In a year where headlines were again dominated by Covid, fund manager Rosemary Banyard successfully steered the VT Downing Unique Opportunities Fund (DUO) through a challenging period for markets. 

The A Accumulation share class returned 25.82% in the 12 months to end of December 2021, 8.57% ahead of the IA All Companies TR sector of 17.25%. The concentrated portfolio of 25-40 holdings only added 5 new positions and sold out of 3, which indicates the quality of the original portfolio selection at launch in March 2020. 

Volatility was a recurring theme throughout 2021, with the most challenging period for the fund being during late September through to October. This was characterised by a resurgence in investor interest in sectors such as oil & gas and mining on evidence of commodity price inflation, and banks which tend to be regarded as a safe haven if interest rates suddenly surge. 

The fund does not hold any of these sectors, and Rosemary explains, ‘I find these very uncomfortable places to invest. In the case of oil & gas and mining they are by definition wasting assets, which is the opposite of the businesses I seek out. I am looking for businesses which compound up in value over time as they invest in high return projects, and I prefer businesses with recurring rather than one-off revenues. In the case of banks, decent returns on equity are only achieved through massive leverage of balance sheets, and the extensive use of derivatives adds opacity.’ 

Rosemary’s disciplined due diligence process results in a high-conviction strategy, where she only invests in companies capable of delivering superior returns over the long-term (5 years +). Holdings include Kainos (KNOS), a technology company, where the share price increased by over 59% over 2021. The group has been in the fund since launch and is growing at about 30% ¹per year.  

Kainos supplies IT services into the UK central government to enable citizens to transact increasingly online, such as for passport applications. Another part of the company is an accredited implementation partner for Workday, an enterprise software company listed in the US which is taking share from Oracle and SAP. Both parts of the business are growing rapidly, with recent interims showing revenues up 33% and backlog, the value of contracted revenue that is yet to be recognized, at £250m¹. Rosemary says ‘The backlog represents around 9-10 months of revenues – a significant number. Importantly, the company is growing profitably, which is not always the case in high growth businesses.’ 

Another long-term holding in the fund is Chemring (CHG), a technology company specializing in defence, particularly cyber security, national security, and military sensors. Interestingly, Rosemary once considered the company ‘uninvestable’ because it embarked on a largely unsuccessful acquisition strategy, had a poor safety record, and held high levels of expensive debt. Management changes – the appointment of a new FD and CEO in 2017 and 2018 - have turned the company’s fortunes around, with a focus on health & safety and conservative accounting. Recent results bode well for the future with significant growth in reported revenue and pre-tax profits. ‘Chemring now has a robust strategy, market-leading positions across different geographies and sectors, and products and services that are critical to the government and blue-chip customers around the world. The group’s long-term prospects are strong.’ 

Alfa Financial Software (ALFA), a developer of mission-critical software for the asset finance industry, is one of the largest positions in the fund. The group is something of a turnaround story, which might indicate a higher level of risk. However, Rosemary explains, ‘Investments in listed companies carry risks as well as the potential for rewards, so it is important to assess both, before and while investing. In the case of Alfa, it is a world leader in the provision of software to the leasing industry such as automotive, aircraft, agricultural and office equipment. There are risks in its customer concentration, although this is reducing steadily as the group wins new accounts. The contracts are generally multi-year and large, so this can result in a lumpy order book and volatile staff utilisation rate. There is also the general challenge seen in all software and IT services businesses of talent recruitment, retention and salary inflation. Mitigating these risks is net cash on the balance sheet, a rising element of recurring income from maintenance contracts and cloud services, majority ownership by the founders, and conservatism in forecasting, itself directly linked to a painful debut on the stock market a few years ago.’ She remains confident in Alfa’s capable management team. 

The fund has had one major disappointment in James Fisher & Sons (FSJ), a marine engineering specialist, which saw its share price crash in October following a disappointing trading update. Some of the issues faced by the group are Covid related and temporary but capital allocation errors by previous management have surfaced and existing management has been slow to react, so the painful decision was made to sell the position. Rosemary comments, ‘I’m particularly concerned about the high level of debt and the publicly stated intention to try and sell assets to pay down this debt, which will likely generate sub-optimal returns.’ 

The fund also sold Avon Protection (AVON), a provider of life-critical protection for the military and first responders. The group made two major acquisitions in 2020, one of which has rather rapidly proved to be unsuccessful and will be wound down with attendant write-offs. Avon was sold out of the fund at 3x the present price, so a more timely exit. 

Looking forward to the year ahead, Rosemary expects further volatility as markets wrestle with inflationary fears, concerns over rising interest rates, and worries over how the pandemic will play out. Covid has provided a variety of challenges for investors, but Rosemary is mindful of the words of Warren Buffet – ‘Be fearful when others are greedy, and greedy when others are fearful.’ She believes that when markets begin to panic, ‘The thing you have to do is take a deep breath and ask yourself, what do I think about this business that I’ve invested in, and what is its future? If the original investment thesis still plays out, then you can afford to be patient and wait for opportunities to top up at an attractive price point.’ 

She concludes, ‘My philosophy has always been based on making decisions based on my own research and due diligence rather than being heavily influenced by the macro newsflow. The fund is conservatively managed, and I have a history over a couple of decades of managing funds with a cash buffer most of the time – usually c5- 10%. While this may produce a slightly lower return than a fully invested fund, it dampens volatility, and enables me to take advantage of individual or general share price falls.’ 

Banyard began her career with James Capel & Co where she was a senior investment analyst for 12 years before becoming a fund manager at AIB Govett. She rose to prominence and developed a reputation as one of the leading female fund managers in the UK after she joined Schroders in 1997. For almost 20 years she was known for running the acclaimed Schroder UK Smaller Companies Fund  with Andy Brough, and was for many years lead manager of the award-winning Schroder Mid Cap Fund PLC as well as heading up several other segregated UK equity mandates, managing total assets of circa £1 billion. In 2016 she joined Sanford DeLand to launch and manage the Free Spirit Fund. The Schroder UK Mid Cap trust returned 16%² pa while she was manager and in her two and a half years managing money at Sanford DeLand the Free Spirit Fund returned 31%³ placing it in the top decile of the IA UK All Companies sector. 

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Opinions expressed in this document represent the views of the investment manager at the time of publication, are subject to change, and should not be interpreted as investment advice. 

Risk warning: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies. Diversification may not be achieved and investments may be in the same sector. Opinions expressed represent the views of the Fund Manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. 

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