Three ‘world-leading’ UK shares we’ve owned for over a decade

Royal London Sustainable Leaders’ manager Mike Fox sits down with ii’s Sam Benstead to discuss how he picks UK shares.

The fund is biased towards high-growth shares, and also applies sustainability criteria to all its investments. He explains where he is finding opportunities today, and why a technology edge is critical when assessing which companies to buy.

The fund manager talks about some of his best ideas, including AstraZeneca, London Stock Exchange Group and RELX.

Royal London Sustainable Leaders is a member of ii’s ACE 40 list of recommended sustainable funds.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Mike Fox, manager of the Royal London Sustainable Leaders Trust. Mike, thank you very much for coming into the studio.

Mike Fox, manager of the Royal London Sustainable Leaders Trust: You're welcome.

Sam Benstead: So, you're running a UK equity strategy. Can you please tell me how you invest?

Mike Fox: We have two criteria, one financial and one sustainable. On the financial side, we want to invest in value-creating businesses that have the potential to grow over time. And then sustainably, we want to invest in companies that have products and services that have some societal or environmental benefit to them, as well as companies that manage their own operations in a responsible way.

Sam Benstead: How many companies are you typically investing in? And is that across the market cap spectrum?

Mike Fox: We invest in about 40 companies currently. At the moment, there is a large-cap skew to the fund to larger companies within the index. But we do have the ability to invest across companies of all sizes.

Sam Benstead: Is it fair to say that this fund therefore has a growth bias in terms of the companies that it owns?

Mike Fox: In terms of how it would be characterised, it certainly would be classed as a growth fund. We would say that the differentiation between value and growth over time has blurred somewhat.

So, there are companies in the portfolio that some people might view as value stocks. But actually we think they have growth potential. But ultimately it's a fund that's looking to grow people's capital rather than providing income.

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Sam Benstead: What kind of characteristics are you looking for then for inclusion in the portfolio?

Mike Fox: We start off with the sustainability tests. Can we understand if a company's products and services will benefit society/the environment in some form? From that, we can get a judgement as to whether their long-term growth potential is perhaps better than the average company.
 
We'll then look at the operations of a business and understand how they manage their employees, how they're managed, and the broader stakeholder set to make sure that we don't think there are any risks inherent in that business model that traditional financial analysis would miss.

So, we find companies that have long-term demand for their products and services that have benefits in a sustainable context. Those companies are managed well. They tend to be the building blocks of how we think about investing.

Sam Benstead: And in terms of what companies then make the grade, are you looking for high growth or dividends, or return on capital? What are you looking for in a company?

Mike Fox: It's a good question. We look for persistent growth. I mean, some of the best companies we've invested in have only grown 3% or 4% a year, but they've done it for decades. So, we don't obsess over that rate of growth, but we do want the persistency of growth.

They do tend to be companies that offer good returns on capital, i.e., when we give them a pound of our money, they create value for shareholders. Those would be good criteria.

If there's income attached to those businesses, we will happily take it. Some of the companies we invest in do offer good income streams, but that's not the primary judgement we're making when we invest.

Sam Benstead: The largest three shares are AstraZeneca (LSE:AZN), RELX (LSE:REL) and London Stock Exchange Group (LSE:LSEG). What makes those companies so attractive to you?

Mike Fox: I think one interesting thing about the UK market is there's quite a negative narrative around it at the moment, and these are three companies that completely disprove it. They are three world-leading companies.

AstraZeneca is a pharmaceuticals business, particularly working in cancer treatments, London Stock Exchange and RELX being data-orientated companies that use data to provide products and services to their clients that make them more productive.

These are three companies that are world leaders in what they do, they have a long runway of growth ahead of them, and they're just great investments for UK investors to own.

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Sam Benstead: Have you owned them for a long time, and do you generally jump in and out of shares?

Mike Fox: So, for those stocks, we have owned them for more than a decade. If you look at the turnover rate for our funds, which is an indication of how much change there is in every year, it is typically somewhere between 20% and 30%, which implies three to five-year holding periods. Now, those are examples of companies that have been in the portfolio for longer.
 
But we are trying to look at the world and companies on a three to five-year view, because that's where we can find some inefficiencies. Short term, it's much more about market cycles and interest rates. If you go beyond five years, then the crystal ball can get a little bit weaker, particularly in innovative companies. So, we find three to five years is a good place to try and find ideas in terms of time horizon.
 
Some can be shorter, some can be longer, but we are absolutely not of the mentality that the way to successfully invest is to be flipping and moving in and out. We think that's not a skill set that we have.

Sam Benstead: Data and pharmaceuticals. Big growth themes for you in the UK. But where else are you finding opportunities in terms of investment growth?

Mike Fox: Infrastructure is a good area, so we own SSE (LSE:SSE), which is the UK's largest renewables developer and is building more offshore wind than any other company in the world at the moment.

When we look globally, we think SSE is the best-positioned integrated utility, and by that I mean it has generation in terms of wind, but also networks in terms of distribution networks in the world.
 
That's another good example of where you can get a world-leading company with strong growth drivers through the UK market.

Sam Benstead: So, generally the fund has a growth bias. What types of markets do you expect this fund to outperform and underperform in? And how is it done in this period of rising interest rates over the past couple of years?

Mike Fox: That's a good question. Because this fund has been run under the same process for 21 years, you can pretty accurately backtest when it out and underperforms.

On the underperformance point, it's typically when commodity prices are strong. So take 2022, when the oil price and the gas price were strong, carbon-intensive industries are not a natural fit for what we do, so that would be a good example of underperformance.

Outperformance is when you're in a particularly innovative time. So, we think about what we think drives genuine value creation in equity investing. It's companies that can create products and services that didn't previously exist, whether that be cancer treatments or data-related products. Those companies tend to grow much faster and then tend to deliver much better equity returns.

So, we do well when innovation is doing well effectively.

Sam Benstead: We touched on fossil fuels. Is that sector excluded from the portfolio and are there other sin stock areas, which also aren't allowed to be included?

Mike Fox: The only hard screens we have are armaments manufacturing, tobacco manufacturing, and nuclear power generation. So, if you take those, after that everything else we can look at.

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Sam Benstead: You can buy oil companies?

Mike Fox: Yeah. It’s a failure of process that we wouldn’t own them rather than a principle. And up till now they have failed our process, really because not just the carbon intensity of them, but their role in transitioning has not been clear to us on a consistent basis.

So, if we ever did find an oil and gas company that was committed to that transition in a very material way, we would look at it. Whether it would pass our financial screening is really interesting because they’ve not been good investments over the long run.

Sam Benstead: You don't invest in sin stocks, which are often associated with income. So, are investors missing out on dividends by investing in your fund?

Mike Fox: There are some sectors that you can get income exposure to, such as utilities and property through sustainable companies. So that's helpful. It's not that there aren't any.

One small pushback I would make about the income that's attached to certain sin stocks and sectors is that you pay a lot for that income because your capital return has been significantly lower than investing in other types of industries.

You're actually paying a high price for your income and that high price is in lower capital returns effectively, so high income often isn't the right goal. It's getting the right balance between income and capital growth. That's usually where the sweet spot is.

Sam Benstead: We spoke about the exciting opportunities in the UK at the moment, data and pharmaceuticals. Is there another sector you would highlight as particularly exciting that you have exposure to?

Mike Fox: We do very well in the UK for engineering businesses and chemistry businesses. So, companies such as Croda International (LSE:CRDA) and Spirax Group (LSE:SPX) would be good examples of companies that have world-leading technology that are based in the UK.

Generally, we like companies that make practical things. So, data is maybe a little bit more ephemeral, but it is something with a practical use to it. And things like traditional engineering and chemistry that actually produce things that can create some kind of change that meets our requirements and is profitable would be examples of other industries where we would take meaningful exposure.

Sam Benstead: Mike, thanks very much for coming in.

Mike Fox: Thank you.

Sam Benstead: And that's all we've got time for. You can watch more Insider Interviews on our YouTube channel, where you can like, comment, and subscribe. See you next time.