Meet the managers: James Goldstone and Ciaran Mallon

As proposed Co-Managers of the Invesco Select Trust: UK Equity Share Portfolio, James Goldstone (JG) and Ciaran Mallon (CM) give an insight into their backgrounds and investment approach.  Ciaran and James were appointed co-managers of the Invesco UK Equity High Income Fund (UK) and Invesco UK Equity Income Fund (UK) in May 2020.

You’ve both been at Invesco for a number of years, can you tell us a bit about your backgrounds and industry experience?

JG: I joined Invesco in 2012 and have 19 years of experience in equities.  I began my career in institutional sales before joining Invesco on the UK Small Cap Team.  In 2014 I moved across to UK Large Cap and took over the management of the Invesco UK Equities Pension Fund before taking on management of the UK Equity Share Portfolio of the Invesco Select Trust, prior to taking on the co-management of  the Invesco UK Equity High Income and Invesco UK Equity Income Funds with Ciaran in May 2020. 

Ciaran and I have different backgrounds. I’m a linguist, Ciaran’s a scientist. We’re complementary characters and we think our different skillsets bring diversity of thought to our investment process.

CM: I have 27 years’ experience in the industry. I started out in private client investment management for part of HSBC, and moved into institutional investment management for an insurance company before joining Invesco 15 years ago. 

In addition to co-managing the Invesco UK High Income  and UK Income Funds with James, I have  managed the Invesco Income Growth Investment Trust and Invesco Income and Growth open-ended Fund since 2005 , and the equity parts of the Invesco Monthly Income Plus and Distribution Funds since 2013.

How would you describe your investment philosophy and process?

JG: I look to identify companies which I believe are under-appreciated by the market. My stock selection process centres around valuation with a focus on looking for upside potential whilst limiting downside risk. I place an emphasis on free cashflow generation, looking out two or three years ahead and evaluating expected return on capital.

With the emphasis on free-cash-flow generation, good capital allocation is a key qualitative assessment. I prefer companies where management teams have demonstrated good returns on capital and retained balance-sheet strength. Quality of management is a key consideration and I always look to meet with company management prior to investment and twice a year thereafter.

Company meetings help me to assess ongoing operational risks to the companies I hold. Both before and after making every investment I am looking to understand the downside risks. This often feeds back into considerations of likely returns on invested capital; businesses with a sustainable competitive advantage in sectors or industries with high barriers to entry should offer downside protection from an operational standpoint, whilst likely being more able to ensure invested capital generates an adequate return.

External broker research is used to help with qualitative and quantitative assessments of current or prospective positions, and also for idea generation.

This is an active, bottom up approach which shares much with traditional ‘value’ investing and is informed by my absolute focus on valuation. The broader macro-economic outlook is considered in the portfolio construction process (the top-down characteristics of the portfolio as a whole, appropriate sizing of positions etc) but plays a much more limited role in stock selection.

CM: I too have a fundamental-driven approach.  What I’m trying to do is find companies that could make good long-term investments and then pay the right kind of price for it. I look at a company in the round, look at where it’s come from, its history of returns and margins, for example, who runs it, where it might be going and the kind of industry that it’s in. I integrate Environmental, Social and Governance (ESG) into that approach also as I look at the fundamentals of the business.  I try to understand whether a company’s finances are in the right place to support its business, and what its objectives are, so looking at the balance sheet, for example, and any other risks that there may be around it.

The first questions I ask include:

• Is this a stable company? What are its growth prospects? Does it make attractive profit margins (on both an absolute basis and relative to peers)
• Does the management team value its shareholders? Is there a record of paying sustainable, covered dividends?¹
• How safe is it? Does the company have a large pension deficit? Does it have uncomfortably high levels of debt? Is it in an industry with high risks of regulatory change?
• What price is the market asking me to pay? Do I think this over or under values the business?

In terms of valuation, I don’t think there’s one magic approach to it, but I look, again, in the round at things and try to relate the nature of the business against what you’re having to pay for it.  That’s how most of us buy things in life and I think it’s the same with investments as well. 

Macro-economics is the thing I spend the least time thinking about, and that’s just because I think it’s of lesser importance than the nature of the business and its valuation.  When I think about things that have worked out or things that haven’t worked out it’s generally for fundamental reasons rather than anything external.

How important is ESG analysis in your investment process?

JG: I consider ESG as integral to any investment decision. I really think of ESG as an extension of company fundamentals. When I’m trying to work out how attractively valued a business is, I think about it relative to the strengths or risks inherent in its operating model and its ESG credentials.

I look for companies with proper and effective corporate governance and sustainable business practices that can result in long-term value creation for clients. Corporate governance is a particular focus in my investment decisions. I will continue to engage with investee companies and issuers as part of Invesco’s wider commitment to active ownership. I believe that engagement is one of the most powerful mechanisms for reducing risks and enhancing returns.

CM: While many of the principles of ESG have long been key to my investment approach, I am not looking for ‘perfection’ in the ESG sense. Rather, I am looking for businesses that are embracing ESG values. Buying the ‘potential for improvement’ rather than ‘perfection’ is compatible with both a favourable ESG outcome and solid investment returns.

You both believe strongly in active management, in a fundamental-driven approach to stock picking. What does this mean in practice?

JG: It’s a stock-picking driven process and the funds will differ significantly from the benchmark. I spend a lot of time with management teams and a lot of time thinking about the quality of the businesses I’m investing in. It’s a long-term approach – I’m investing typically on a three-to-five year time horizon. Most importantly, it’s a very valuation-driven approach. Valuation is the single most important consideration for me. It’s a question of finding the best quality businesses at the best valuation, where the risk-reward is skewed in my favour. The weighting of the company’s shares in its benchmark is not a consideration.

CM: Our stock picking process underpins our style of investment management, and the holdings in the funds are highly differentiated from the benchmark. Ultimately, I believe that the main driver of good outcomes is backing the right businesses, i.e. those with robust balance sheets and sustainable business models.  It’s also important to buy those businesses at the right price. In practice, I choose my investments carefully, watch them closely once I’ve bought them, and try to focus on the long term.

Arguably ‘active’ is a misnomer. It means creating a portfolio that reflects independent thought, one which does not look like the stock market. It does not mean high turnover or changing investments to reflect the market’s daily sentiment. Remaining true to fundamental, clearly defined, investment principles – but whilst also reviewing and reassessing the original investment case – is how I remain independent.

How do you work together? How do you interact with the rest of the Henley Investment Centre?

CM: It’s an equal partnership with joint responsibility and accountability. This means that everything that gets bought for the portfolio, everything that gets sold, every significant change in weighting, is agreed between us. 

Fund managers approach the job in many different ways, but I think James and I do it in a way in which we can both see where we’re coming from - we speak the same sort of language. We bring different strengths and experiences and emphases to it, which is how we’re finding that we are working together very well. 

JG: We’ve worked together for eight years now, we’ve both experienced co-managing funds with other managers and of course we have been co-managing the Invesco UK Equity High Income and Invesco UK Equity Income Funds for over nine months. With the extensive support and resources of the UK Investment Team and from across the Henley Investment Centre we are excited at the prospect of co-managing the Trust going forward and we will  put in place our clearly defined and repeatable four stage process. We’re looking for exciting investment opportunities, and at the same time, seeking to control risk and liquidity appropriately.

 As I look at the portfolios we manage together, we have made significant progress and it’s been great to achieve that as a team.  

Can you describe the risk controls that are in place?

CM: Challenge comes about naturally because there’s two of us managing the portfolios, so we discuss everything that’s going on. Challenge and risk monitoring are therefore effectively embedded into the investment process from Day 1 but extend way beyond that. We constantly debate new ideas with, and are tested on the strength of our conviction by colleagues on the UK equity desk at weekly team meetings, and by other colleagues from teams across the investment floor. We work closely with the Henley Investment Centre risk team to evaluate risk metrics, a step which provides a welcome challenge to positioning in the portfolio, helps guard against unintended risk exposures, and can also highlight potential areas of opportunity.  Further review and challenge comes from the Chief Investment Officer and the Investment Oversight team.

JG: We’ve very deliberately introduced two specific steps into the ongoing monitoring stage of the investment process.  One is a trigger for a formal review of any position that underperforms the benchmark by 15% on a three-month rolling and/or 12-month rolling basis and any position that outperforms the benchmark by 20% over the same time periods.  What we’re trying to do here is to ensure that we catch problems early, that we’re decisive and that we avoid issues developing in the portfolios. 

The second thing that we’ve introduced is our own formal quarterly portfolio review. This is  in place to ensure that we are aware and informed of all matters pertaining to the portfolios and to make sure that, should issues develop, we’re aware of them, we’re discussing them and that we’re being decisive where required.