2021 Grand National: Why horses for courses applies to the investment world
With a history dating back more than 180 years, the Grand National is undoubtedly one of the biggest...
A lot has happened in markets over the past 10 years. This time a decade ago, we were in the throes of the global financial crisis. In fact, it was around this time of the year that Lehman Brothers bank collapsed after lending out sub-prime mortgages.
And, since the crisis, there have been plenty more events to keep investors on their toes. From experimental new policy from central banks, geopolitical tensions, debt crises and market corrections. And yet, a number of extremely talented managers have successfully navigated these choppy waters and are now celebrating 10 years at the helm of Elite Rated funds.
We had a chat with some of them about what they have learned over the last decade, as well as their best and worst investment decisions.
“One of our best investments has been a company that we’ve owned from the very early days of the fund, Consort Medical. As a manufacturer of medical devices, it has stable, growing demand dynamics and also has an internal pipeline of products. In addition, it has invested sensibly in its business both organically and through targeted mergers & acquisitions. Despite this, it is very overlooked and undervalued in our view.
“One of our worst has been PZ Cussons, the branded manufacturer of personal care and beauty products. It has been hit much harder than we expected by the poor retail environment in both the UK and Nigeria. Usually, rising oil prices, would be expected to hurt the UK consumer but benefit the Nigerian consumer because the country exports oil. However, this has failed to happen so far. We believe management are high quality and will bring the business back to life in due course.
“The biggest lesson I have learned is the importance of diversification: it is one of the few free lunches in the current market environment given how expensive almost all asset classes appear to be.”
“Over the last ten years, our best investment has probably been Unilever. It was an ugly duckling when I bought it, in comparison to Nestle’s beautiful swan. The acquisition of Bestfoods a decade earlier in 2000 proved to be disastrous, and the company then underwent a painful process of disposing of smaller brands. Although things gradually got better, the period of the turnaround really started with the arrival of Paul Polman as CEO in 2009.
“Our worst investment over the past decade was BNP Paribas – through no real fault of its own. BNP is a well-run bank, which we bought because we thought it was attractively priced. However, this was during the depths of the great financial crisis, and proved to be a reminder that even the best-run of banks can prove to be very risky investments.
“The most valuable lesson learned is that investing is a process and not an event. Investors are looking for a consistency of approach as much as they are for outstanding short-term returns. Whilst it is important to remain flexible and open-minded, less activity is frequently better for the long-term performance.”
“The main high point over the last decade generally has been that we have done the job that we set out to do for clients. We have consistently beaten the market since inception and, importantly, we have done so through using the same process since launch.
“From a personal perspective, I think the biggest high is that I’m still here today and telling the story that it has been very successful fund, in a very competitive sector.
“A success story that springs to mind is private equity company 3i. I have been backing it for nearly 10 years, and it’s still in the portfolio and it’s still delivering returns.
“I’ve learned several lessons over the last 10 years. The first is the importance of having a process which people can rely on and can understand. It helps you explain the fund to the client, and it helps clients understand what makes you tick and what they can expect from the fund in varying conditions.
“Portfolio construction discipline is also important. Once you choose your stocks, you then have to think carefully about building the portfolio around those stocks to let them perform.”
“Over the last decade, my best investment has been Somero. It is a small company with a leading position in equipment that levels concrete. It was a strong underlying business that came under pressure during the global financial crisis and, eventually, its market cap sunk to £10 million – which is when we bought it. Since then, the demand for Somero’s equipment has recovered strongly and its annual profits are now greater than its former market cap; the shares have gone up more than twenty times from the low point.
“My worst investment has been Johnston Press; this was a potentially classic recovery stock, with a strong UK regional newspaper franchise that I thought would improve its profits after the global financial crisis. However, local newspapers lost readership and advertising to their digital competitors. We sold at a significant loss once we acknowledged that the company’s business franchise was permanently challenged.
“The lesson of Johnston Press has probably been our key lesson learnt over the last 10 years, namely to always question whether the industry that a recovery stock is exposed to is structurally intact or structurally challenged, a key question in this age of digital disruption.”
*Source: FE Analytics. total returns in sterling, from start of manager tenure in 2008 to 7 August 2018.