vapes and Chris Whitty, and, you know, all the changes around that and it's amazing time in the market, you know, the big issues around changing flavours of cigarettes back in the 90s, you know, 99-2000 that's all come around again now for vapes and legislation and all of that.
So, yeah, a bit of a long, long answer. But you know, just reflecting these kinds of chats make you think about the sort of long-term themes and what you've seen before and what's coming around again, which is a very big part of investing.
Peter Higgins 04:53
Indeed, and amongst that journey, you know, Panmure Gordon, think you said there, Hargreave Hale while the rest of it there's a little bit that you missed out regarding certain awards from Wall Street Journal maybe? An award winner on our show ladies and gents.
Jean Roche 05:13
Yeah, I, it feels like a long time ago now it's a bit like saying, oh, I got my sort of grade eight piano exam, you know, and the 100 metres fastest runner or whatever it is when I was 13.
But or was it two or three-legged race.
But yeah, I was the Wall Street Journal Retail Analyst of the Year in, oh, I don't know, even know what year it was now, maybe 2003.
But it was all to do with this trend of online retail and you know, it will never take off.
And it was a lot of it was down to that whole shift online.
And in the beginning. You know, nobody believed that anybody would ever buy anything online that, you know, everybody would want to try it on, it'd be too much of a pain to bring it back to the shop. And, you know, those were the early days of the trend.
And, you know, we've seen it come full circle since, but yeah, a lot of it was down as it often is a lot of that award, it was down to very much performance, but it was very much down to one or two stock picks.
And ASOS (ASC) was a big a big player in that because that, you know, through the you know, the GFC ASOS was just rocketing still, you know, and that's what's so interesting about small and mid-cap investing, because these things can work, you know, the macro trends just don't affect them as much because they they're starting from a small base, and then they're growing like weeds to use the technical term.
Peter Higgins 06:37
Absolutely. This is the beauty. Have you been at the forefront and seeing things, you know, where other people's are going no, it's about having that sort of viewpoint where sometimes you've got to challenge the consensus, if anything, you know, sometimes and go, see this is a possibility, what if, you know, so yeah, and you were there doing that 21 years ago and look at online now, it's a force to be reckoned with only second, well, second only to AI probably now, you know.
So, Jean, we've covered a little bit about the backstory there, a couple of your roles as well.
And then you get the offer, or what happens regarding getting into Schroders, what's behind that?
Did they come to you? Did you see them? Did you just think I want to work with Andy Brough, what happened?
Jean Roche 07:25
It was absolutely I want to work with Andy Brough.
So what happened was, well, I was very, very lucky to be asked to move to the buy side, into when it was thinking back now, so that was 10 years ago, bit more than 10 years ago now.
And I'd always wanted to do that I'd done the CFA, I'd had 10 years on the sell side four years in governments, which I highly recommend as well actually, because it, you know, gives you a very well rounded view of how things are run.
And I just had a phone call one day from the team and Hargreave Hale saying, you know, we'd like somebody to help on the fund.
And I absolutely jumped at it.
And I had, I was very lucky to have a couple of years there with Sid Chand Lall and Giles Hargreave and the rest of the team there.
And then, I had always kept in touch with Andy, who I used to broke to actually, for many years, and particularly, in fact, talking about online retail was, you know, where we got talking, because he's a very big believer in, you know, speaking to people who, who are at spotting the new trends, and, you know, not assuming that, you know, everything and you know, just picking up something new from every kind of meeting you go to.
And, you know, there was a space coming up in the team.
And he's a big believer in having diversity in the team.
And he was looking for a female fund manager.
And as you will know, Peter, because I think, you know, this is close to your own heart as well, you know, what are their 11% female fund managers in that kind of a global figure, really, you know, the UK is no worse than anywhere else.
And he, you know, wanted to replace the departing fund manager on his team with another woman.
So, I'd like to say probably the field was probably not that wide.
Anyway, we had we had a chat about, about his investment philosophy, which I think he's run through on this podcast before actually, sort of, you know, buying and holding these unique stocks, the A's, then maybe trading in and out of the flex stocks, the B’s, and I can talk about that a bit more later.
And then avoiding the key avoiding those C stocks, the ones where management is destroying value.
And he even then true source of legendary style, he drew it all out in napkin.
And so what do you think of this philosophy?
And I thought that makes a lot of sense. And the fact that it fits on a napkin probably, you know, very good sign as well.
So I was able to buy into that So I joined the team. And that was, yeah, nearly eight years ago now.
Peter Higgins 10:07
Fantastic. So tell me about the initial role he sold it to you on a napkin?
So what do you say? What was going to be your first role, initial role within the team responsibilities, etc, evolve since then Jean?
Jean Roche 10:20
Yeah.
So actually, what we said was the main thing to focus on and you mentioned the front of the beginning, Schroder, UK Mid Cap PLC, which is an investment trust. You know, that was kind of the main thing that Andy wanted me to work on.
And I was quickly named co-manager with him on that fund.
And now I'm lead manager on the board rode in behind me and Andy did a few years ago and said, right, you can take over as lead manager now.
I'm still managing with Andy now as co-manager.
And it was very much, you know, working on mid-caps.
So the challenge was to develop an encyclopaedic knowledge of the Mid 250 index.
So that would be the FTSE 250 excluding Investment Trusts now, actually, that is only about 170 companies now there are so many investment trusts in the index.
So all I have to do is pick the best roughly may you know that in the fund we have about at the moment about 50 holdings, so I just need to pick the best 50 out of 170 (ish).
So you know, very straightforward, pick the eight the best valued A's and B's out of that, or unique and flex stocks, avoid the Cs, or the stocks to avoid category.
And, you know, so I hopefully, it's a fairly easy one to explain anyway.
But as you know, the realities of doing these things and avoiding emotions, trying to be rational, avoiding knee jerk, all of that stuff and being disciplined about selling, which I'm sure we'll talk about a bit later. is extremely important as well.
Peter Higgins 11:59
Absolutely.
There's no greater challenge I think, than navigating the market and doing it over a course of decades is nearly impossible.
So the fact that you and Andy Brough and the rest of the team, James Goodman and co to navigate it and return, you know, substantial returns over the long-term for investors is exceptional Jean.
So kudos to you and the team for that.
You touched on it a little bit there wanting to go a bit more into detail.
If you can tell me you've got these 170 stocks and you're trying to pick the best 50, you go through some of the characteristics regarding the screening process and methodology that yourself, Andy, James go through to select those core 50 please?
Jean Roche 12:39
Yes.
So what we'll do is we'll take all the stocks and of course it's very exciting index, you mentioned the Heineken index, I think earlier.
So the reason we call it the Heineken index is because it refreshes like no other and you have to be actually I realised now, when I presented a slightly younger audiences, they don't know anything or they do not know about that Heineken ad.
They don't know what you're about.
But whatever you're trying to say is every quarter the index changes because you've got stocks going into the FTSE 100 coming out of the FTSE 100 being promoted from small cap and being demoted from the FTSE 250 And then you might have IPOs, M&A.
So I think there was one quarter where there were 28 changes that that not, not in my time in the mid cap was in the last 30 years.
It that is possible, it was probably you know, maybe it was around the time the GFC I don't know.
So the 170 changes, that's the other part of the game as well.
So you know, so what we do is we take each stock and we categorise it into a unique stock or a flex stock or a stock to avoid and what we're looking for with unique stocks are companies where supply is less than demand.
So there is a scarcity value and classic stocks in that vein might be companies like 4imprint (FOUR) which makes promotional products or Games Workshop (GAW), which probably a lot of the viewers know they they're one of their main brands is Warhammer and they make those plastic figurines that you can spend hours and hours painting and then playing war games with and they've actually had an interesting agreement in principle with Amazon recently as well to do more stuff on screen as well which is you know the details of which are still being worked through.
So that would be you know, your unique stocks they would tend to have very high gross margins and very strong management teams they would often they would generate a lot of cash internally they might be very capital like models.
And you know, I think but you know you have to be buying them at the right price as well so we would buy and hold those ones and we would flex in and out of them as well.
But you know there are no sacred cows you know, if they get too expensive, we would absolute that unique or not unique we would sell them if they became too expensive and then you've got your flag stock sale the other strategic crossroads often in their lifecycle It may be that the supply of what they do is coming out of the market.
So that might be the case of, for example, pubs, you know where or the supply of shares in the market where they're buying, you know, they're buying back to their own shares the scarcity value there or pubs where you've got, you know, several thousand closing down every year, I think there's a limited something like 20 years of drinking time left or something.
So, you know, they would tend to be on you would expect to be paying less for those.
And for the unique stock thing I forgot to say about the unique stocks as well as often they would be very typical acquisition targets, by virtue of being unique and one that went off the market last year was Dechra.
That was unique in the UK market. And that's a farm animal and and companion animal pharmaceuticals company. And that would have been your class, they came from the small cap went to the mid cap went into the large cap, we sold it when it went into the large cap as part of our selling discipline into the FTSE 100.
But that would be your classic, you know, there was nothing else like Dechra (DPH) in the index, and that's unique.
And then so I had moved on to the flex or B categories, we tend to trade in and out of those more, you tend to pay less for them probably, and they might not have, you know, such high margins as the unique stocks would, and they might be more cyclical and prospect, maybe the house builders, you know, potentially a bit more in the regulated sectors or the sectors which are more affected by government policy, for example.
So it's, and then when you move on to the C stocks, as I said, they will be companies where management is destroying value where there are accounting issues. It might be, you know, several acquisitions have taken place start companies where there's a difficult balance sheet situation, but that list tends to be quite small actually.
Because generally speaking in the UK, we you know, we have very strong corporate governance and, you know, the market regulator itself, really so you know, that those situations don't go on that long, actually.
So that so that, you know, stocks to avoid list does not tend to be very long.
So it's, you know, mostly the A's and the B’s, and then we select the most attractively valued of the A's and B's and we like to have anywhere between 40 and 60% A's or unique stocks.
Now, I'd love to have a whole portfolio of unique stocks. But I think you know, you can't, we don't have that situation right now.
And I think to explain the flex a bit better as well, you know, it there are areas like for example, staffing, so you'd say Hays (HAS) and PageGroup (PAGE), they would say they're very different companies, however, it's very similar drivers.
So you could never say that either of those are unique. So even if they had the high margins, they wouldn't have that unique characteristic, whereby it's the only way to get exposure to that theme.
So I hope that explains the two the two main categories the the flex and unique stocks that we put together to combine to make our portfolio.
Peter Higgins 18:02
Brilliant, really explained, thank you ever so much.
We're going to go into more detail about another on a more forensic level about some of the stocks that you hold a bit later on.
But firstly, I want to talk about something that was mentioned some time ago by yourselves and Andy.
And it's one of the often-overlooked real skills of investing in stocks.
And that's the learning when to sell so other than takeovers or promotions into the FTSE 100, how do you and your team identify when to trend reduce and sell a particular holding?
Because that's one of the skills that there's no books really out there to teach somebody?
Jean Roche 18:40
Yeah and there's no, you get so many fewer emails, you know, from brokers telling you to sell stuff as well.
It's all about, you know, the vast, vast majority is buy and for various reasons, you know, it's more interesting and more, I guess, the human condition means you'd much rather tell someone to buy something than say, oh, you hold this, by the way, I think you should sell it, you know, and then, you know, I want you to be happy that you've heard from me, and I'm telling you that your big holding, you should actually sell it.
So, you know, the brokers aren't really, you know, it's just not human nature to tell you to sell. So you have to have a set of rules.
So we talked about stocks being promoted to the FTSE 100 and it's worth talking about that because often that is as good as it gets for many companies.
I mean, there are ones that continue to go on, you know, for example, Halma, I would say, very strongly industrials company in the UK, but you know, it as a general rule, it tends to be a very good signal as to when things have got too hot.
Maybe you're looking at peak margins, maybe you're getting to a point where competition is starting to come in.
You know, companies like Rightmove, for example, they were the only game in town for a while until they weren't and now we're seeing what's happening with CoStar.
So, you know, that's the point about that's a very good catalyst being promoted to the FTSE 100 Because other things are starting to happen in the sector by then competition is starting to creep in.
So you know, that's it, maybe it's going to the FTSE 100 or maybe competition, a lot of you starting to see a lot of competition in the sector, it maybe you think it's peak margins, maybe it's peak valuation, maybe there's a change of management, there might be so that we talk about a change of, say, ESG, or sustainability behaviours.
So that's often to do with the change of management.
A key one is doing, you know, doing a high number of deals unsuccessfully, when a balance sheet becomes challenged.
So we do have actually, we have a lot of reasons, there's a lot of holes for companies to fall into. And we're constantly checking and, you know, we're very much a team of eight, you know, printing out, printing out the accounts, and going through the numbers, and, you know, if the accounts, you know, frequent exceptionals would be another, a key reason to sell, you know, frequent and, you know, significant exceptionals.
And there's a product actually called Quest that one of the brokers has, and they just do something called accounting blobs.
And that's a technical term for, you know, so anything that looks a bit messy on the accounts, things like unusually low tax rates, you know, frequent high levels of exceptionals cashflow that doesn't add up properly, on, you know, profit that doesn't convert to cash, and things like that.
So that those are accounting, they call accounting blobs, and they can, that can be a very useful screening way, actually, you know, so if you want to say, well, I'm looking at these 10 companies, oh, this one has six accounting blobs, and this one has none.
But this one has three new accounting blobs, say for example, that can be useful way of screening.
So, you know, I think we kind of have to tell each other, you know, because the brokers aren't going to necessarily tell us too much about selling, we like to do it in the morning I sit is I sit with James on my left and Andy and my right.
And we like to, you know, picking holes and things I've read through these this is, you know, look at this thing they're saying here, or, you know, they you know, they're saying this is a record year, oh, it's a record year, well so what does that mean, for next year's record margins? You know, so it's all of these things. Okay. So what happens next after that?
So or, you know, simply, this has gone up a lot, the P/E is double what it normally was? Is it a different kind of company?
Is it really that much better than everything else in the sector? Does it deserve to be on 20 times and everything else is on 10 times, and sometimes they do, but we, you know, we so we like to, you know, go through things and then equally you know, a stock report, shares can be down a lot, and we'd go through it and say, I can't see any rational reason why this is down.
We hold our nerve and this is why it's so great to work in a team and the number three in a team seems to work very well also, actually, I find.
Peter Higgins 22:49
Brilliant, now, you know, they say you've got you know, yourself a mathematician, you've got Andy, who's I think, has PricewaterhouseCoopers background as well. Okay.
Jean Roche 23:01
Cricketer, James in an ex-cricketer, it's a combination.
Peter Higgins 23:10
The three of you are hitting sixes out the ground all the time.
So I want to talk now a bit focus now a couple of the stocks that are in the portfolio firstly, with the long- term stocks that you remain most confidence in yourself, James and Andy?
Jean Roche 23:25
Yeah, I mean, probably want to want to mention it, because they've published their annual report today is 4imprint, which is UK quoted stock, but actually well over 95% of what they do is in the US, they make promotional products.
If you go to a conference, and Schroders is printed on it, or you know, indeed, the Investing Matters Podcast, if you're getting merch, you might be looking at them to get it printed for you.
And there you've got very high margins, as you would expect.
You've got high top-line growth rate, high returns on capital invested because they do something called a drop ship model where they put the order through to their suppliers and the supplier delivers it directly to that conference.
And you know, if you're having a conference on the 21st of April and the product arrives on the 22nd, well, you’ll know Peter, that's no good to anyone.
You need your baseball hats, your pens, your tote bags on the day.
So they have a reputation for being extremely reliable, and equally with their suppliers, they can deliver the kind of volumes of suppliers need to make it work.
They'll also do work where so if you wanted PH embroidered on your fleece, although, you know, no fleeces going on there at the moment I can see but if you did, for example, once you knew you had a team and you wanted PH on both the teams fleeces they would embroider that for you.
And that's actually the whole area of personalisation of branding is so important and what you would want as well as down the line you know when I take My Schroders mug out of the dishwasher.
I don't want the word Schroders peeling off it, you know, a year later when I think about that conference, so that actually the importance of quality, and branding and how that all ties in together, and they feed into that, but you know, delivering the financials as well.
So you've got a case where you're increasing your market share from three to 6%.
So that is obviously the top line growing incredibly strongly, you have also market where you know that gone are the days, unfortunately, where you can give out, you know, you know, quite expensive goodies to people or conferences.
So all that sort of low level, let's just call it merch to your other words for it. But you know, the kind of less valuable stuff, but you can still give that out. But it's important that it be of a certain quality, they're feeding into that.
But you know, the last two years, their top line has been growing at 45% and some of that was COVID recovery with some of that also was taking market share.
And then also being very clever with how they use digital marketing themselves. So their own use of marketing.
So they were very high in paper marketing, but now they do a lot more digital, but also newspapers.
And then also not just kind of performance marketing, but also brand marketing their own brand.
So 4imprint, that's the number four and imprint, and to kind of be front of mind.
So if you quickly, you know, they'll be feeding into the small, smaller sub teams within a large enterprise.
So you know, the average order is $600.
So if you needed something for your team lunch next week, and you wanted sort of, if we want a team Schroders on our hats for or team shoulders Mid Cap, say, we would be able to you to get that, well, if we were based in the US, we would get that through them.
So I think it's an attractive, you know, still remains an attractive at an attractive valuation, despite its high returns high margins, and it has a negative working capital model as well, which means that it's not using its own capital to generate sales.
And so it's very, that's very good and cash, which means it can pay dividends, and it can pay special dividends.
So you've got this sort of holy trinity of the capital growth, the dividends and the special dividends.
So that is one that we're very positive about.
Peter Higgins 27:13
And it's been a phenomenal success for decades now.
And it's always been off the radar, it's not one of those stocks that you see, everyone talking about just quietly just goes about his business, you know, and compounding for, for institutional and private investors, so absolutely fantastic.
Now, Jean that the largest sector that the teams exposed to is industrials, other than what are the stocks that you've mentioned already? What are your other holdings within that sector please?
Jean Roche 27:40
Well, I think it's, it's probably worth sort of taking a pause for it, you know, everything that's going on in the Middle East, which is very sad at the moment, and a lot of human destruction.
So, you know, with that in mind, we, you know, we're looking after our shareholders, we have three defence stocks, which are classified as industrials and the portfolio.
So that is sort of a sub theme that we've leaned into.
Now, originally, I, you know, obviously, I didn't have a crystal ball, sort of four or five years ago, when I first really started leaning more into the sector, I was would take the view, and the team will take the view that defence, they tend to be, you know, inexpensive technology stocks.
And, you know, you'd have some of these more highly rated stocks move, for example, like Darktrace (DARK), which has, you know, very positive qualities as well, and you know, is a, I would say unique stock.
We don't currently hold it, but, you know, you can pay less and still get high technology companies.
So stocks, like QinetiQ (QQ.), Chemring (CHG) which works very closely with some of the intelligence services, but also sells sort of flares and the more of what you would associate more with defence, but also working in the grey zone, in other words, the defence that under the radar, terrible pun, but so that's less obvious.
So in that zone, where there's been sort of like a very quiet battle going on, it's called the grey zone and QinetiQ have actually written a fair bit about us.
And then there's Babcock (BAB) as well and then there's, you know, the others of our stocks as well like Bodycote (BOY) which feeds into the defence industry.
So I think there's a theme there, and that was already sort of inexpensive, and some very high margin products.
And, you know, we've had some good, you know, high double digit top line growth, you know, sort of 10 to 15% for some of these and higher, even before events broke out in, for example, the Ukraine and in the Middle East.
And we're just seeing that go further.
And they're being as I mentioned, you know, we were seeing when you see more demand then you can supply I for what they do.
And then you know, Babcock's a very interesting one for us as well, because that was one where the balance sheet was very challenged, it had a lot of fixed price contracts.
And when you're, you know, building enormous and enormous piece of, you know, enormous vessels, say, two then guarantee the price to the buyer. When so many things can go wrong. That's, that's quite tricky.
So they've moved more to a cost plus model, rather than a fixed price. And they've repaired the balance sheet, they brought in a management team from elsewhere, which we knew from elsewhere. A guy called David Mellor is a guy called David Lockwood.
They only not employ people called David.
And, you know, they, you know, they've done a very good job there. And you know, I attended a capital markets day there about, I don't know about might have been seven years ago, and it was night and day, the one I went to about three or four months ago, the same company, it was a different venue, but different management team with the balance sheets different and obviously, the supply, sorry, the demand backdrop is different.
But you know, that sector has been through a torrid time, because, you know, quite rightly, people have mixed feelings about it.
And it's moved around in terms of, you know, it was, you know, pretty much becoming an investing pariah until people realise they wanted to protect Western democracy, but, you know, not wanting to get into much into that side of it.
But I think it's that the valuations have been supported by the fact that people's minds have started to be chained be changed by the realities of what we're seeing unfolding across the world, really, and by geopolitical tension.
So that's a big part of the industrials. But I mean, I think it's 30% of the index is industrials of that of the investment, you know, and it's a really mixed bag, it goes from Inchcape to the stocks like Renishaw, which are sort of plugged into the robotic side of things.
And measuring the width of a human hair and Olympic sized swimming pool, you know, and that they, they're, they do a very interesting site visit, and they're one of the jewels in the crown of the UK, I think is investment opportunity set.
And then Inscape, you know, looking after BMWs distribution interest in South America, just still waiting for that site visit.
But you know, I think, you know, you just very, very big differences in that industrial bucket.
And you know, very in and I think that's one of the things I really enjoy about, you pile it all into industrials. But actually, every company has such a different personality and in a different sub niche.
So I think those can be the really interesting site visits as well, actually, because you're not going to see it every day. It's not like, you know, I was in M&S this morning, and that was like a mini site visit.
And I always ask questions, when I'm in there, it's obviously not in the Mid 250 anymore, it was promoted to the FTSE 100 Plus with industrials, you know, it's not something you could do in your everyday job, I can't just pop into have a look at the, at the machinery that that's being built. As you know, as a every day, member of the public.
Peter Higgins 33:14
Indeed, indeed. I think that the beauty of it as well is that he says it's so diverse, it gives you lots of opportunities to actually see something new each time you do get the opportunity to visit as well.
So that's yes, quite unique, unique opportunity for you there.
So on the consumer discretionary side, can you give us one of your favourite stocks in there? With the team's really, really keen on?
Jean Roche 33:35
Yeah, well, I think we always talk we talk about Games Workshop a lot.
But I think when I, the one I'll talk about instead is Dunelm (DNLM).
And I should say that I was actually, you know, retail analyst for 10 years and it's very dear to my heart as a sector.
So Dunelm was actually one that I covered when I was a sell side analysts and I remember the IPO.
And I remember it very interestingly, at the time. It being said that, you know, nobody would ever buy a cushion online, because everybody likes to like kind of cuddle a cushion before they buy a stroker curtain, you know, feel the quality of sheets, whatever it is, and that home wares will sell online. And you know, Dunelm has had to take some hard medicine over the years in that it had to embrace online.
And actually, that's what we see.
The best companies will disrupt themselves. So what they did was they bought World Stores.
So they don't have an absolutely I'm not sorry to say that they literally had a shocking website, you would be a challenge to buy anything.
But they went, they bought an online native company, World Stores and they rebuilt themselves and they embrace the internet and so much so that when it came to the pandemic, they were able to do a very high significance.
Almost, I think it was something like 75% of their normal sales.
They were able to do that just by going online, no stores open, but able to do a very significant proportion of their normal sales just by having, you know, decided to embrace the internet.
And you've got 50% gross margins there tick the box, we quite like to see.
And mid to sort of late teens, operating profit margins generates high levels of cash has a very clear model whereby they pay out special dividends when their balance sheet goes to a certain level, you still have a founder family involved and that can be very powerful actually.
And it can be featured it doesn't tend to be featured in large caps. So again, a reason I quite liked the mid and mid-caps in particular, because they're, you know, bit further in their development journey.
But you have a very active family still involved in it.
And, you know, I knew that they were really coming on, you know, get coming into the own, when I came home one day, and my and my husband had bought a load of stuff from Dunelm. And he said it was the best price.
And I've ordered it from there. And you know, we when you start seeing it, that's kind of the fun of retail, you know, that's where everybody thinks they understand retail and eat retail stocks are easy, but I would say actually, it's hard, because everybody thinks they know how it works.
And actually, you know, the end of the day, the customer is extremely fickle, and you're hot till you're not, you know, one day to another and we still, you know, we saw that with Doc Martin, that's been really difficult.
And, you know, it's you sort of understanding, you know, can the company keep up with the trends and I think Dunelm was one that can, you know, and it's never we look at PEG in terms of valuation, that's one of my, you know, kind of guide rails.
So price earnings divided by three year forecast earnings growth, and Dunelm, it looks very attractive on that basis.
So it's got, it's got the team, it's got the demand for the product. You know, you've had people come out of the market as well that people like Debenhams and others who were very active in home wares, and sort of mom and pop stores.
We don't have a good expression for that in British English.
So the mom and pop stores coming out of the market very was very fragmented, and they're gobbling up market share, keeping their margins high, but not not kind of gouging the customer either.
And then developing, you know, probably the travails of John Lewis have been quite helpful for them, too. So by the same token, we keep an eye if John Lewis is fighting back, then we need to keep an eye on that.
So yeah, I'm making myself when I go shopping there.
Peter Higgins 37:36
No, you covered up brilliantly. Thank you.
Thank you, Jean and also you touched on technology.
So given all the traction that AI has got know what in the portfolio if you go that gives them the team some exposure to artificial intelligence, if adequate?
Jean Roche 37:51
Yeah well, I think really interestingly, the one I would point to, is one of the users of artificial intelligence, and that's Man Group (EMG), the quoted hedge funds, who wants a better expression.
So when I looked back in my notes, actually, they said, you know, we, you know, we've been talking about AI for 10 years.
And when I looked on my meeting notes, actually, I discovered that they had been, and they were calling it machine learning originally, but they're processing billions of pieces of data every day, and they're feeding that into their trading decisions.
And I would say that's an application of AI and that is still an inexpensive stock.
Okay, it can be quite volatile, because, you know, they make part of their profits on performance fees, just like any asset manager would.
But there are truly I would say, that's, again, an example of unique stock, because in the quoted world, we don't have anything else like that in the UK mid cap space.
And so that would be an example of a company that uses AI, very effectively, and is ahead of others as well in doing that.
And then in terms of, you know, feeding into the sort of the picks and shovels, for example, I mentioned Renishaw and that's clearly providing pieces that go into that into that world.
And also the delights of Oxford Instruments (OXIG), which has a quantum computing side note, you can't always make money out of that, by the way, that's, you know, initially, it's always going to be loss making. So I think that's why it's important to think about who's using AI smartly, and that's something that Schroders is also doing at the moment and you know, management here have been wanting to provide us with the tools so that we can use it ourselves.
Because you know, because you have to keep up with the world as it's changing and not and not you know, try to ignore it or not be a King Canute about it.
Peter Higgins 39:53
Indeed, now Jean you’ve mentioned, lots of quality stocks there, so I've got to ask the question regarding your own personal investing style, are you wedded to all things Schroder? You know, have you got the mid cap? Have you got the funds that are in their portfolio that you've got for your own savings and long-term pension?
Jean Roche 40:11
Well, my single biggest investment in terms of equities is Schroders UK Mid Cap PLC.
And you would expect us I think, yeah. In look at that the dividends a 10 bagger just had to get that in there from 2p to 20p over 20 years.
And that, you know, but obviously, it's a capital growth focused product. So when I was on the sell side, very sadly.
And I think actually, Alexandra, who was on your last podcast mentioned this, I could not actually it was very difficult to buy shares in the companies I covered or in the companies my colleagues covered.
So one of the first things I did when I moved from the sell side to the buy side was I bought four stocks.
So I still have two of them. I'll tell you what the four of them were and I'm not going to tell you what the two are that I still have.
So I bought ASOS, I bought Burberry (BRBY), I bought Domino's Pizza (DOM).
I bought what the company formerly known as Royal Mail.
Yeah. So that was, you know, single stocks.
But actually, I quickly realised, you know, because I was never allowed to buy really buy stocks before because being on the sell side, I quickly realised that funds was were where it was at.
So as soon as I became involved in Schroder UK Mid Cap, I quickly shifted into that.
And you know, in terms of my sort of investing style, it's my pension. Aside from that is, you know, very much directed into small and mid-cap funds, run by my colleagues, but also, you know, I'm not averse to buying the Vanguard ETF as well, you have to say it because you can't ignore it.
And, you know, value is important as well. But I'm very much a believer in active and you know, I'll choose, you know, I as you would expect lean towards the UK lean towards Sid and lean towards individuals that I know, because I know that they I know how much care they take when they're choosing stocks.
And I think you know, the issue with ETFs and I say this, you know about a FTSE 250 ETF is you're buying those 70 or 80 investment trusts to when you're buying that ETF you're not buying operating companies.
So if you want exposure to operating companies, then you need to go active in that case.
So yeah, my own investing style is yet to buy collective, because I think that makes absolute sense.
And you know, to and then a part of it as well was having, you know moved around from it to a few between a few different places between Morgan Stanley, I was at Panmure, I was at Arbuthnot as well, back in the day.
And so I had a few different pension pots.
So one of the first things I did actually during COVID was and a lot of people would have done this admin I think was put the pots together into one SIPP to make it more manageable.
And that's you know, that if anybody can do that I was actually one of my colleagues was telling me that his wife did that during COVID, as well, that was, you know, I think that was a bit of a moment, I think people hit sort of around 40.
And say, actually, this pension thing is now closer than it seemed before and start getting organised.
So it used to be the pot of money, I'm never going to be able to spend and now it's actually I need to make it you know, so that I live in the standard I'm accustomed to down the line, whether that’s 70, 75. Who knows.
Peter Higgins 43:49
Brilliant now that's very good thing to have done.
Now. I want to touch on a piece of research you did from the London Stock Exchange, Jean.
You mentioned already, you know, the dividend on the on the trust that you'd run and the fact that is compounded the dividends over the years, we did a piece of research regarding multi-baggers with James for the London Stock Exchange and just share with us if you can so I'm conscious of the time that we've got left, some of the nuances of what the findings were and the multi baggers that you did find?
Jean Roche 44:17
Yeah. Okay.
So for anyone who's not familiar with multi-baggers, Peter Lynch was the guy who originally talked about this and you can look that up online.
But my colleague James did a bit of work on 10 baggers.
And then I was asked to do about a year ago, a year later, I was asked to do something for the 30th anniversary of the FTSE 250.
And I thought, why don't we look at 30 baggers, and I saw there that the UK had a higher proportion of 30 baggers than the US.
And that was interesting in itself.
And so then the next question is okay, Jean, that's looking backwards.
So in order to help us move forwards, what are the characteristics of these 30 baggers?
And one of the things that we found was that they were companies where management haven't had not issued many shares.
So the share count keeping down and I mentioned Man Group earlier, and they've been buying back significant number of shares up to 20% of their of their share capital. So not issuing shares, bolt on deals tended to be a characteristic.
But also an interesting characteristic was it didn't have to be going up in a straight line. And we can, you know, they could be lulls, as well.
And it tended to be in a sector where there wasn't significant competition, usually, or certainly.
And also, they would tend to be maybe reinventing themselves being nimble and management teams where they would move around and different, you know, out of one sector into another.
So what I think the very notable one was that, you know, equity is expensive, so, not issuing lots of shares was a significant feature.
Now, some of them had done, you know, would have done a number of deals over the years that might have been paid for partly insurance, partly in cash.
But that was very much a, you know, recognition of how expensive equity is, was, it was a big part of us.
But the UK tended to be very good, particularly as we found had a bit of a cluster of multi-baggers around the sort of high skilled engineering side of things.
And I suppose that, you know, goes into the fact that the internet was invented really in the UK. And you know, that that sort of, you know, that talent, we see it with FinTech now as well, that happens to exist here.
But you've been just a very highly skilled high value-added engineering.
A number of the multi-baggers were tilted in that direction. But they've been all sorts of sectors. And we have four podcasts, which we've recorded three with CEOs of mid 250 companies to our multi-baggers, and then a more general key around the theme of multi-baggers.
So you know, if you wanted to hear more about it, James and I have done a fair bit on that.
So, but yeah, I mean, I think the quest for the multi-bagger is that isn't that what all of us investors are trying to hunt for truffling for them?
Peter Higgins 47:14
Absolutely, we are now I love the fact you've covered multi-baggers, but there's something else I know that's very, very close to your heart.
So you've been working with the City for as long as you have.
And you're one of the top fund managers that we do have currently as well and hopefully for another two or so decades, for as long as your pension pot can go to.
So let's talk about diversity and inclusion.
You mentioned when Andy was looking to recruit he wanted he wanted to have a female on the team and you know, you made a very good choice in yourself. It was very, very lucky to be able to have the opportunity to pick you for Schroders but you started to do some work with Dame Helen Morrissey.
And I want you to talk about that worldleading project, please because you mentioned also that you do watch the previous podcast that I did for Investing Matters with Alexander McGuigan and we spoke about inclusivity and diversity on that as well. So tell us about that project?
It started last January, January 2023. And what happened in the first year and what resonates with you regarding that project, please?
Jean Roche 48:17
So yes, back in January 2023, the programme was launched in a very draughty Canary Wharf in the HSBC building there.
And we started with 60 participants, from various asset management houses each would have a sponsor, and they would go through sort of an MBA like programme with very sort of modules in things like building a portfolio, what drives financial markets, you know, quite, in many ways, the softer skills and the more crunchy financial skills of being an investor.
And it was, you know, it's the idea is to take people from all sorts of on over to all sorts of backgrounds. Well, they'll already be, you know, financially professionally qualified, they might be accountants, they might be working in risk, they might be working in operations.
And you know, it helps them to decide over the year, you know, whether they would like to be a fund manager, because we've got this problem with only 11/12% depending on how you count it, of fund managers who are actually controlling buying and selling assets are female.
And the idea is to try and bring more of them through.
So last year, we had 60 graduates. So we say from there, and actually I'm proud to say Schroders was one of the first firms to sponsor it as well.
And this year, we have another cohort coming through. And my own involvement has been, you know, fairly light touch.
But the main part has been, I've been on the launch panel both years and I've under sort of Chatham House Rules basis, just spoken about my background and what brought me to fund management.
And then the people in the audience can ask questions, and it tends to be the sponsors and the sponsees as well.
And for example, Schroders has two people in this year and did have last year as well.
So it's a concerted effort to do something really practical about the diversity problem we have.
And it's only one aspect of diversity, obviously, it's the lack of female fund managers, it doesn't address every other aspect, but it's a really good start.
So I'm really happy to support it. And, you know, I think you could do a lot of talking, but it's a very, very pragmatic way to, to address the issue.
And then you know, people can see do I actually want to become a fund manager, and, you know, and makes it accessible to people who might not be that obvious for when they're, you know, at a certain point in their career, a lot of them are sort of five, six years in, and I'm very hopeful that it will inspire a new cohort to come into the, into the profession.
Peter Higgins 51:02
I think it's phenomenal piece of work, Jean, and you know that yourself Dame Helena Morrissey and others that are doing it are going to inspire so many young individuals into the industry, I think, and maybe some that didn't think they'd want to be a fund manager, in essence, as well.
So please, please keep up them that piece of work. And if I can be of any help, as a male, you know, sponsor, I'm happy to do that as well. I've got one final question.
We're conscious of the time and I've had to cut out a lot of other questions as well.
And to get to a bit of a bit of a bit of a fun question for you.
The final question to you, I'm going to currently grant you complete power and autonomy over the investment industry. And when it asked you what would be your immediate changes that you would make for the betterment of all, and for future generations of investors Jean, you've got the you've got complete control now.
Jean Roche 51:59
Okay, it was a really easy one, actually, I would change the hours of the stock market. I don't think it needs to be open from eight till 4:30 in the UK, so I'm just talking about the UK.
I think it would be it used to be open either nine or 9:30.
I'm not sure which, so that I think would open the career to more people.
And I think, I don't think it would be that hard to enact.
Although, you know, there will be people who probably would strongly object to it. I feel that it would just make it a bit easier for more people to be involved.
Because I think particularly it's a UK issue as well. individuals don't tend to be so engaged with the market.
And I think, you know, listening to Alexandra in Australia, people seem to be more actively leaning into their investment futures and in the US, we know they certainly are. And so that's you know, that's sort of the UK industry. So that is the single thing. I think I would just move that move it to nine o'clock. See what happens.
Peter Higgins 53:11
Brilliant, I’ve not had had the reply before.
I think I think that'd be a game changer.
I think I really, really like that answer, actually. Thank you.
I hadn't thought of that. Why didn't I think of that? Thank you. Ah, brilliant.
That has been absolutely fantastic. Speaking with you ladies and gents, you too.
That was my special guest, I’m going to say special because you have to truly have been an absolute diamond for the industry and a fantastic find.
And I'm glad we didn't lose you to French lessons and something else out there, although that's important as well.
You know, I'm glad you’re in the investment industry.
So ladies and gents that was Jean Roche, the lead manager the FTSE listed Schroder UK Mid Cap fund 1/3 of the UK Small Cap team with Andy brough and James Goodman and Jean I must wish you as well good fortune as you have a huge task ahead of you when you become a member of the UK takeover panel forthcoming.
I think your start next couple of months. If you can safeguard any other companies from being taken over and you know, please do your very, very best. Ladies and gents.
Jean Roche of Schroders take care Jean. Thank you.
Jean Roche 54:32
Pleasure, thanks for the chat. Bye bye.
Peter Higgins 54:33
Bye bye.
London South East 54:36
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