Funds: 2Xideas Global Mid Cap Library Fund

WHAT IS IN THE PORTFOLIO?

2Xideas’ Global Mid Cap Library portfolio features five sectors: consumer, financials, healthcare, industrials and technology. The financials segment does not include banks, but instead stock exchange operators, data services, insurance and real estate services. Holdings include MSCI (MSCI:NYSE) which is best known for providing stock indices, data and analysis tools.

It has a stake in ResMed (RMD:NYSE), a specialist in medical devices and software for sleep apnoea treatment. The fund also invests in Verisign (VRSN:NASDAQ) which maintains the registry for .com domain names.

A fifth to a quarter of the fund’s holdings change each year. The team remove stocks from the portfolio typically if their analysis shows deteriorating fundamentals, the value of the business becomes too large for the investment criteria, they find something better or the valuation becomes too rich.

Recent disposals from the portfolio include InterContinental Hotels (IHG) – ‘there are better hotel companies on the market, we’re waiting to invest in one of the US ones’; and medical devices group Masimo (MASI:NASDAQ) – ‘a brilliant business, but last year made an acquisition which we didn’t like, so we sold the shares,’ says John Kelly.

Shares in music streaming platform Spotify (SPOT:NYSE) were sold from the portfolio in the first quarter of 2023 due to ‘disappointment in execution around improving profitability’, while heart pump specialist Abiomed left after a takeover by Johnson & Johnson (JNJ:NYSE).

The only new addition in the quarter was Lonza (LONN:SWX), a contract development and manufacturing business for the pharmaceuticals and biotech industry.

That leaves it with 200 to 250 names to research, looking at ‘4M’ factors – macro, market, moat and management. It then analyses the financial model and investment thesis to check for business quality, growth prospects and sustainability.

‘To pass the test, companies need to score highly,’ says Kelly. ‘We have 150 names classified as having “library potential”. At the start of 2023, 87 of these names sat in the fund portfolio and the rest were sitting on the substitutes bench.’

The Voting Process

It is at this point where the single person stock picker versus a team debate kicks in. How does 2Xideas decide which stocks make the cut and feature in the portfolio?

Once a quarter, the team review everything that is already in the fund or on the subs bench. The original seven founders of the asset management company get a vote, along with eight senior people from the research department.

This is not an equal vote. Certain individuals have more voting powers than others and that is determined by their history with previous votes. ‘We look at every decision people wanted to make historically and determine the quality of the decision-making. So, the voting weight is based on people’s relative success. We do not have a star fund manager; we have a team approach that works very well for us. It means you do not get the single person risk,’ says Kelly.

Given the fund has investments across a broad range of sectors, why should an equity analyst specialising in a specific industry such as industrials get to vote on a healthcare stock, for example? You could argue they do not have the knowledge to say if that stock deserves to enter or exit the fund.

Kelly says each person in the team is more informed than you might think. 2Xideas has a large research department that produces in-depth analysis on each stock. If someone has the power to vote, they need to have studied the company’s research notes in advance. ‘There is nobody in global mid-caps that has a research capability like we do,’ he adds.

‘We have a defined style and we all talk the same language. The voting process is something we have always done and something that Bellevue has always done. It is good to have different opinions.’