Polar Capital European Income fund manager Nick Davis on what bottom-up truly means, working at a boutique and responding to the political pressures of the eurozone and Brexit
“If you do something different and think differently to what everyone else is doing, you’ve got a good chance of making good investment returns.” This is what Polar Capital European Income fund manager Nick Davis believes it can take to stand out from the crowd.
Having started his career in accountancy, Davis has worked at big-name firms, including the now defunct Arthur Andersen, Deloitte and, prior to Polar Capital, Threadneedle.
He says his background in accountancy means he knows “how all the plumbing works”, and offered a solid understanding of numbers which now lends itself to his career as a fund manager.
Davis has been at Polar Capital since 2014 and says the beauty of working at such a company is having the freedom to focus on a specific investment process. “You can really spend all of your time focused on your strategy and that autonomy is really empowering, to focus on what you think is important,” he notes. “We are a performance-driven boutique with a strong peer group. There are strong managers that work with me who I can bounce ideas off. It’s a very intellectually stimulating environment to be investing in.”
When it comes to his individual process, it is bottom-up driven with a top-down overlay. “We are looking for companies that can do quietly brilliantly in different markets,” he says. The team does not look for 10-baggers (stocks that go up 10 times in value) or products such as Bitcoin. He adds: “We look for good companies that can grow cashflow over time. We are an income fund so we want a share of those cashflows that come back to us as dividends, and also want reinvestment for future growth.
“The process is underpinned by whether a company can grow its cashflow by the medium term.”
The team likes entry points to stocks when they are out of favour. Davis says he sells companies when he believes they get expensive but there is no set time limit to this.
He adds: “If I think a company is structurally challenged in eight years, I wouldn’t own it in the next three. Some companies we own for a relatively short period – say, a year – and other companies we have owned for a very long time. There is no set period and we don’t try to play chicken with the market when we see troubles down the line.”
Out of favour
As at the end of August, the fund’s highest sector weighting was financials, amounting to 19.51 per cent, closely followed by telecommunications utilities, which accounted for 17.89 per cent.
At the moment, there are some out-of-favour sectors Davis does not like. For example, the fund has nothing in autos or retail, which he believes have a “huge structural risk” he is not comfortable with.
Parts of the market that Davis says are interesting yet out of favour include reinsurance.
He adds: “There have been quite soft market cycle conditions, so the pricing of reinsurance risk has been falling because of new, cheap capital coming in. They pay attractive dividends and the market is very soft term, focused on what rates will do in the next six months.”
Avoiding the noise
One topic investors, advisers and fund managers – particularly European managers – cannot avoid at the moment is Brexit. The fund sits in the Investment Association Europe including UK sector, which means managers must invest at least 80 per cent in European equities and the allocation to the UK must not exceed that 80 per cent.
Davis is sceptical of people who say they know what is going to happen. “When you look at the eurozone crisis, the amount of noise that came through was a total distraction. If you were reacting to each piece of news flow and doing something, you would be constantly flip-flopping because the next piece of noise would be positive or negative.” His advice? To read books and not watch the news: “It has been an echo room where there is a lot of noise and no information.”
But despite being a bottom-up investor, politics around the globe cannot be avoided. Davis views stocks at a company level, so looks at how macroeconomic situations affect the business, its position, future cashflows, and whether or not it will become more or less expensive because of market moves and sentiment.
“What often happens is the market tends to have a consensus top-down view. So people get very worried about China, the eurozone or certain sectors, for example, and the market tends to move as a herd,” he says.
“But we always think it’s interesting to look where everyone else is negative, because if you do your bottom-up work and understand the companies well, those macro moves can create very good entry points to these companies.”