Investing like 007
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In the immortal words of Lord Alfred Tennyson, it is better to have loved and lost than never to have loved at all. But, being realistic – and especially in the world of investing – this doesn’t necessarily mean it won’t hurt when ‘the right one’ leaves your portfolio too soon, or perhaps never even enters it in the first place.
In the spirit of Valentine’s Day, we lament the ‘shoulda, woulda, coulda’ stocks that still haunt three FundCalibre Elite Rated managers, and the lessons they have learned from their experiences.
ARM Holdings – the British smartphone chip designer – hit the headlines in 2016 after it was acquired by Japanese telecoms giant SoftBank Group in a £24bn deal. At this time, shares were valued at 1,700p.
Anthony Cross, who heads up Liontrust Special Situations, sold the fund’s shares in the company at 130p in 2009, in a move which he admits was the result of being too sensitive about near-term valuations.
“We judged the company to be too expensive and the lesson learnt was not to ignore the power of
compounding,” he admitted. “As long as a company has strong barriers to competition that can sustain high returns on capital, then let it quietly work away for you.
“We now treat valuation as a key part of our initial purchase of a company. This is after assessing its intellectual capital barriers to competition and the company’s returns on capital.
“Once a company enters the fund we are now much more relaxed if it becomes expensive. We are looking for compounding to erode this expensiveness and, in the long term, allow the company to deliver great returns.”
James Clunie, who runs the Jupiter Absolute Return fund, often holds more ‘short positions’ – which is when the manager actively bets against a company performing well – in order to generate better returns relative to the broader market.
One stock he wished he had shorted but didn’t was South African retail holding company Steinhoff International Holdings, which came to his attention in 2016 when it bid for retailing company and mattress store Mattress Firm – a US stock which Clunie already held a short position in.
“On our analysis, Mattress Firm looked over-indebted, operating in a competitive field and had a falling share price,” the manager explained. “Steinhoff bid at a premium of more than 100% for the shares – we’ve almost never seen such largesse. When one of our over-priced shorts is bid for at a big premium like this, we look closely at the acquirer and see if we should short that stock in turn.
“Usually we wait a few months, so that any accounting ‘noise’ is cleansed, and we can see the true picture of the firm’s health. That was our plan with Steinhoff. But what happened is that Steinhoff’s leverage and ‘unconservative’ accounting led to a denouement for the firm. The company ‘unravelled’ and the share price collapsed before we had shorted it.
“We’re still annoyed at the missed opportunity, because we strongly sensed that this stock would be a good short-sale eventually, but we failed to act in a timely manner.”
Jonathan Pines, who heads up Hermes Asia ex Japan Equity, owns a number of Asian tech giants in his fund including Alibaba and Baidu. However, the largest individual constituent of the MSCI Asia ex Japan index – Chinese conglomerate Tencent – is missing from his portfolio.
Shares in the $500bn giant have achieved triple-digit gains over one, three and five years, and Pines admits that not holding Tencent has been his “single biggest mistake”.
The manager avoided the company because he believed there were more attractive valuation opportunities in cyclical stocks – or stocks whose prices are affected by economic movements – as opposed to high-quality growth names.
While Pines admits that this may not have benefited his fund’s performance recently, he nevertheless believes it will reap the rewards over the long term.