There are few managers who can claim to have been at the helm of a fund for 15 years, and the long-term approach of SVM Asset Management’s Margaret Lawson have helped make her £172m SVM UK Growth fund become one of the top-performing strategies during that time.
She has achieved this by simply avoiding challenged businesses in challenged industries and by identifying potential winners that can be held for a long time.
“A lot of the stocks that we have in the portfolio I’ve held for quite a period in time,” she said. “Really what I’m always thinking about is, what businesses are going to become substantially bigger businesses in the future?
“I think we’ve been lucky in recent times because – for a lot of these businesses – technology and Covid-19 has accelerated those structural trends.
“You had a lot of trends that were perhaps sort of nascent, that people were paying a bit of homage to, but Covid-19 has accelerated them.”
Lawson (pictured) contrasted this to already challenged businesses in challenged industries, that have become even worse after Covid-19. 
“If there’s a challenged business and a challenged industry, that’s the worst possible combination,” she said. “What I’ve done when I’ve encountered things like that? I’ve cut them.”
Lawson makes an effort to avoid businesses that are structurally challenged, have low margins, and have “really lost their way”.
She highlighted high street retailer Marks & Spencer as an example of the types of companies that will become significantly smaller going forward.
“It’s very difficult to turn around a tanker like these businesses,” she said. “It’ll take many years, if it happens at all, so I think it’s not the best use of our time to focus on these. We’ve got to focus on the successes of tomorrow.”
She said many of the structurally challenged businesses also typically have a poor history of deploying investor capital and pointed to Marks & Spencer rival Tesco as an example.
Performance of Tesco over 20 years
Source: FE Analytics
“So, Tesco, over all the years was going to build this international growth, big grocery company,” she recalled. “They were spending lots of money, but the returns were never there. They had their own problems in the UK and had to pull back from all that.
“If you look at the capital that Tesco have deployed and have destroyed over the years, it’s been a terrible journey.”
Lawson said this is reflected in the share price of Tesco which is the same as it was 20 years ago.
For online supermarket Ocado – the fund’s largest position – it’s a different story.
Whilst Ocado has admittedly spent a lot of money over the years to get where they are, Lawson said the difference is that “they're solving a problem for retailers that they can’t solve themselves”.
Performance of Ocado over 5yrs
Source: FE Analytics
“It’s all about if they execute well. If they muck up, they’re toast, but there’s this great opportunity,” Lawson said. “We all consume food, we all eat two or three times a day, what Covid has told us is, well, maybe we don’t need to go to the supermarket. We value our time at home now, so why do all that?”
Another reason why Lawson likes businesses like Ocado is that they often become incubation baskets for other technologies.
She explained: “They’ll buy a small stake in something and provide the capital for that. That’s the business model. That’s the kind of business that you should be looking for.”
However, she admitted that aspect also makes it difficult to look at these businesses and determine what they are worth with old conventional measures such as price-to-earnings (P/E) ratios and discounted cash flow (DCF) models.
“These industries are so dynamic, so your DCF’s likely to be rubbish,” she said. “You’ve just got to have a portfolio of them, and you want to invest in them when they’re beginning to have traction.”
She continued: “You could have had Ocado for a long period of time, even after it came to the market, and it actually went nowhere.
“But it was when it first got those contracts from Morrisons, and then it got some contracts in France, and then it got Kroger in the US, that could see that it was starting to get the endorsements. That’s probably the time to buy these things.”
She highlighted how AIM-listed Ceres Power, another top holding within SVM UK Growth, has started to gain traction as it gets investment from industry incumbents looking to take stakes in new technology.
Weichai Power, a Chinese state-owned diesel engines developer and manufacturer, has been taking equity stakes and injecting capital into Ceres Power over the last few years for its SteelCell fuel cell technology.
Lawson explained: “You’ve got the big companies that have got diesel engines and they know that they’re not fit for purpose today, so they want to embrace these new technologies.
“So they’re putting money into the likes of Ceres Power, to be joint partners, and they’re giving these companies the early business.”
She finished: “You want to be part of that, but you don't want to be part of it before that’s recognised.”
Performance of SVM UK Growth under Lawson
Source: FE Analytics
SVM UK Growth has delivered a total return of 315.37 per cent, compared to 122.54 per cent from the FTSE All Share benchmark, and 128.07 per cent from the average peer in the IA UK All Companies sector. It has ongoing charges figure (OCF) of 1.03 per cent.