A desire for delivering above-average organic growth, and firms that have a strong culture and focus on innovation has led the manager of a fund to hold some of the biggest names in modern commerce. He explains his reasoning to this publication.

Technology and healthcare account for a large chunk of Stonehage Fleming's Global Best Ideas Equity fund, the product of its policy of chasing sustainable compound growth at attractive valuations. 

That’s one of the principal takeaways from this news service’s recent conversation with Gerrit Smit, the fund’s manager; (he recently reflected on the earnings' results of major firms).

“It is about having a solid and clear philosophy and strategy with the discipline to never deviate from it,” Smit said in an interview at the multi-family office’s HQ in St James’s Square, London. 

“We see ourselves as an equity boutique with the influence and support from a respected organisation. Our target market is not only the typical Stonehage Fleming family. Our target is any cautious investor that looks for above-average, sustainable and compounded returns,” he said. “We compete against the best in retail, wholesale and institutional markets.”

Winning qualities
Smit looks for firms by considering their ability to deliver above-average, sustainable organic growth; and a business culture which is credible and focused on innovation and renewal to ensure continuous long-term growth.  

A firm may, for example, show that it has “top-line growth but if it is not profitable, then it is not for us,” Smit said. 

It has worked out that, by choosing and holding firms with the qualities it seeks, the Stonehage Fleming fund is tilted towards tech and healthcare, Smit said. “We see it moving further that way,” he continued, noting that these sectors combined account for 55 per cent of the fund at present.

Smit’s top 10 holdings are Alphabet, Microsoft, Amazon, Cadence, ASML, Edwards Lifesciences, EssilorLuxottica, S&P Global, Visa, and Verisk Analytics.

“Given what is going on in tech, there is a digital revolution going on,” he said, noting how different parts of tech – such as AI, increasingly powerful chips, cloud computing, spread of the internet, etc – are interconnected and mutually reinforcing. The same kind of reinforcing trends work in healthcare, as can be seen in how medicine is being influenced by AI, modern data diagnostics, etc.

However, this publication asked Smit that, for all the prowess at the moment of the “Magnificent Seven” Big Techs in the US (Nvidia, Meta, Tesla, Amazon, Amazon, Alphabet and Microsoft), is there a risk to such businesses from, for example, an anti-trust push against Big Business? (We interviewed Smit before Donald Trump nominated noted anti-trust enthusiast, JD Vance, as his running mate and pick for Vice President.) 

“In America, I am less concerned [about anti-trust] than I am about Europe,” Smit said, arguing that the European Union seems more favourable towards regulatory interference with corporations – he gave the case of the EU’s regulatory approach to AI – than is the case in the US.

“The difference is that America is much more practical about the [presumed] threats…Europeans totally over-regulate themselves and scare away entrepreneurs with the result that you can count [Europe’s] tech champions on one finger!” he said. 

To give one sense of the difference, the capital expenditure of Amazon Web Services, Microsoft, Alphabet and Meta is about $200 billion, which is more than the next top 90 tech companies in the US. “Their free cashflow is more than 1.5 times the capex they’ve decided to spend. For others to compete [with the Big Techs], do they have the balance sheet power and cash flow to compete…the chances of newcomers are quite low,” he said. 

The case for healthcare
“For us, healthcare is about demographics and technology. People are living longer and require healthcare for more of their lives, which provides structural demand for a host of products and services. We like the fact that healthcare companies tend to be less economically sensitive as a result,” Smit said. “Scientific developments (e.g robotics) continue apace across the sector and we own companies including Stryker, which manufactures hip and knee equipment, and Thermo Fisher, which makes hospital and laboratory equipment.”

Smit said there are certain sectors, such as commodities, that he does not hold.

“We prefer not to own commodities companies because they are cyclical and company management is not in control of the top line – they cannot set prices. We also avoid auto/electric vehicle manufacturers because the technology is still nascent, and it is an overly competitive space. As we manage a quality growth fund, we also do not own tobacco stocks,” he said. 

Rates
Smit thinks that US interest rates will hold “higher for longer,” and he does not see this as a significant issue. “The [US] Fed is dragging its feet in cutting rates and I give them credit for how they have managed to build reserves while the West is overly indebted,” he said.

An important point, in understanding sensitivity of firms’ balance sheets to interest rate changes, Smit said, is that the quality of companies is higher than it was since the turn of the century.

“They are better in terms of the returns they generate utilising technology and they have materially improved their balance sheets...one should pay more for that than you would 20 years ago,” he said. Another point, Smit said, is that the pandemic showed how resilient many companies are. “Our grandchildren are not going to believe us when we tell them one day that we closed the world.”