Amundi: meet the new head of global equities

French investment giant Amundi moved its global equities business to London last year. The firm, which has €844 bn ($963 bn) in assets under management, handed the job of developing the new team to Nicholas Melhuish, who joined Amundi in 2014 after several years at UBS Global Asset Management, where he served as head of global equities. Prior to that, he held various positions at Nicholas-Applegate Capital Management, Putnam Investments and Schroder Investment Management.

Nicholas Melhuish, Amundi
‘I tell my team, if you don’t really want to see a company, don’t waste its time and yours’

You were hired to develop the equity management capability – can you elaborate on that?

We had a global equity product based in Paris but we decided it made more sense to locate it in London, partly because we get a more consistent flow of companies coming through and partly because it’s a much more natural financial center for a global equity business. So we put together a team last year, moving some people over from Paris and also making a few hires. There are now six of us plus an intern here in London. Total investment headcount at Amundi is around 750 so we are a very small team – but an important one strategically.

Amundi has investment offices in Paris, London and Asia. Can you explain what each office does?

The investment platforms are essentially based in Paris but in Asia we operate a Japanese equity and fixed income business out of Tokyo as well as two other Asian businesses that operate out of Hong Kong and Singapore. London is where most of the global product is: global fixed income, global rates, global FX and obviously now we’ve got a global equity product, too.

How do the different offices interact with each other in terms of US equities, for example?

The entire US capability is here in London. The way I set up the team is to be quite independent, so we don’t confer with our colleagues often but in certain sectors there is a good exchange with Paris. We have our own research capability embedded in our process. The most important thing for us is that an investment actually fits with our investment philosophy and process as defined here in London.

Do you split market sectors and geographies?

We split sectors but not geographies so we break out into six super-sectors: technology & telecoms, healthcare, financials, energy & materials, industrials and consumer. This is a rebuild of a team so in some cases we’ve hired sector specialists and in some cases we’ve hired seasoned investors who have switched sectors, and we’ve added some new blood.

It’s good to have a mix. You want to have people with lots of experience but you also want to have other people who are up and coming. Having that bench strength is important and it is good for [team] culture.

What do you look for in a fund manager or analyst?

Our investment process is very bottom-up so we all spend time analyzing companies and ultimately trying to find firms we think meet the requirements for our process, which is called ‘thesis valuation timing’. Basically, we look for a material level of undervaluation. Ultimately, therefore, we are core value investors.

Do you have a goal for increasing equity assets under management?

In terms of global equity assets under management from London, I think we are very undersized relative to our distribution capability and capacity of the product. I think $20 bn is too big but I think $2 bn is far too small. We have less than $2 bn under management right now but we could very easily be $10 bn, though it’s going to take a while to get there.

So the global equity team in London will invest globally?

We will invest in US, European, Asian and emerging market equities. The cut-off is $500 mn market cap and we need turnover of $12 mn a day; this will rise over time as the product grows. That gives us a universe of about 3,300 companies, which is a lot for six people. We refine that universe very significantly using quantitative screens.

We have a very disciplined investment process, which is not to say there isn’t any room for creativity but the way we have defined the process is quite precise in terms of what falls inside it and what doesn’t.

Which screens and benchmarks do you use?

We use a third-party, quasi-proprietary screen. We run the 3,300 companies in our investible universe through it and there are 53 factors. Over time it has proved to be extremely effective in identifying outperformers. It has a strong valuation tilt and capital efficiency is important, too.

In addition, we use the HOLT [company evaluation system]. And for benchmarks, we use the All Country World Index, including emerging markets.

Do you have a target price when you buy a stock?

Absolutely – that’s the beauty of present value (which we use when valuing stocks). For every stock, we produce a hard value that we think the company is actually worth. We are aiming to own a stock for two or three years.

If the expected return from equity markets is 7 percent, clients want us to achieve +3 percent per annum so we really need 20 percent to 30 percent upside. That means our base case is somewhere between 25 percent and 30 percent – more in a blue-sky case. Generally if a stock has less than that, it’s not going to make it.

What is your average length of stock holding?

Typically I’d say 18 months would be the average but there is a range from six months to more than three years.

And what is your average market cap for stocks?

We are bottom-up stock pickers but $5 bn to $15 bn is our sweet spot. Having said that, we’ve found quite a lot of value in mega-caps such as large-cap tech stocks that are cash-generative: Microsoft, Apple, HP. There’s been a surprising amount of mispricing of large-cap tech stocks. This is also true of large pharma, where the R&D cycle means value has been unlocked. A lot of the so-called boring companies have been left behind so there’s an opportunity in large-cap names.

What size position do you typically take? What’s the value of your largest position?

There are 30 stocks in our flagship fund and positions are from 2 percent to 4 percent. An average position is 3 percent.

Any sectors you won’t invest in?

No – we care about a company’s cash flow profile and how it is priced by the market.

Does a stock have to be profitable for you to invest?

No, we would invest in something that’s not profitable. But we’d be unlikely to invest in a high-priced start-up in social networking, for example. We prefer companies that have fallen on hard times, companies that are doing a major restructuring, that sort of thing, because these can be very interesting. We are highly unlikely to invest in a new Facebook.

Are SRI considerations important?

Amundi takes SRI very seriously. We do an in-house ESG score for every company and can’t buy the bottom tier. For example, within the aerospace & defense sector we can’t buy companies that are involved with cluster munitions. I think SRI and ESG issues, especially those concerned with corporate governance, are quite important for long-term investors. Our dashboard includes a mandatory ESG box. It has A to G ratings and if a firm is lowly rated in governance, we would want to discuss governance with it.

Do you vote your proxy?

We have a department in Paris that votes the proxy. Sometimes things get flagged.

How important is it for you to meet companies?

Very: there are 3,300 companies in our investible universe and around 500 are possible targets. We own around 30 stocks and there are about 30 more we are actively researching, so there are about 60 companies we want to see. That makes us very selective.

I always tell my team, if you don’t really want to see a company, don’t waste its time and yours: don’t take meetings just to fill your diary. When we do take meetings, it’s important to ensure we have done our homework, that we’ve been through the numbers and have strategic questions to ask on these numbers.

What do you think of the new regulations in the UK regarding corporate access?

The direction the Financial Conduct Authority is traveling in is entirely correct. We don’t pay hard dollars (or client commissions) for access. We do direct access where we can instead of going through a broker.

It is up to companies themselves to take responsibility for who they see. There are some great long/short funds but most are very short term. Large long-only institutions, for example, often constitute long-term and supportive shareholders – these are the kinds of investors companies should encourage. Companies need to work out who their core holders are and who they want them to be. They need to target long-term holders that will hold for three, five or 10 years.

Should US companies visit Amundi in Paris or London – or both?

Most of our analysts in Paris are very Euro-centric but there are one or two exceptions. For example, some US tech stocks are also covered out of Paris. Generally, however, US companies should consider visiting us in London.

How do you like to meet corporate management members?

It really depends on why we want to see them. It is sometimes helpful to meet at their HQ as it is good to meet divisional managers, get a feel for the culture and how the company works but that is obviously very time-consuming, not to mention expensive. If we have a large holding in a company, a private meeting in our offices is better. For an initial meeting, a group event is good as it can be useful to hear what other people think. I hate two-on-one or three-on-one meetings because, if you don’t know the other person, it can be painful. We do a lot more conferences and group events as we are not that big.

How does it operate culturally, working for a French institution based in London?

Amundi wants to internationalize the business. It is currently very French and in many ways this is a strength. The challenge lies in tailoring our strengths to suit the different markets – and developing local offices and investment centers, like Amundi London, is part of that process.

Gill Newton is a partner at Phoenix-IR, an investor relations consultancy (www.phoenix-ir.com)