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SW Mitchell Capital reaps the rewards of its focused stockpicking mantra

Stuart Mitchell 700

Having founded his own business nine years ago, Stuart Mitchell, the former European equity manager at JO Hambro Investment Management, says he is now almost unemployable at any other fund management group.

A month after leaving JOHIM in March 2005, Mitchell realised a long-held dream by setting up his own venture – SW Mitchell Capital. Unlike many other start-ups, however, Mitchell left his former employer on good terms, which saw him taking $700m (£421m) in assets to his new venture and JOHIM providing administration on an outsourced basis.

Nine years on, the specialist equity boutique manages $1.8bn in assets across a range of Ucits and hedge fund mandates. So how has Mitchell found the experience of running his own business?

“As a result of the financial crisis, many of the businesses that started up at the same time as us have disappeared because they didn’t have time to get established,” he says. “However, when I set up in 2005 I thought very carefully about all the mistakes we made back at Morgan Grenfell [where Mitchell worked before joining JOHIM in 1998] and JOHIM and tried to set the business in a way that we would not fall into these traps again.”

The most important thing, says Mitchell, was to attract the best possible clients.

“One of the mistakes many peers made was to make a real grab for Geneva fund-of-funds money or the very leveraged assets, which of course all disappeared during the crisis,” he says. “We made a real effort to keep this type of money to an absolute minimum, with the result that when the crisis broke in 2007, we only had about 1-2 per cent in funds of funds. While we did see some outflows, we were able to get through the crisis ok and continue to grow and invest in the business.”

The outsourced administration deal struck with JOHIM was also an important factor. “Stability was very important and we spent a long time thinking of how to have the most flexible cost structure,” says Mitchell. “While we are paying more than the costs of doing it ourselves, the 14 people in this office are focused purely on running money.”

While Mitchell admits asset gathering has been a slow process, he believes a level of $4bn to £5bn is achievable. “Given the tough bear market we have gone through, we have done well. A considerable portion of money comes in during the latter stages of a bull market and flows have been picking up. There has also been a sea change in attitudes towards Europe. Sure, you need to accept the larger peers will take a lot of money first but eventually it feeds through to groups like us.”

One thing that will attract potential investors is the performance of the Dublin-based Ucits fund range. Mitchell’s own fund, SWMC European, was launched in November 2011 and, according to FE, over one year to 18 March is ranked first quartile in its sector, having posted a 23.16 per cent gain.

Mitchell manages the St James’s Place Continental European fund on an outsourced basis, which is first quartile over one year in the IMA Europe ex UK sector and second quartile over five years. He also runs the Cayman Islands-based Charlemagne fund, a long/short hedge fund which, since launch in 2005, has returned over 244 per cent.

FS April 2014 Group profile Table

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For the other funds in the Ucits range, Jamie Carter has managed the SWMC Small Cap European fund since its launch in 2007. Carter worked with Mitchell previously at JOHIM before joining him at SWMC in June 2006.

Last year, SWMC launched the Emerging European fund, run by Alexis Mathieu, and in March it launched the SWMC UK fund, which is managed by Brian Cullen, who joined the firm four years ago as UK specialist.

“Everybody here has worked their whole lives with us,” says Mitchell. “Three of us have worked together for 25 years and another three have worked for 18 years. Our aim is to give money managers a fund to run as quickly as possible.

“Jamie Carter, who joined in 2006 and started at zero, is now running a $150m fund. And while Alexis’s Emerging European fund is small at the moment at $6m, at some stage Russia and Ukraine will come back into investor focus and the fund will grow.”

While Mitchell’s own European fund is only $90m in size, renewed appetite for the region and strong relative performance are likely to draw attention.

“If we can get to $200m it is not a massive leap to get to $500m, if we can keep the numbers going,” he says.

SWMC’s high-conviction investment approach results in concentrated portfolios of about 30 to 35 stocks. The only fund with a larger number of positions is Carter’s small cap, which is closer to 45 for liquidity reasons.

“There is one way of doing things here: stockpicking, stockpicking, stockpicking,” Mitchell says. “We run tight, concentrated portfolios and do not trade too much, with turnover being about 30 per cent a year.”

For Mitchell there are two types of stock to invest in: top-quality growth and restructuring stories. At present he is making the most of his money in the latter camp.

“Between 2008 and 2010 we were tilted to best-quality growth as the economy tanked. But from 2011 we made the shift, maybe slightly early but it has proved very successful. We don’t think this rally is over as these shares were so significantly de-rated during the crisis.”

So what of the prospects for Europe? In October 2013 when Fund Strategy profiled Mitchell in its Q&A, he believed it was a mistake to rate the UK and US economies ahead of the eurozone. He retains this view.

“Since we last spoke, the outlook has definitely improved for Europe. It has a lot less debt than the Anglo-Saxon countries and is running a trade surplus, making it more competitive. The whole process of austerity has worked and we have seen a fast recovery across the region, particularly in the periphery – Spain, Greece, Portugal and Ireland.”

Indeed, 25 per cent of Mitchell’s fund is invested in Italy and Spain, centred largely on banks and Spanish property.

“The challenge in the periphery is that the choice of stocks is fairly limited, whereas in Germany you still have some big domestic stocks which still look very cheap,” he says.

Mitchell has continued to eye opportunities in the core countries. His SWMC European fund’s French and German exposure was 26.9 per cent and 17.2 per cent respectively at the end of February.

“Germany’s numbers look good while France is running a trade surplus and is a great industrial economy, far more competitive than the UK could ever dream of, with much less indebtedness.”

Mitchell predicts Europe as a whole will grow by 1.5 per cent in 2014, well ahead of consensus forecasts. He says the recovery taking place on the ground is not yet feeding through to the analysts and economists.

On his goal for the business in three years’ time, he says: “We have just launched our fourth Ucits fund and I don’t envisage any more launches as small funds can be quite loss-making. The hope is that these four funds will generate 40 per cent of our revenue, with the rest coming from the big clients.

“The slight disappointment has been that we have not taken in more large managed accounts.

“However, this could partly be the result of how out of vogue European has been, with investors preferring global managers. But this appears to be starting to change and we hope to benefit from this.”

Independent views

Hector Kilpatrick

Hector Kilpatrick, Chief investment officer, Cornelian Asset Managers

We have been holder of the SWMC European fund that Stuart Mitchell manages for nearly two years. What attracted us is that they are true bottom-up stockpickers who can back their own judgement in a high-conviction portfolio. All the stocks they invest in are there for a reason; there is no ballast. The team is also very stable and have worked together for many years, which is important.

We also like companies and people who have a significant personal stake in either the fund they manage or their company and that is definitely the case here.

Charles Macfadyen

Charles Macfadyen, Director, Waverton Investment Management

We like to get to know the managers in who we invest and have followed the group for a long time, helped by the fact that Stuart and a number of his team used to work here [Waverton took over JOHIM in January this year]. We have always had good access to him and the team and they always give us their time. We are invested in Stuart’s long-only European fund and Jamie Carter’s small cap Ucits fund and hedge fund and we like the fact they are not afraid to move away from the benchmark. We bought Stuart’s fund at the start of 2012 as we know he typically does well in a bull market and he has done very well for us.

Adrian-Lowcock-2012-700x450.jpg

Adrian Lowcock, Senior investment manager, Hargreaves Lansdown

Mitchell is a traditional stockpicker so meeting senior company management is central to his investment philosophy. As such company meetings are core to the investment process. The group is a European equity specialist with a mid-cap and smaller company’s bias and its approach is to look for a total absolute return. We do not own any of their funds and I admit I last looked at Mitchell before he set up the boutique. While we applaud this, there are thousands of funds to analyse and sometimes many do not come up on investor radars, but given the long-short nature of the funds I think they want to appeal to a more institutional audience.

SW Mitchell Capital

SW Mitchell Capital was founded in 2005 by Stuart Mitchell, the former head of specialist equities at JO Hambro Investment Management. It manages some $2bn across a range of Ucits funds, hedge funds and segregated mandates.

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