Gavin Rochussen, CEO at Polar Capital, talks exclusively to Wealth DFM about the growth in this specialist, active fund management business, what it offers investors and the types of fund its investment teams run.
We begin our conversation by talking about how he became involved with the business and its key driver for success. Gavin Rochussen has been the CEO at Polar Capital since July 2017 when he took over from Tim Woolley, a co-founder of the business alongside Brian Ashford-Russell.
The key driver for the group is the belief that if funds perform well, then they will attract investors which is why Polar Capital is all about performance not asset gathering. Rochussen explains that the business is structured to allow their 13 investment teams to focus on their portfolios while a best-in-class operational structure works on everything else.
The Covid Crisis
Rochussen recalled the moment when he realised the global economy was heading towards a crisis as a result of Covid-19. In February last year he spent two weeks on an expedition to Antarctica with his wife, a photographer. “We were completely oblivious. We got back to London the same weekend the news broke of an outbreak of COVID in Italy” he said, pointing out it was only after the outbreak in Italy when the stock markets responded. “That was the last time I was on an airplane actually. It’s been quite an adjustment, but for the better I have to say.”
21st March 2020 was when the UK went into the first lockdown. This coincided with the lowest point in global markets, with many losing around 30% of their value in what was proving to be the fastest bull to bear rotation on record. Polar Capital funds consist almost exclusively of equities, and overall performance is entirely correlated to the movement in equities. Rochussen sums it up, “It was a scary time.”
By last March, the equity markets had experienced the longest bull run in modern history, when in Rochussen’s view “a lot of people got complacent.” He pointed to the markets continued rise in January and February 2020, long after the initial outbreak in Wuhan. By the end of March 2020, their financial year end, Polar Capital’s AuM had plummeted to £12.2bn, having had £14.3bn AuM in October 2019. He comments “the full year results were very robust, of course we didn’t know what would happen going forward. We had no idea. We were modelling break-even scenarios, we had a very strong balance sheet, we always ensure we can pay dividends.”
The strength of Polar’s balance sheet meant they chose not to furlough any staff, a good decision in retrospect. “That was the best decision we ever made because obviously the fiscal and monetary stimulus from governments around the world got the market going. Of course, the rest is history.”
Between March and December 2020, Polar Capital’s AuM increased by a massive 55%, from £12.2bn to £18.9bn, with market moves and fund performance making up £5.6bn of inflows. 81% of the AuM performed above benchmark.
So how has Polar performed so well?
Polar Capital consists of 13 autonomous teams, the largest are focused on Technology and Healthcare, with strong inflows into both of these strategies over the pandemic. Rochussen pauses for a moment to reflect on quite how large the technology sector has become, after the last decade of such significant growth but he also reminds us of the awesome growth the sector has witnessed throughout the pandemic. “The information technology sectors now make up 21% of the MSCI all companies world index. The five largest tech companies in the world are worth more than the entire London Stock Exchange.”
Going further, he points to tech’s presence in other sectors too. “Alibaba and Amazon now make up a third of the consumer discretionary sector. Half of the communications services is made up of Facebook, Alphabet, and Tencent. If you take direct technology out of consumer discretionary sectors and communications services and add that to information technology, around a third of total global equities is in technology.” Considering the boost in demand for services, it is no wonder that these sectors have grown so strongly throughout 2020.
The technology sector has now dwarfed the finance sector, which pre-2010 was so dominant.
Polar Capital’s fund management teams are autonomous, each with their own strategy, and they run a range of 27 actively managed funds. These cover single country, regional and global mandates as well as specialist thematic funds like tech, healthcare and financial sectors.
The firm provides oversight and capacity constraints, in order to maximise returns for their clients, and reduce business risk for their shareholders. On the funds ’capacity constraints Rochussen is clear. “We don’t want them getting too big. In my experience, the larger a fund gets then the more difficult it is to produce alpha and out-perform. For us to continue to grow shareholder value over time, you cannot just keep adding to existing funds, you have to be adding new teams and new strategies.”
Rochussen is always on the hunt for new teams. In 2020, Polar Capital announced the Healthcare Discovery Fund and an International Value Fund based in the West Coast of the United States. Overall, the approach is to complement biases. Technology and healthcare are high growth, but over 2020 these sectors were complemented by inflows of £234m into Polar’s Global Insurance Fund, £100m into their Emerging Markets Stars Fund and £90m into their UK Value Opportunities Fund.
So where does Rochussen currently see the most attractive investment opportunities? We break these down into distinct areas.
Looking forward, Rochussen expects to see continued demand for technology, which he called now “a core sector” providing growth with cash flow positive balance sheets, unlike the Dotcom bubble.
On the future of ESG investing, Rochussen highlights that it is the Environmental and Social aspects of ESG which have accelerated throughout the pandemic, not least because lockdown had people considering their carbon footprints through travel and other actions. He continues, “like we saw during the financial crisis, the pandemic has reinforced and brought about a lot of inequality. I think there’s a real focus from investors on these issues.”
Polar has done a lot of work throughout 2020 to integrate ESG principles and investing into individual teams, appointing a Head of Sustainability with a team supporting them. “It’s right at the heart of our decision making” he comments. The approach is based on company analysis where they fully engage with the management teams behind it, ranking each of their funds against an ESG benchmark to assess its direction of travel and ensure that sustainability measures are being met.
Rochussen explains that when it comes to stock selection “we don’t negative screen.” So, if a fund invests in a company that has a low ESG score, “we make them justify why they invest in it. It’s about direction of travel. You can enable more positive change by engaging with management rather than just not investing in a particular company.”
Emerging Markets & the UK
Two particular areas of interest for the years ahead in which Rochussen is excited are emerging market growth and value plays in the UK.
Polar’s Emerging Markets Stars Fund has a ten year track record. Sustainability is right at the heart of this fund, with the flow of information being supported by a Shanghai research office. On the use of this Shanghai office, Rochussen clarifies the reason behind it is “because we believe most of the growth will come from China, we wanted to understand them.”
He also points to a growing demand for value investments. One such receiver of inflows was the UK Value fund, that focusses on small to mid-cap UK companies. “It’s been a tough sector since the Brexit referendum.” He comments. Plagued by uncertainty in recent years as a result of the UK’s negotiations with the EU, it’s now an area that is coming back very strong.
In summary, Rochussen is very positive for the outlook saying optimistically that he believes, “the FTSE 100 and even the all-share index will provide interesting returns in the near future.” He sees this as being linked to a likely boost in consumer spending following the pent-up demand over the pandemic. However, he stressed the overall importance of diversification as the key to how Polar will continue their hunt for returns in a way which ensures sound risk management principles are right at the core.