As Envestnet analysts explain, the London Company SMID team — managing $1.1 billion — does "an outstanding job of adding value for shareholders as demonstrated by the strategy's impressive long-term performance metrics."
Brian Campbell has served as the strategy's portfolio manager for the past decade, sharing lead duties for the last year and a half with company co-founder Stephen Goddard.
Calling 2019 a "very strong year for us," Campbell said, "We don't expect to outperform when the markets are up as much as they were. It's a reflection of really good decision-making" over the past five years that "allowed us to do so well" last year.
The London Company strategy "outperformed the benchmark (Russell 2500 Index) by nearly 650 basis points in 2019 (32.24% vs. 27.77%), and ranked in the top decile of the Morningstar Mid-Cap Blend managed account peer group universe," according to Envestnet.
"Our outperformance was driven by stock selection," Campbell explained. "Our allocation was a drag in 2019, as we were underweight" in the healthcare and technology sectors. Still, the team was "able to offset that with strong stock selection," which was "broad-based," he said. Of its 30 positions, 17 were up over 30% last year, such as those in the industrials, materials and staples sectors.
Year to date in 2020, "We're performing just as expected," the portfolio manager explained. "Our focus is preserving capital when times get tough and capturing a lot less of the downside risk." In the first quarter, the markets took a "big move south, [but] we did really well," he said. "If you look at the year-to-date numbers, we're right now down about 6% or so vs. 10% for the benchmark."
Thus, the strategy is ahead by roughly 350 basis points. "Our goal is to capture about 80% of the downside and 90-95% of the upside, which is pretty much what's happened so far in 2020," he said.
The team has an "inherent belief that the markets are less efficient at assessing risk than reward," Campbell said. "We spend the majority of our time analyzing what can go wrong in each decision we make. We don't build feature models and try to outguess every other analyst and PM on growth rates and margin expansions.
"We spend a lot of time looking at companies' ability to earn good spreads on the capital they invest, so we focus on high-return-on-capital companies. We go through a pretty stringent checklist trying to find potential potholes and red flags," he said. "And our team has been very adept [at] avoiding mistakes in a meaningful way."
Though the team, of course, doesn't know exactly what will the next 12-18 months hold for the economy given the ongoing COVID-19 pandemic and related issues, "We are very long-term focused," Campbell explained. "We're looking for businesses to own for three to five or perhaps 10 years or longer." Furthermore, the team's decisions are based on fundamentals. "We try not to speculate too much on market factors. That said, we would expect continued volatility," he noted.
"There's been a tremendous amount of stimulus funneled into the economy. People are forecasting much stronger second-half results than first-half results, and we'll have to wait and see what comes to fruition," the portfolio manager added. — Jeff Berman
