The boom and bust of Neil Woodford’s fund management career showed that star fund managers are not invincible and that a better solution might be to have two or three managers making investment decisions as a team rather than rely on one person.

But what if that team consisted of 15 people? That is the situation with Swiss asset management firm 2Xideas, which has taken the view that one person alone cannot provide consistent and repeatable positive investment results. It has taken the unusual step of forming a large committee to decide what goes in and out of its 2Xideas Global Mid Cap Library Fund (BJVQPB5), with everyone following the same research process.

One might argue that ‘too many cooks spoil the broth’ and in 2Xideas’ case, 15 decision makers might seem excessive. The asset manager argues otherwise.

BELLEVUE ALUMNI

2Xideas as a business was set up 10 years by a group of equity analysts who used to work together at Bellevue, the Swiss asset manager best known for running biotechnology investor BB Biotech (BIO:SWX) and London-listed investment trust Bellevue Healthcare (BBH).

Its mid-cap fund takes a similar approach to Fundsmith’s Smithson Investment Trust (SSON) and Columbia Threadneedle Global Smaller Companies Fund (B8Q73W3). They are all looking to invest in companies with quality characteristics.

2Xideas is trying to do what it says on the tin – double investors’ money over a five to seven-year period. That works out as a 10% to 15% return per year. ‘The only companies that can do that fit into the profile of quality growth. Particularly good business models, high margins, high returns, strong moats,’ says sales director John Kelly.

The first step of its research process is to narrow down the investible universe. Once it excludes companies worth less than $2 billion (c45,000 stocks) and more than $100 billion, and then applies ESG filters, the universe is narrowed to approximately 2,600 liquid stocks.

It then screens and scores these companies, searching for those that have historically achieved high margins, returns and growth. It also uses sector knowledge to filter out the good from the bad.

That leaves it with 200 to 250 names to research, looking at ‘4M’ factors – macro, market, moat and management. It then analyses the financial model and investment thesis to check for business quality, growth prospects and sustainability.

‘To pass the test, companies need to score highly,’ says Kelly. ‘We have 150 names classified as having “library potential”. At the start of 2023, 87 of these names sat in the fund portfolio and the rest were sitting on the substitutes bench.’

What is in the portfolio?

2Xideas’ Global Mid Cap Library portfolio features five sectors: consumer, financials, healthcare, industrials and technology. The financials segment does not include banks, but instead stock exchange operators, data services, insurance and real estate services. Holdings include MSCI (MSCI:NYSE) which is best known for providing stock indices, data and analysis tools.

It has a stake in ResMed (RMD:NYSE), a specialist in medical devices and software for sleep apnoea treatment. The fund also invests in Verisign (VRSN:NASDAQ) which maintains the registry for .com domain names.

A fifth to a quarter of the fund’s holdings change each year. The team remove stocks from the portfolio typically if their analysis shows deteriorating fundamentals, the value of the business becomes too large for the investment criteria, they find something better or the valuation becomes too rich.

Recent disposals from the portfolio include InterContinental Hotels (IHG) – ‘there are better hotel companies on the market, we’re waiting to invest in one of the US ones’; and medical devices group Masimo (MASI:NASDAQ) – ‘a brilliant business, but last year made an acquisition which we didn’t like, so we sold the shares,’ says John Kelly.

Shares in music streaming platform Spotify (SPOT:NYSE) were sold from the portfolio in the first quarter of 2023 due to ‘disappointment in execution around improving profitability’, while heart pump specialist Abiomed left after a takeover by Johnson & Johnson (JNJ:NYSE).

The only new addition in the quarter was Lonza (LONN:SWX), a contract development and manufacturing business for the pharmaceuticals and biotech industry.

THE VOTING PROCESS

It is at this point where the single person stock picker versus a team debate kicks in. How does 2Xideas decide which stocks make the cut and feature in the portfolio?

Once a quarter, the team review everything that is already in the fund or on the subs bench. The original seven founders of the asset management company get a vote, along with eight senior people from the research department.

This is not an equal vote. Certain individuals have more voting powers than others and that is determined by their history with previous votes. ‘We look at every decision people wanted to make historically and determine the quality of the decision-making. So, the voting weight is based on people’s relative success. We do not have a star fund manager; we have a team approach that works very well for us. It means you do not get the single person risk,’ says Kelly.

Given the fund has investments across a broad range of sectors, why should an equity analyst specialising in a specific industry such as industrials get to vote on a healthcare stock, for example? You could argue they do not have the knowledge to say if that stock deserves to enter or exit the fund.

Kelly says each person in the team is more informed than you might think. 2Xideas has a large research department that produces in-depth analysis on each stock. If someone has the power to vote, they need to have studied the company’s research notes in advance. ‘There is nobody in global mid-caps that has a research capability like we do,’ he adds.

‘We have a defined style and we all talk the same language. The voting process is something we have always done and something that Bellevue has always done. It is good to have different opinions.’

TOP PERFORMER SINCE LAUNCH

Does the voting process work? The proof is in the performance. On a three-year basis the fund has returned 33.6% in sterling terms, triple the return from Smithson (11.3%), according to data from FE Fundinfo.      

Having launched on 30 April 2018, we will have to wait 10 more days to be able to get the full five-year performance data. But running the numbers since the fund’s inception to 12 April 2013 shows that 2Xideas was the top performer in sterling terms of a group of 10 funds with a similar focus on global smaller companies.

For this period, 2Xideas Global Mid Cap Library Fund returned 59.3% versus Columbia Threadneedle Global Smaller Companies’ 27.2% and 57.6% from the MSCI All-Countries World index (again, in sterling terms), among others. Smithson did not exist when the 2Xideas fund launched.

On that basis, 2Xideas might soon get on the radar of retail investors, particularly as the quality growth investment style comes back into fashion.

Equal-weighted portfolio

One unusual quirk of the 2Xideas fund is that its portfolio is equal-weighted. Most actively managed funds will have a bigger percentage in their best ideas versus the rest of the portfolio. By having an equal-weighted approach, each holding theoretically has the same importance as all the others.

Every three months the 2Xideas fund will rebalance so the best performing holdings do not become dominant and the laggards do not dwindle away. ‘Share prices tend to overshoot or undershoot in the short-term. Rebalancing neutralises this effect,’ says the asset management group, which also says an equal-weighted approach eliminates behaviour biases.

DISCLAIMER: The author owns shares in Smithson referenced in this article

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