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Tales of a Long Bull Market: Angus Tulloch

October 2019

In his latest insight note, Simon Evan-Cook, Senior Investment Manager for Premier’s multi-asset, multi-manager funds, takes a deeper look at another of the investment industry’s outstanding active fund managers; Angus Tulloch of Stewart Investors. With active managers under the spotlight again, he looks how the best funds occasionally test their holders’ patience, and how passing that test can prove extremely valuable.

With markets going through one of their occasional Momentum-or-Bust phases, and ‘star’ fund managers seemingly under the cosh, it’s worth taking time out to view the bigger picture. Reminding ourselves what good active investing actually means proved a cathartic experience with the case study we produced last year, and it can only help now that markets have gone on another tear in 2019

A good way to do this is to consider the long term, as this removes markets’ day-to-day noise. In this instance, ‘the long term’ is the career of Angus Tulloch, who headed up Stewart Investors’ Asian equities team, and recently retired from managing funds. This is the track record of the Asia Pacific fund he began managing in 19881.

That’s a total return, after charges, of 5,945%. Which means £100k invested on day one would have grown to £6.0m by the end of last June. The average fund in the sector2, meanwhile, would have grown to a measly £2m (that £4.0m gap is why we heed the passivists’ advice by not investing in ‘average’ funds – only excellent ones).3 The catharsis, for fundamentals-based investors like us, comes from appreciating that, while that chart looks like an easy cruise to incredible returns, it wasn’t: There were times when the process looked broken, tempting holders to abandon ship - most likely for an inferior fund. Doing so would have proved costly.

The two most notable temptations came in the late stages of bull markets. In both cases investors were only interested in the few exciting sectors or stocks whose prices had recently risen, and had little concern for the valuation or fundamentals of the underlying businesses. This is technically referred to as ‘momentum investing’ (and less technically known as ‘performance chasing’).

The Tech Bubble

The first of these periods was the final stage of the tech bubble in 1998-99 (see chart below).

As this period began, the Stewart team had already sold much of their tech exposure, due to concerns about company valuations and underlying fundamentals. Angus told me he then attended a standing-room-only tech conference, where he was shocked by his “more tech-savvy co-attendees who were clearly swallowing everything the presenter said hook, line and sinker”. His team sold the remainder of their tech shares upon his return.

This is a common experience among successful fund managers. They often miss out on the final, frothy extension of the bull market, as they simply can’t stomach what they’re having to pay for the most popular shares. The stocks that do look sound investments, meanwhile, get left behind in the rush for the glitz. But, as the chart below illustrates, such managers are usually proved right when the rose-tinted glasses slip away. And sure enough, the team’s performance over the subsequent five years was nothing short of stellar:

The Global Financial Crisis

Investors were then treated to the same show, albeit with different actors, in 2007. This time it was commodity stocks, not tech, that captured investors’ imaginations: the market was now excited about the ‘commodity super-cycle’.

Commodity companies don’t lend themselves well to the Stewart process, even at the best of times. And with excited investors driving valuations higher, this was not the best of times. I’ll explain more on their style later, but part of their process is to look for excellent companies with differentiated products. And a commodity, by definition, is not differentiated. So when natural resources companies are expensive they’re simply beyond consideration. So, once again, the fund missed out on the final, ecstatic stages of the bull market:

And sure enough, once the euphoria evaporated, the fund more than made up for it, holding up impressively through the turmoil of the Global Financial Crisis. Their dislike of highly-cyclical commodity companies paid off, as did their avoidance of Australian banks. And on the positive side of the ledger, a return to the by-then-ignored technology stocks also worked well:

There are many lessons to be learned from studying the methods of proven fund managers. But for today, the big one is that great managers do not always outperform. In fact, an occasional period of underperformance is actually a feature of a great fund, not a flaw. Yet we see reams of comment bemoaning a lack of funds that have outperformed for 'x' calendar years in a row (or some other randomly-selected yardstick).

This drives fund investors to make what we consider to be their most common and costly mistake: buying good active funds after they’ve outperformed, then selling them after they’ve lagged - usually in favour of a different fund that’s just outperformed. And so on and so on, until they’ve made the same mistake so many times that they give up on good managers altogether, settling instead for the guarantee of sub-index returns from a market tracker. (A market tracker will deliver -as expected- index minus charges),

But look again at the track record. The message is clear. Find a good, trustworthy manager operating a proven style. Then (as long as they stay true to that style) stick with them through thick and thin. In fact, the ‘thin’ bit may prove a good time to invest more with them, not less (although it won’t feel that way at the time).

We believe we are currently going through one such period in markets. And as the chart below shows, the Stewart fund is enduring its third notable bout of relative underperformance (making it roughly one for every decade of its life so far).

Many of our own, similarly minded investors have also struggled to keep up with fly-away, story-driven markets. Most state their unwillingness to join in with the increasingly narrow and expensive group of predominantly technologydriven stocks that dominated the earlier rallies. This is the ‘thin’ phase mentioned above and we believe it will pass, just as every phase of every cycle has in the past. In such periods, we think it’s our job to buy more of these well-run funds, not less. Rest assured that this is exactly what we are doing.

Further Reading: ‘How Do They Do It?’ and ‘Five Big Lessons from the Stewart Investors Experience’

How do they do it?

This fund has a personal edge for me. Its sister fund, Asia Pacific Leaders, was one of the first I ‘inherited’ when I began analysing funds for Premier in 2007. Angus Tulloch was generous enough to spend time humouring a rooky fund picker, and although my job was officially to check up on the fund and its management team, I spent more of that time learning than I did judging. Before that, I was as blinkered as the cowgirl bartender in the Blues Brothers: Just as she played both types of music; Country and Western; I ‘knew’ both ways of investing; Value and Growth. It was getting to understand the nuances of the Stewart investment philosophy, which didn’t sit squarely in either camp, that shone a light on the many shades of grey that live in, around and beyond those two styles.

So how do the team invest? This is best answered by asking another question: how do you really protect wealth? And I do mean really protect wealth. I’m not talking about dampening down the lumps and bumps that wobble markets every few years. I mean the genuine long term: Long enough to throw up some nasty, history-shaking events that can destroy your life savings in one go.

The answer to that question, by the way, is not “keep it all in cash”. If you think that’s the answer, It’s worth brushing up on some history. Twentieth Century Germany would be a good place to start. If individuals’ savings weren’t wiped out by war or the hyperinflation of the 1920s, then the ‘currency reform’ of 1948 cleared out the rest (for all intents and purposes an instant, managed, one-off hyperinflation). But if you owned a trusted, well-run, financially-sound business operating in a resilient industry? Then your 'real wealth' had at least a chance of surviving. And, just as importantly, the potential to grow again once normality (whatever that is) returned.

And there you have what, for me, is at the heart of the Stewart philosophy. While some investors obsess about all that could possibly go right, they spend as much time obsessing about what could possibly go wrong too. Once they have eliminated that, which turns out to be almost everything, what they are left with is their portfolio.

For them, this means equities. Equities have the ability to compound their growth in the good times and, crucially, withstand the occasional monetary episodes that can decimate fixed-income assets, like government bonds or cash. That said, they certainly don’t hold any equity. They spend the lion’s share of their time identifying companies that are resilient. That might sound simple, and on one level it is, but resilience is a complicated thing. Many things can damage a company: weak balance sheet; poor management; and obsolete products, are just a few of the threats they watch out for.

Corruption is another. Given the nature of some of their chosen markets, this is an area they spend a great deal of time on, be that at a corporate or governmental level. One of the best protections they have found, is to assess the character and track record of the company’s controlling owners. This means that many of their holdings, while publicly listed, are effectively family controlled. Families (specifically trustworthy, reputable families) are often better at making decisions that suit the long-term interests of the business, and therefore all of its shareholders.

Just as we like to see fund managers investing their own money in their funds, Angus’ team wanted to see company owners closely aligned with him and his investors. And some family owners, who care greatly about keeping a business going for generations (not just for the next bonus) are extremely well aligned with their shareholders. Skin in the game, as it’s known as, is a powerful thing. This one facet has gone a long way to help them avoid the errors that have skewered many of their peers.

Any signs of stakeholder abuse are also met with a sell order - not just rough treatment of shareholders, which is where many managers’ concerns begin and end, but of customers, employees and other related parties too. This focus on governance – the ‘G’ in ‘ESG’ has always been paramount, but the ‘E’ (environment) and ‘S’ (social) have grown in importance, as the team evolved too. So, early in the Fund’s life, they had no issue with holding casinos or tobacco stocks, but latterly considered them too harmful to invest in.

The work doesn’t end with identifying resilient companies though: a company may well be a bullet-proof compounder, but if you pay too much for its shares it can still turn out a poor investment. This is where the ‘value’ part of their process kicks in. In essence, it doesn’t matter how good a company is, if its valuation rises too high, so does the risk of permanent capital loss. So they will, with a heavy heart, sell and move on to the next opportunity.

This is just a loose outline of their philosophy, and is my own interpretation of it too. There are countless other details and nuances that make up their ethos, such as it being a team-based approach and a genuinely active one too (team members, no matter how senior, were banished from an investment meeting if they even mentioned the benchmark). But doing them justice would need a book, not a note, so in the interests of brevity I’ll leave it there.

Five Useful Lessons From The Stewart Investors Experience:

1) Charges matter but finding a good manager matters more

OK, if you’re paying 10% a year for a fund, then charges matter more. But chances are you’re not (please tell me you’re not?). Just to reiterate, the track record set out in this note includes all annual charges. It’s hard to find an equivalent tracker that goes back as far enough, but here’s the Stewart team’s fund (current OCF: 1.04%) versus one commonly-held tracker since it launched (OCF: 0.23%). The experience here illustrates our own belief: if your active manager is good, and the charges aren’t ridiculous, then they’re worth paying extra for.

And for regulatory purposes, here is a five year chart.

2) Asset Allocation is important, but so is picking the right fund

At the end of 1993 (when our first available index data begins), if you had decided to commit to Asian equities over global equities for the next quarter of a century, then you would have been wrong. As the chart shows, over the next 25 years, the Asia ex-Japan index rose by 6.3% a year, while global equities returned 8.3%. Hard luck! But wait… If you’d backed Asian equities, but done so through the Stewart fund, you comfortably outperformed the global average with 10.5% a year. So you were right after all! Well done.4

3) Find a repeatable edge, then compound it

The annualised numbers in the example above sound modest. The total return numbers, which equate to actual money earned, don’t. So a 2% annual gap between Stewarts’ fund and the global equity benchmark may sound like it’s not worth getting out of bed for; the c. £450k difference it would make to a £100k initial investment over that period most definitely does. This is down to the magic of compounding. Finding something that works, then sticking to it, pays off for those with the patience to keep doing it.

4) Markets move in long sweeps

As the Stewart track record, and the chart in Point 2 illustrate, markets move in long sweeps. So it’s worth being prepared for a manager’s style to not work for an uncomfortably long time (just as ‘value’ investing generally hasn’t worked for the last 10 years, despite winning for eons before that). The fund’s tougher periods might look like blips on the long-term chart, but even if they last ‘only’ a year, that feels like an awfully long time when you’re in the midst of it. Similarly, it’s worth noting that geographical trends can persist for long enough to seem like they’re permanent too. So in the noughties, Asia’s thrashing of US equities made it feel like Asia could never lose. However, in the whateverthis-decade-is-calledies, America’s thrashing of Asian equities has made it feel like US equities can never lose. These are trends though and as such can reverse at any time. It’s as well to be aware of that.

5) Nothing goes up in a straight line

This is true for markets, and it’s true for great fund managers’ performance against those markets. In our experience, the best fund managers have a ‘style’ that they work over and over again – this is how we can be sure their performance is repeatable. But these styles will inevitably have phases when they don’t work. Provided this underperformance fits with their stated philosophy, we are paradoxically reassured by this underperformance, not worried by it.

Conversely, if a manager outperforms at all points of a market cycle, it suggests there’s an element of market timing to what they do. Market timing almost certainly needs good luck to have worked. Skill, intelligence and hard work are a lot less likely to run out than good luck, so we stick with the former and avoid the latter


1The Fund was launched by the independent boutique Friends Ivory, in 1988, now part of First State Investments. Angus handed over the lead management to Ashish Swarup in 2016, then retired in 2017. The Fund is now managed by David Gait and Tom Allen. Angus was (and still is) quick to point out that the fund was run on a genuinely team-based manner (and that certainly seemed the case to me), so it is appropriate to run the returns beyond his retirement date.

2 As represented by the IA Asia Pacific Ex-Japan sector average. We’ve used this, rather than the market, because we don’t have access to relevant index data going back that far. The sector average, we think, provided a “close enough” proxy for the market (as you can judge from later charts where we do use an index).

3Source: Morningstar, as at 31.08.2019.

4Morningstar, as at 28.06.2019.

All data sourced to FE analytics unless otherwise stated. Charts based on a bid to bid, UK sterling basis.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. This information is for authorised financial advisers and professional investors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

Source: FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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