Royal London Asset Management's (RLAM) head of equities, Peter Rutter, explains how the asset manager's approach to equity investing leads to portfolios that have proven robust through a range of market conditions

What is RLAM's equity investment philosophy and process?

Equities represent an opportunity for investors to participate in the significant long-term wealth created by individual corporations globally. Our investing philosophy is based around the belief that, whilst it is business fundamentals that drive stock prices over the long term, different fundamentals matter at different stages of a company's life cycle and there are enduring inefficiencies, which cause temporary mis-pricing of these fundamentals. Our approach is designed to repeatedly identify and exploit these mis-pricings. It leads to alpha generating portfolios with high stock-specific risk and low factor risk, that have proven robust in multiple market environments over very long time periods.

How did RLAM help clients navigate 2022's stock market volatility?

Our approach of building Global Equity portfolios that are fully diversified across all stages of the corporate life cycle, together with controls over other common factor exposure, helps to maximise idiosyncratic risk and, on a relative basis, insulates the portfolio from macro factor swings, such as those driving volatility in 2022. This approach has helped our longest running Global Equity strategy outperform in 18 of 21 years, including each of the last three years which have seen significant pre, during and post covid swings in sentiment, together with market style leadership shifts on reversing discount rate movements and inflation.

What is RLAM's outlook for equity investing over 2023?

The significant falls in equity markets, along with the resilience of long-term wealth creation in equities, means that stocks are likely more attractive now than 12 months ago, which does provide some comfort in the face of a challenging and still uncertain outlook. There are large swaths of the equity market that are likely to be relative beneficiaries should inflation moderate. The cyclical nature of parts of the equity market are also likely to rally in the event of a more moderate recession once the growth outlook improves. It's never possible to predict the market for the next 12 months, but current lower priced markets, areas of inflation protection and areas that have become particularly cheap all create pockets of opportunity that were not as evident at the beginning of the year.

How does RLAM incorporate ESG principles in its equity strategies?

We believe the core principles of our investment philosophy support an enduring and repeatable competitive advantage. We regularly appraise our investment philosophy and whilst we do not believe the core elements will change, we do refine how we execute the philosophy to assess market inefficiencies. An example of this relates to the emergence of what we consider an additional potential market inefficiency that our approach may be able to exploit: poor quality third-party ESG analysis and data in more complex ESG situations may create opportunities for our clients. The integration of ESG factors is owned and conducted by the Global Equity team. This analysis is supported by the expertise and advice from RLAM's team of fifteen responsible investment professionals.

ESG integration is involved at both key stages of the stock selection process: shareholder wealth creation assessment, where ESG analysis is an explicit part of the scorecard informing the overall assessment and valuation analysis; and where ESG factors are explicitly incorporated into our bull, base and bear case scenarios.
www.rlam.co.uk

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.

For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

Issued in February 2023 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.