Confidant Spring 2021

Acting for clients as they would want to act for themselves

Spring issue 2021

C O N F I DAN T Save | Plan | Invest

Levelling up

Breaking out

Investing wisely

Mastering craft

Paul Killik on improving market access, p4

Six stocks for better times, p8

Terry Smith’s top tips, p16

A young entrepreneur’s story, p22

Getting started Our wealth planning roundtable, p12

C O N TA C T S

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2 — Spring 2021

FROM THE EDITOR

Setting expectations Tim Bennett Head of Education The long period of lockdown we are now emerging from has been very challenging for many people.

However, for some it has been quite the reverse. Here is JD Roth, writing on the Blogsite getrichslowly.org, “At the end of January I had an epiphany… for the first time in forever, I felt completely content.” Sitting with his wife, reading a book and enjoying a glass of wine by the fire on a cold evening, with his children in bed upstairs, he muses, “when was the last time I was this happy?”.

His explanation for this unexpected state of bliss, achieved during a period of severe constraints on normal life, rests on the advice once given by US investor Warren Buffett’s longstanding investment Partner, Charlie Munger – “A happy life is very simple. The first rule is low expectations.”

His observation could easily be misconstrued as a call to embrace laziness, or a lame excuse for failing to fulfil your potential. That, however, would be a misinterpretation, as striving for excellence is also very

much part of Munger’s world view. No, what both he and Roth are suggesting is that, whilst we should set the bar as high as we can in terms of our dreams and life ambitions, we should also be realistic and remain sanguine when we do not get everything we want, exactly when we want it.

I think the secret to achieving that tricky balance is to aim for wealth in the widest and original sense of the word. Interpreting it as meaning wellbeing, happiness and contentment allows people to set their personal goals at the right level and build an achievable plan that will deliver the financial means to attain them.

This is harder than I make it sound here. Perhaps that is why too many young people, in particular, faced with daunting challenges such as getting onto the property ladder, building some savings for the short to medium term and accumulating a fund that will support them through life after work, procrastinate or bury their heads in the sand. That is a shame, as in doing so they store up considerable financial

Avoiding this trap is largely about having the courage and foresight to get started when it comes to saving and investing, even from a small base.

Talking to someone can help. That is why in this issue of Confidant we feature a roundtable conversation between three of our wealth planners, including the Head of the Team, Svenja Keller (see page 12). Amongst a wide range of topics, they discuss what stops people from pulling together a simple plan that will set them on the route to achieving their life goals. As Svenja notes, one of the keys to unlocking this process is honesty. Without it, personal life goals can be distorted by the expectations of family, friends and colleagues. My Director of Studies at University once put it this way, “Be your own person and you will be a happier person.”

I hope you enjoy reading the article, along with the rest of this issue. ●

C OMING UP

SECURITIES IN THIS ISSUE

Analysing markets, p5

Antofagasta, Rio Tinto, BP, Shell, p7

Talking commodities, p6

TJX, LVMH, Estée Lauder, Diageo, p9

Watching inflation, p10 Managing tantrums, p19 Escaping lockdown, p20

anxiety for themselves later, having missed out on years of compound growth. Not for nothing is it dubbed, “the eighth wonder of the world.”

Airbnb, Disney, p8

LondonMetric Property, Trojan Fund, 3i Infrastructure, PGIM Keynes Systematic Return, p11 Nike, Starbucks, p18 Jet2, Restaurant Group, p20 Redde Northgate, p21 Spring 2021 — 3

PERSONAL VIEW

Harnessing the winds of change Paul Killik Senior Partner Paul highlights two key financial reviews and explains why they are critical to the future of both the London Stock Exchange and the UK economy.

This quarter, I want to focus on two important documents, which were both overshadowed by the recent March Budget. Taken together, Ron Kalifa’s Review of UK FinTech and Lord Hill’s UK Listing Review powerfully demonstrate the importance that the Government correctly places on reinventing our role in global finance.

Firing up FinTech Kalifa’s Review emphasises why young companies must be nurtured through their early years as they develop strength and maturity. He notes that, although we are global leaders in this space, other countries envy our success and we must fight to stay ahead.

He then makes recommendations in five areas, including the key ones of regulation, skills, and investment.

Whilst I would like to see all of them adopted by the Government, those centred on investment are arguably the most important. They encompass an expansion of research and development tax credits, Enterprise Investment Schemes and Venture Capital Trusts, alongside improvements to the UK’s listing environment.

Opening up access Meanwhile, the UK Listing Review proposes some big changes to the way companies raise capital here, including; enhancing the environment for firms seeking to go public in London, redesigning the prospectus regime, tailoring information to better meet the needs of investors, empowering retail investors whilst improving capital raising for existing listed issuers, and refining the listing process.

I hope the Government has the courage to be radical, in particular

when it comes to ending the distinction between institutional and retail investors. After all, why should the former be favoured over the latter?

I am therefore pleased to see the following statement under the second recommendation above, “The goal of reform should be an approach much closer to the one that existed in the UK before the Prospectus Directive and Prospectus Regulation.” It also states, “The recommended review should consider what can be done to increase retail participation for primary market issuances, both at IPO and for further issues.” Later, the Review goes on to recognise the controversial issue of pre-emption rights. Overall, I am glad that Lord Hill sees the need for retail investors to be treated equally and fairly when primary issues take place.

Introducing PrimaryBid His Review also stresses the importance of a digital solution that allows experienced retail investors to react at the same speed as institutional ones and also facilitates settlement. Fortunately, this already exists and we have a link to the underlying platform.

PrimaryBid offers retail investors access to a growing number of primary market issues (from which they have mostly been excluded in recent years) whether IPOs, Placings, or the rump of Rights Issues. Being left out is especially galling when a listed company holds a placing at a discount, which can be significant.

The traditional excuse has been that involving them is too cumbersome, expensive, and slow. However, PrimaryBid’s digital app-based technology, which bridges an existing custodian and issuing house, can quickly accommodate multiple underlying clients. Shareholders can then collectively make a significant

bid, with less administration, than they could individually*.

Rejuvenating the ORB My one disappointment is that the Government’s brief for the Listing Review was only to consider equities.

Historically, bonds have been listed too, and still are, in the Gilt market for instance. Notwithstanding current yields, they remain important tools in an investor’s armoury.

The Prospectus Directive was designed to prevent direct retail investor access to bonds and results in them being advised to buy bond funds instead.

However, a bond fund is not the same as a bond, as a fund loses visibility over key bond characteristics, such as the quality of the underlying credit, coupons and, most importantly, maturity dates.

That is partly why I have been a critic of them for many years.

My other concern remains that we may reach a point when the long bull market in bonds ends and triggers a rush for the exit. One-way selling pressure will cause “gating” (the inability to trade) at many funds. They will not then continue to be viewed as quite such a safe haven.

Fortunately, there is an alternative. Ten years ago, during Xavier Rolet’s tenure as CEO at the LSE, the Order Book for Retail Bonds (ORB) was launched. I was proud to have been involved – it started well and attracted some prestigious issues. However, the Prospectus Directive eventually got in the way and it has subsequently withered. A more flexible and less expensive approach to the issuing process could, nonetheless, bring it back to life. I believe ORB could become an invaluable resource for the UK’s SMEs and the many retail investors who are desperate for income. As a closing thought, we could go one step further and introduce a single Sterling Debt Market under a simplified and less expensive listing regime. ●

*To find out more about PrimaryBid, please speak to your Investment Manager or call Daniel Gallagher on 020 7337 0598.

4 — Spring 2021

Q U A R T E R LY R O U N D U P

Asking the right questions Rachel Winter Associate Investment Director Our weekly Market Update presenter analyses some of the key events from the last quarter and what they mean for investors.

Stopping the games One of the biggest stock market stories from the last three months was the so-called “GameStop saga”. This firm, a traditional US high street video game store operator, came under pressure when hedge funds started to short its shares (a bet on the price falling), confident that the company would go the same way as video rental chain Blockbuster.

However, an army of retail investors, largely co-ordinated through the social media platform Reddit, conspired to buy the shares in an attempt to move the price up sharply. On the other side of this trade, hedge fund Melvin Capital stood out for all the wrong reasons, by losing 53% of its value (about $4billion) as a result.

The plot then thickened. Huge numbers of these retail investors had used a single online broker, Robinhood, to execute their orders. Like its peers, this trading app is required to hold a certain amount of capital with the DTCC (the main US trade clearing organisation) in proportion to the outstanding value of its clients’ trades.

This is designed to protect the rest of the market against a potential default.

The sheer volume of GameStop orders meant that, at one point, the online broker was forced to stop accepting new purchase orders while it raised additional emergency cash as collateral. This freeze triggered rapid losses for the many retail investors who had hopped onto the bandwagon late.

The whole episode is now being investigated by the US regulator and raises many important issues.

These include the role and rights of short sellers and whether the mass co-ordination of GameStop orders

counted as market manipulation.

A wider debate has also begun around the potentially dangerous rise in retail investor interest in single stocks and whether it is contributing to higher levels of market volatility.

Pounding away Currency movements have had a notable impact on portfolios recently.

Back in March 2020, investors fled to the safety of the dollar as the coronavirus took hold, such that the $/£ exchange rate plunged to just 1.15. However, after December’s last-minute Brexit agreement, the UK currency put in a sterling performance – by February one pound bought 1.41 dollars. A stronger pound may be good news for foreign holiday hopefuls, but it is less so for UK-based investors with overseas holdings and underscores the importance of positioning longterm capital correctly and diversifying across the currency spectrum.

The past quarter has also started to reveal the shape of the post-Brexit economic landscape. International businesses have complained of excessive checks and bureaucracy.

Meanwhile Andrew Bailey, governor of the Bank of England, has criticised the EU for trying to take financial services business away from the City. The good news is that the Government’s progress in procuring and administering coronavirus vaccines puts us far ahead of the EU and could be an early test case for the longerterm benefits of being able to operate outside of its political constraints.

Powering change Another key quarterly landmark was the Crown Estate’s auction of new seabed rights for UK offshore wind farms, with a total of six sites up for grabs. There were two key takeaways for investors. The first was the participation of Big Oil – consortiums involving BP and Total were successful

bidders. This shows their commitment to move into the renewable power arena. The second was the bumper prices paid for the auctioned sites, with the winning bid in one case 65% above its nearest rival. Such price enthusiasm has triggered concerns that it will become more difficult to make a profit from wind farms in the future, which is why shares in some renewables firms weakened following a big rally over the last few years.

Watching inflation Low inflation has been a constant backdrop over the last decade, however investors are now weighing up how much longer this will last. Key factors include the potential for a postlockdown spending surge and the impact of further government stimulus.

Joe Biden’s $1.9 trillion package has now been signed into law and includes $1,400 being sent directly to 85% of American adults.

The unattractiveness of fixed rates of return, when inflation is on the rise, was evidenced by a notable sell-off in longer dated government bonds.

The benchmark 10-year treasury yield, for example, rose from 0.55% in May 2020 to over 1.5% in March 2021 (see page 19). Meanwhile, sectors that have historically offered protection against inflation, such as mining, have experienced sizeable inflows (see page 6).

Inflation concerns have in turn led to speculation as to whether central banks will raise interest rates. This has been reflected in growth stocks giving up some ground, with the technologyfocused NASDAQ composite undergoing a correction (defined as a 10% fall) in February. For investors, this reinforces the importance of diversification and achieving the right balance between growth, cyclical and defensive stocks. ● Spring 2021 — 5

THE BIG PICTURE

Tracking commodities Andrew Duncan Senior Equity Analyst Andrew weighs up the recent price surge seen right across commodities markets and assesses the outlook based on three of the world’s most heavily traded ones; copper, iron ore and oil.

Commodity prices have been on a rollercoaster ride. The onset of the COVID-19 pandemic in early 2020 saw prices plummet as the sharpest economic contraction on record triggered big falls in demand.

Between the start of the year and the point where they hit their lows last March, copper prices fell around 25% and iron ore by about 20%, while the oil price plunged over 70%. Since then, however, many commodities have experienced a rally that has taken analysts by surprise – at the time of writing, copper and iron ore prices have more or less doubled, with oil up 200% (see chart). Investors are therefore right to wonder what lies ahead.

Oil, copper and iron ore price (indexed)

Reflating demand The recent and rapid “reflation trade” has been driven by several factors.

These include; a weaker US dollar (the currency in which most commodities are quoted), the anticipated release of pent-up consumer demand, spurred by the unlocking of “forced” savings, and accommodative central bank policies coupled with unprecedented stimulus measures from governments.

This optimistic backdrop has led some commentators to suggest we might be at the start of another “commodities super-cycle”, similar to the one witnessed in the 2000s and early 2010s. That extraordinary period is worth briefly revisiting.

Comparing notes Demand for hard commodities, such as copper and iron ore, has always been closely linked to economic growth. By some estimates, a 1% increase in GDP demands an increase in the quantity of mined materials of around 2%. Oil prices still show a close correlation to growth too, despite oil consumption declining as a percentage of GDP since the 1970s.

During the previous commodities boom, China’s economy acted as the strong rising tide which lifted all boats.

Growing at an average rate above 10% per year between 2000 and 2010, it drove a super-cycle that was largely “commodity-agnostic” in that prices rose across the board in unison.

250

200

150

100

50

Oil (Brent)

6 — Spring 2021

Iron Ore

31/01/2021

28/02/2021

31/12/2020

30/11/2020

31/10/2020

30/09/2020

31/07/2020

31/08/2020

31/05/2020

Copper

30/06/2020

31/03/2020

30/04/2020

29/02/2020

31/12/2019

31/01/2020

0

Post-pandemic, however, we think that the outlook for the next decade is likely to be more nuanced when it comes to individual commodities. Over the medium term, some price support will come from the ongoing fiscal

stimulus in developed markets. This will underpin infrastructure spending and the drive towards decarbonisation.

Yet, whilst their emerging market peers may be expected to grow faster than global averages, it is unlikely that China in particular can sustain growth at the sort of breakneck speed we have seen in previous decades. The OECD predicts annual GDP growth closer to 4% to 2030, well below the sorts of rates achieved in the past. So, what will this longer-term backdrop mean for our three illustrative commodities?

Copper – renewing enthusiasm Thanks to its ability to conduct electricity, copper is seen as crucial to the electrification of many industries.

It will therefore play a key role within several secular growth themes over the next few decades. These include increasing urbanisation (especially in emerging markets), alongside the ongoing decarbonisation of key industries which include the power and automotive sectors. Generating renewable power, for example, requires up to fifteen times more copper than traditional sources, notably in the booming offshore wind industry. Bernstein analysts estimate that the combined demand from wind, solar and hydropower will grow 8% annually for the next

THE BIG PICTURE

renewables as part of a global drive to decarbonise. Indeed, it seems likely that the pandemic has brought forward peak oil demand, which had previously been pencilled in for 2030. That helps to explain why BP’s annual energy outlook published in September 2020 estimates that, based on their “business as usual” case, demand will recover from a COVID-related trough in 2020 but then plateau.

decade. Meanwhile, the batteries needed for electric vehicles require around three times more copper than traditional internal combustion engines. In combination, therefore, renewable power and electric vehicles demand alone could account for as much as 26% of copper supply by 2030, up from just five percent today.

Normally, you might expect this sort of demand surge to spur greater investment in supply. However, there appears to be a lack of large-scale greenfield projects on the horizon, especially in the context of the increasingly stringent ESG considerations that apply to new investments.

In summary therefore, we see a credible path to durably higher longterm copper prices. That is why we still favour one of the world’s largest pureplay copper miners, Antofagasta.

Iron Ore – drifting demand As the key ingredient in steelmaking, iron ore is crucial to the construction and manufacturing industries.

As such, it is essential to infrastructure investment, as well as ongoing emerging market urbanisation and GDP growth. However, with growth rates slowing in China, which accounts for roughly half of all iron ore demand, we see less scope for a new iron ore super-cycle.

In terms of market dynamics, solid (if unspectacular) demand growth to 2030, driven by robust global GDP, will be offset by improving iron ore supply over the next couple of years. For example, a planned return to normal production at Vale, the important Brazilian iron ore miner, will see it target lifting production growth up from a level of around 300 million tonnes in 2020 to more like 400 million. This could mean that, although the iron ore price is close to a 10-year high of $170/tonne, it could trend back down towards the longer-term average over time.

That said, if higher-than-expected demand materialises in the coming years, or the market suffers any further supply disruptions, prices could remain elevated for a longer period. Either way, we remain positive about mining giant Rio Tinto, given its ability to generate low-cost ($30 per tonne) iron ore. With world-class assets in Western Australia, the company should be able to maintain its outstanding track record when it comes to generating free cash flow and shareholder returns.

Although we are sanguine about long-term oil prices, we still see value in two of the UK’s leading producers, BP and Shell. Both have low-cost operations and conservative capital allocation plans that should generate robust cash returns to shareholders as we return to a more stable price environment. Importantly, the two firms also have credible plans to participate in the future green economy.

Oil – peaking soon 2020 triggered a perfect storm for the oil market, as a price war between Saudi Arabia and Russia coincided with the accelerating spread of the COVID-19 pandemic in March. Since then, however, prices have staged a very strong recovery, and currently trade close to the levels seen at the beginning of 2020. Ongoing OPEC+ production cuts, alongside disruption across the US shale industry, have helped, whilst demand has bounced back and is set to continue to improve throughout 2021 and into 2022. The ongoing post-pandemic recovery in the transportation sector will be particularly important – according to data from BP, it accounted for almost 60% of liquid fuels demand in 2018.

Looking further ahead, however, our view on the oil industry is less exuberant than this upward price swing might suggest. That’s because structural headwinds persist, including an ongoing shift towards

For more information on any of the companies mentioned in this note, please contact your Investment Manager. ● Spring 2021 — 7

EQUITY RESEARCH

Opening up Mark Nelson Senior Analyst Mark highlights six consumer-focused shares that should benefit as the world emerges from lockdown. Please speak to your Investment Manager to find out more.

It is just over a year since COVID-19 became a major global health risk. The economic impact of the subsequent pandemic has been felt in every corner of the planet, resulting in GDP declines during 2020 that were the deepest since the Second World War. The largest vaccination program in world history is now well underway and the latest round of lockdowns appear to have been successful in lowering infection rates. The resultant gradual reopening of economies has led to cautious optimism for a return to some sort of normality in the coming quarters.

Taking stock Whilst some parts of the economy may have been permanently impaired by what has happened, we believe that other badly affected sectors and industries will bounce back strongly.

Economic growth forecasts for 2021 and 2022 are promising (chart 1) in part thanks to unchallenging comparables, but also because of the potential for a big boost in consumer spending. Massive fiscal and monetary support from governments and central banks has set the scene for an unlocking of “forced” personal savings (chart 2). The impact is estimated to be as much as $1.5tn in the US alone, with close to another trillion dollars added by mid-2021.

8 — Spring 2021

Chart 1 – World Output (real GDP, annual percent change) 6 5 4 3 2 1 0 -1 -2 -3 -4 2020

2021

2022

Source: IMF estimates and projections. World Economic Outlook, January 2021.

Chart 2 – US Personal Savings ($bn, monthly and seasonally adjusted) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020

Source: U.S. Bureau of Economic Analysis.

We believe that this wall of money, coupled with pent-up demand for experiences and social interaction, could support strong spending in certain parts of the economy including travel, restaurants, and leisure activities.

After all, a century ago the world emerged from World War One, and one of history’s deadliest pandemics, into the “Roaring Twenties” – a decade of economic prosperity and consumerism.

And although an exact repeat is unlikely, we do expect that as economies reopen, many pre-pandemic activities will resume with a vengeance. Here are six of our covered stocks that we think stand to benefit over the coming years.

Airbnb – hosting growth Restrictions on travel hit Airbnb hard.

As an online platform, which enables hosts to provide guests with access to properties and experiences around the world, it felt the effects of the pandemic directly. During March and April 2020, its “gross booking value” turned negative as the value of cancelled trips exceeded that of new ones booked.

We nonetheless expect the company to be one of the long-term winners in the travel sector. It is, in our opinion well positioned to capture any immediate rebound. That is because Airbnb enjoys some key competitive advantages, including a powerful network effect which will support both revenue growth and profitability over the coming years. Meanwhile, the company’s breadth of listings, alongside the flexibility of its platform, has seen business recover more strongly than at some of its travel sector peers. It has also helped it to benefit from the relative resilience of domestic travel and long-term stays.

Disney – riding higher The Walt Disney Company is another business that has experienced significant disruption from the impact of COVID-19 on travel. The most obvious one was the closure of its theme parks, which drew around 156 million visitors in 2019. Disney owns eight of the top ten most popular parks worldwide, as well as six of the top nine in North America.

However, there are now signs of green shoots emerging. At the locations it has been able to reopen with limited capacity, guests have consistently demonstrated a willingness and desire to visit, seemingly confident in the health and safety protocols the company has

put in place. For example, average daily attendance at Walt Disney World in Florida grew significantly from the third quarter of 2020 to the fourth quarter.

Meanwhile, per capita spending was also up double-digits year-over-year and consumer sentiment around future visits remains strong. That is why we expect the company to be a key beneficiary as the global economy breaks out of lockdown.

TJX – looking good As the world’s largest off-price retailer, with over 4,500 locations globally, TJX sells high quality, fashionable, brandname and designer merchandise at prices that are generally 20-60% below those of full-price retailers. Given that the economics of this “off-price” model, in which TJX is the market leader, are relatively hard to make work online, the firm has historically generated most of its revenues through its stores. The pandemic has, unsurprisingly, had a significant impact on this business with revenues and earnings down significantly during 2020.

Now though, we expect it to recover strongly as economies continue to open-up. At the stores that have been able to reopen, comparable sales have recovered well, suggesting that consumers remain attracted to the TJX value, “treasure hunt” offering.

Furthermore, we expect off-price retailing in general to continue to take a greater share of overall global retail spending. TJX will be a specific beneficiary as other retailers struggle to shift unsold inventories and as brands look to support revenues by producing products for sale within its stores.

That is why the company remains one of our top picks in global retail. Its highly differentiated, flexible business model should be capable of producing growth and solid returns on capital.

LVMH – bubbling up The luxury goods industry is heavily exposed to spending by Chinese nationals, particularly those travelling abroad. The whole sector was therefore

EQUITY RESEARCH

hit hard by the outbreak of coronavirus in China at the beginning of 2020 and the restrictions that subsequently rippled out across the world.

LVMH is the world’s largest company in its space, operating across six different subsectors. The Fashion & Leather Goods division proved remarkably resilient last year as its two leading maisons, Louis Vuitton and Christian Dior, gained market share while increasing prices to offset a reduction in volumes.

Other parts of the business continue to be cowed by the pandemic, but we expect to see their operating performance improve as lockdowns end.

Perfumes & Cosmetics will benefit from a resumption of social activities, while Wines & Spirits and Selective Retailing – which includes the duty-free retailer DFS – will pick up as the on-trade channel reopens and international travel resumes.

Finally, the Watches & Jewellery division will be bolstered by the completion of the acquisition of Tiffany & Co, where we expect LVMH to improve what has been an underperforming business in recent years.

Estée Lauder – smelling success This global leader in prestige beauty owns brands such as Estée Lauder, Clinique, La Mer, MAC, and Bobbi Brown. It focuses on four key business segments: Skin Care, Makeup, Fragrance, and Hair Care. The first two of these provide another good illustration of how binary this crisis has been in commercial terms.

On the one hand, Skin Care has recovered strongly from the initial impact of the pandemic, posting 25% year-on-year growth in the three months to 31 December 2020. Estée Lauder’s online pivot in this space was critical to offsetting declining sales through travel retail channels.

By contrast, limits on social activities, such as trips to bars and restaurants, and an increase in working from home, hit demand at the Makeup division hard – net sales of all of its brands dropped during the most recent financial quarter.

We nonetheless believe that over the medium term a reopening of the global economy will return Makeup to the sort of consistent mid-single digit sales growth it achieved prior to the crisis. This will follow what could be a stronger short-term performance on the back of pent-up demand. With China accounting for around one third of beauty sales, including spending

by Chinese tourists through travel retail channels, the resumption of international travel should also boost the overall business.

Diageo – distilling profits Diageo is one of the world’s largest drinks companies. That is thanks to its ownership of some highly successful and instantly recognisable spirits and beer brands, including Johnnie Walker, Smirnoff, Captain Morgan, and Guinness. Having been knocked back by the pandemic, we believe that it represents a great reopening play.

The industry’s so-called “on-trade”, which is focused on pubs, bars and restaurants, was one of the worst affected areas of the economy. For example, by some estimates it declined in the US by over 60% between March and June 2020. Although sporadic reopenings have helped in some pockets of the world, many venues remain closed, or are operating at well below full capacity. Meanwhile, restrictions on global travel continue to impact Duty Free retail spending.

Yet, with its leading portfolio of brands, that are enjoyed at social occasions both inside and outside licensed venues, we believe that Diageo should see strong sales growth as we head back towards normality. Indeed, pent-up demand for social interaction and experiences could trigger a significant sales boost in the short-term, as consumers look to compensate for a year in which key events, such as weddings, sporting events and live music, were greatly curtailed or disappeared altogether.

Further, the cost-saving measures taken

by Diageo during the last year should help to drive margins and profit growth over the medium to longer term. ● Spring 2021 — 9

FUND RESEARCH

Rising concern Gordon Smith Head of Fund Research

Chart 1: Total Assets of the Federal Reserve in $trn 8

Looking East

5 4 3 2

2019

2020

2017

2018

2016

2014

2015

2013

2011

2012

2010

2009

1 0

Source: Federal Reserve.

Lifting the lid

Reinventing normality The reaction of governments and central banks to the unique COVID-19 crisis since last Spring has triggered much speculation about whether we are witnessing a new chapter for monetary and fiscal policy. The recent expansion of their balance sheets (chart 1) may not be a new phenomenon but this time it does look different. The Quantitative Easing (QE) undertaken in response to the last financial crisis in 2009 saw the transfer of liquidity largely onto bank balance sheets. Last year, however, 10 — Spring 2021

However, for long-term investors what matters is whether this all adds up to a short-lived spike, or a longer-term shift in growth expectations across the global economy. That is why the debates around the level of inflation deemed acceptable by central banks as they attempt to ward off deflation, and whether the economic crisis has changed fiscal policy for good, is likely to persist for some time.

7 6

2007

Inflation or deflation? That is one of the trickier questions facing investors. On the one hand, significant deflationary forces continue to weigh on the global economy, including the near-term impact of a pandemicrelated slow down as well as longer term factors, such as the acceleration of technological innovation. Arrayed against those are the extraordinary and inflationary stimuli applied to markets across the world in 2020.

Against such an unprecedented backdrop, investors may wish to consider whether they need to build some inflation protection into their portfolios. That is why this quarter I want to flag four funds that can offer it.

the introduction of furlough schemes and new types of stimulus packages, such as the one recently signed into law in the US, represented a change in the type of response, to include placing money directly into the hands of consumers.

2008

Gordon explains how investors can position themselves should inflation make a comeback.

When weighing up inflation, it is worth remembering that it is ultimately a function of both the supply and velocity of money (being the speed at which it moves around the economy). The former accelerated once again in 2020, however the ultimate impact of recent policy decisions on the latter remains uncertain.

Over the short-term, we expect inflation data to be most sensitive to the success or failure of the various vaccine programmes, which will influence the timing and speed of the reopening of economies. Other factors are in play too, however, such as the rebound in energy prices. This suggests that there is clear potential for a significant short-term increase in economic activity from extremely low comparable levels last year.

By way of a precedent, Japan’s experience of persistently anchored prices is often cited to counter the argument for long-term inflation emerging across the rest of the developed world. However, a piece of work carried out by UK economists, Charles Goodhart and Manoj Pradhan, “The Great Demographic Reversal” suggests this ignores the impact of a slower moving, longer-term influence – a decline in the working age population.

Their broad thesis is that population growth has been a primary factor in dampening inflation, alongside nominal and real interest rates, for three decades.

Now though, that downward pressure is reversing because we have reached a point where the number of working age people in China and much of north Asia (both responsible for flooding the labour market over the last two decades), are going into absolute decline. Meanwhile, recent equivalent growth elsewhere in the developed world is noticeably slowing. The conclusion they draw from this is that the bargaining power of labour is set to improve markedly, leading to higher real wages and inflation.

The fact that global inflation levels have been on a multi-decade

FUND RESEARCH

downward trend (chart 2), should therefore not blind investors to the cumulative effect that a resurgence could have on the value of their wealth, even at relatively low levels.

But what can they do about it?

Chart 2: World Consumer Prices (% change)

The table below summarises four funds from our coverage list, which are also constituents of our Alternative Allocation and Alternative Income Managed Services. These aim to provide protection against future inflationary scenarios within portfolios. Please speak to your Investment Manager for more details on any of these strategies.

Income & Growth

Growth

LondonMetric Property (LMP-LON)

Trojan Fund

Fund Type

Real Estate Inv Trust

Fund Type

Open Ended Inv Co

Asset Manager

Self-Managed

Manager(s)

Sebastian Lyon

12

Manager(s)

Andrew Jones & team

Fund Size

£5.28bn

10

Market Cap

£1.95bn

Ongoing Charges

0.87%

Historic Yield

4.0%

Historic Yield

0.5%

14

8 6 4 2 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

0

Source: World Bank.

Building defences From a portfolio perspective, businesses with strong pricing power (the ability to raise prices without sacrificing demand) can offer protection over long holding periods. Investors need to be ready to weather increased volatility, however, particularly amongst highly rated stocks, as market assumptions about the value of future cashflows are recalibrated. Aside from equities, other assets that have proven their worth in the past, albeit to an extent that is determined by the prevailing backdrop, include; property, infrastructure assets, commodities, inflation-protected securities (such as TIPS) and gold.

The success, or failure, of investments in each of these areas will depend on a number of factors, including the specific drivers of inflation over a given period and how the response from monetary policy makers impacts real yields (the nominal yield on bonds minus the rate of inflation). Building a combination of differing strategies, therefore, seems to us to provide the best protection against a range of inflationary scenarios. These are exhibited, to varying degrees, by the four funds highlighted in the table opposite. ●

Key fund data and charts

LondonMetric’s strategic focus is on owning desirable real estate, aligned to sectors that are supported by structural trends. The portfolio is principally invested in distribution assets, from small urban logistics units to regional and mega distribution assets located on major arterial routes. Around two thirds of the related income is subject to contractual uplifts, with the remainder coming largely from urban logistics assets where constrained supply and strong demand is driving strong open market reviews.

Risk Rating: 6

The Trojan Fund aims to achieve capital preservation and growth, in real terms, over the long term. The Fund can invest globally in equities, fixed interest securities and cash, as well as cash equivalents, including gold.

The current allocation to inflation-protected government bonds and gold remains high as the management team believe that the fiscal and monetary tools used to stimulate the economy will become increasingly unorthodox. This suggests that real yields will continue to drop.

Risk Rating: 4

Share price, total return (last five years)

NAV, total return (last five years)

200 180 160 140 120 100 80

2016

2017

2018

2019

2020

2021

Income & Growth

135 130 125 120 115 110 105 100 95 2016

2017

2018

2019

2020

2021

Absolute Return

3i infrastructure (3IN-LON)

PGIM Keynes Systematic Absolute Return

Fund Type

Investment Company

Fund Type

Open Ended Inv Co

Manager

3i Group

Manager

QMA Wadhwani

Market Cap

£2.63bn

Fund Size

£113m

Ongoing Charges

2.24%

Ongoing Charges

0.94%

Historic Yield

3.3%

Historic Yield

0.0%

This London-listed Investment Company aims for income and capital growth through a portfolio of unquoted infrastructure businesses and assets.

The portfolio is focused on businesses that have a strong market position. This means they have an asset base that they own in perpetuity, operate within regulatory frameworks, or provide essential services and generate stable cash flows underpinned by long-term, often inflation linked, contracts. Risk Rating: 6

This absolute return fund aims for an attractive return on capital while attempting to limit the risk of loss. The strategy has a targeted return of LIBOR plus five percent, with volatility of seven percent and is one of the more agile and nimble we have under our research coverage. A focus on monetary policy and economic signals indicates that the fund is alert to emerging inflationary pressures and is positioned accordingly. Risk Rating: 5

Share price, total return (last five years)

NAV, total return (last five years)

210 200 190 180 170 160 150 140 130 120 110 100 90 2016

2017

2018

2019

2020

2021

140 135 130 125 120 115 110 105 100 95 90

2016

2017

2018

2019

2020

2021

All chart data source: Bloomberg. Chart data to 31 March 2021. For details of the Killik & Co risk rating system, please refer to page 15. Figures stated gross. Past performance does not guarantee future results.

Spring 2021 — 11

W E A LT H P L A N N I N G R O U N D TA B L E

Getting started Svenja Keller, Will Stevens and Dan Fellows

At a client webinar earlier this quarter, our Head of Wealth Planning discussed why we all need a financial plan and how to pull one together with two of her colleagues. Here are the highlights. For more information about future events, please email events@killik.com

What is planning all about?

a client might need, whereas others are limited to either planning or investment advice. As a result, people that approach us for the first time have often previously been faced with a confusing array of independent financial advisers, or specialists connected with a larger firm. The simple truth is that not every firm in the market offers the same type of advice.

Svenja: I split our role into two parts – understanding the big picture, and then mastering the detail. The former involves trying to help our clients to identify what they want from their lives, and how a financial plan can help them to achieve it. Key stages include; making long-term projections, setting an overall strategy and then creating a roadmap. Only then can we delve into the detail and decide on the right products and structures that will move them along it in a tax-efficient manner, taking their personal circumstances into account.

At Killik & Co, we strongly believe in a two-specialist approach. The complexity of some aspects of the financial advice world means that it is nigh-on impossible for one person to know everything. That is why we have separate Investment Managers and Financial Planners (which we sometimes label “Wealth Planners”) working closely together to offer a broad range of services under one umbrella. Their skill sets are very different, but in combination they bring a huge amount of knowledge and experience to the table.

Typically, we will be looking at how they can effectively use tax wrappers such as pensions, ISAs, or some of the more complex options, such as offshore bonds and trusts. It is important that we understand how each component within their overall strategy will be taxed so that we can reduce the total burden. As part of this process, we will carry out a review of any existing products and wrappers they may have so that we can clearly set out our views on their current position and make personalised recommendations for the future.

Naturally, I am a big believer in this approach, but I always remind people that our way of doing things is not the same as everyone else in our space.

Sadly, new clients are not helped by the fact that the industry we work in has not evolved in the most straightforward way. For example, some advisers can provide everything 12 — Spring 2021

When do people tend to seek your advice?

Will: Different planners will have their own take on the answer to this question because what we do can be

applied in many diverse situations to resolve a wide variety of challenges.

Most of my clients are trying to balance multiple financial objectives.

For example, they may be saving long-term to fund themselves once they reach the point at which they decide to either stop full-time work or dial it down. This increasingly includes funding the later phases of life, when they may need to make major adjustments in terms of the way they live. In the meantime, they also need to be sure that they are sufficiently liquid, in cash terms, to meet their current commitments, which could be anything from school fees and university costs to property renovation or travel.

There is clearly a balance to be struck and we can help to clarify what can be quite a complex financial picture with different objectives all competing to be funded at multiple points in time.

We can steer clients through the various trade offs they may need to weigh up to ensure that their short, medium and long-term goals can be covered without incurring a shortfall or depleting their lifetime savings. For example, they may not fully appreciate the impact that a decision about a property upgrade, or private school fees, could have on their current lifestyle (if it means, for example, that both partners need to work full time) or the timing of their full, or partial, retirement. On a brighter note, I also meet people who have worked and saved hard all their lives, but have not yet realised that their goal of reducing the time they spend working is closer to hand than they think.

Dan: My phone often rings when people suddenly come into a

P E R S O N A L V I E WW E A L T H P L A N N I N G R O U N D T A B L E

large sum of wealth. The most obvious example is an inheritance.

This can be quite intimidating for someone who has not had to manage a substantial sum in the past. It can also create mixed emotions – in the absence of a specific stipulation from the deceased should they, for example, use it to accelerate their departure from full time work, plan to leave it to their own children, or a bit of both?

Business owners are another example.

They may have done a fantastic job in growing a firm and managing dividends and other withdrawals with the help of an accountant. However, when it comes to dialling down their involvement, perhaps through a full, or partial, disposal of their interest in a business, they will seek our guidance when it comes to deciding what to do with both the rest of their lives and the capital they are about to receive.

A third situation where a sizeable lump-sum may be involved, is divorce. We are sometimes brought in early in the process for pre-divorce planning, where a couple are seeking to split their combined household assets as tax-efficiently as possible.

Alternatively, we might be engaged further down the line once a decree absolute (the document that legally ends a marriage) has been signed and the relevant assets are being shared out. For some people, this may be the first time they have taken control over their own finances, either fully or at all. Suddenly, they need to start providing an income for themselves and perhaps their children, while making decisions about where they will live and how much they can afford to spend on setting up a new home.

Svenja: I would echo Will and Dan, in that we are asked to advise clients in a very wide variety of circumstances.

That is one of the things I love most about the job. Another area that I often get involved with is intergenerational planning. Many people are fortunate enough to be able to provide not just for themselves, but also their children

quite a difference to the tax-efficiency of a financial plan over the long-term.

Is there a difference between when planning is used, and when it should be?

and grandchildren. The challenge is minimising the tax leakage that is created by the need to pay inheritance tax on each generation’s wealth. There are specific things we can do to help here, but the starting point is often just a conversation around the assets someone has and how they plan to pass them on.

There are also decisions to make about how and when they would like their assets to be received by any beneficiaries. Some grandparents, for example, are keen to see money they give away used during their own lifetimes. Others worry that gifting large sums too early will take away the motivation from subsequent generations to work hard. Since these are personal considerations, our role is to try to facilitate a constructive dialogue between the different generations within a family as early as possible, and to help the relevant parties to put a plan together that everyone understands and is comfortable with.

This can involve some challenging conversations at times. For example, I may push back against someone making gifts too early, if I am not sure that they have thought hard enough about their own financial security, or given themselves enough of a runway to fully enjoy money that they may have worked very hard to acquire.

Some people live a lot longer than they expect and underestimate the amount they may need for themselves.

Whatever the situation, the key is starting the process early. That way we can, for example, make the most use of the smaller, regular allowances that make

Will: I would say “yes” in a lot of cases.

People are often unsure about whether, or not, they should engage with financial planning and that is exactly when a planner would recommend a conversation. The result may be a simple review of their current position, a few steers and an agreement to just keep in touch until they need more support.

The pity is that, on other occasions, people come to us later than we would have liked because the opportunity to maximise their use of certain allowances has passed and we then need to move at speed to make sure that they don’t miss out in the future.

That is why I urge people to at least check in with an adviser as early as possible. Even if they have only just started saving money, it gives us the opportunity to signpost things they should be aware of when it comes to being tax-efficient in the future.

Sometimes these are quite simple if they are connected with, say, someone moving up into a new income tax threshold, from basic to higher rate, or higher to additional rate. For example, if they are fortunate enough to see their annual income hit £100,000, then they should look at ways to minimise the impact of their personal allowance disappearing, as otherwise it can result in some eyewatering marginal tax rates.

Where these changes in income coincide with a promotion, or even a job move, the planning side of things may get forgotten unless we are kept in the loop.

I have also had quite a few people talking to me about starting their own businesses over the last few years.

The reasons vary, from fulfilling a lifetime dream to solving the problem of losing a full-time job and needing to generate an income. I find that although entrepreneurs may be very good at getting a business off the ground and nurturing its assets, they Spring 2021 — 13

W E A LT H P L A N N I N G R O U N D TA B L E

one of our colleagues on the investment side of the firm to ensure that a client has the right growth strategy in place.

Are people intimidated by advisers? often leave gaps when it comes to their own personal protection and that of their families.

We need to ask questions about whether all the business revenue is recycled, or if any of it is being used to provide some degree of future personal security. Relying solely on the eventual sale proceeds from a start-up can be tempting, but also very risky.

Dan: I agree with all of that and would urge anyone who is taking on financial commitments of whatever sort for the first time to come and talk to us. These may include signing up for a mortgage, getting married and having children – all are examples of important “tipping points” where someone’s financial circumstances may change quite radically as they begin to carry financial responsibility for other people, rather than just themselves. Children bring lots of big decisions into play around when, and to what extent, parents choose to help them financially. For example, I have some clients that offer support through the school and university years, but then leave them to fend for themselves. Others are keener to help them onto the property ladder as a priority. Then there are the families that can afford to do both, and also want to cushion them financially further out, perhaps through the use of trusts.

In all cases, the key to a good financial plan is to identify core goals and then break down the “big picture”, that Svenja referred to earlier, into more detailed and specific action points. For example, if children are to be offered help with school fees paid as a lump sum, we can review the timing and amount involved and then work out how to build it up in the most tax-efficient manner. We will often discuss this with 14 — Spring 2021

Svenja: I think they often are, yes. That is, in part, down to a misconception about what is involved.

Some people assume they will be bombarded with complicated spreadsheets and cash flow models from the off. But whilst modelling can be a very useful way to frame choices, it is the broader background research we do that most of our clients really get value from. Well before we get into the financial detail – a lot of which we can work on behind the scenes while they get on with their lives – we act more like coaches. A key part of our role is to ask the right questions and to not be afraid to deal with strong and differing opinions.

For example, I meet young people sometimes who feel they have been conditioned to do what is considered right for them by their parents or peers – marriage, children and a steady job are often on the list. However, when we dig down a bit, we often unearth the fact that their real dream is to start a business or enjoy the trip of a lifetime well before they settle down.

Whilst I would never want to come between different members of a family, I think it is important to properly understand what each person really wants to achieve. Otherwise, any plans and fancy models that are formulated later will rest on unsound assumptions.

What is the secret to successful planning?

Will: To build on Svenja’s last point, I think it is all about people being honest with themselves and with their planner and not just telling us what they think we want to hear. The old life plan, whereby someone goes to university, gets a steady job, has a family and then retires aged 65 just isn’t relevant to many people anymore.

Take the decision to go to university.

It is not always clear cut now, given that most people who do so will clock up a huge debt that their parents may have avoided. As for a conventional retirement, that is a pipedream for many young people, not just financially but also in terms of how they want to live their later lives.

Conversely, when we drill into the expectations of older generations, around spending money once they dial down work or sell a business, we sometimes find we can deliver a pleasant surprise by advising them that they can afford to spend more money than they thought, and sooner too.

The fact is that we need to be able to properly test some of the assumptions we come across, so that we can do the best job for our clients. The more honest they are, the easier that becomes. A good adviser will try to identify not just what someone’s objectives are, but also the underlying drivers.

This sets us apart from the firms who seem to start from the solution and work backwards. Personally, I have yet to meet anyone who wakes up wanting to consolidate their pensions, even though a chunk of the industry’s advertising suggests that many clients are desperate to do just that. It’s an approach that sends the wrong message that financial planning is just a one-size-fits-all administrative exercise. Done well, it is far more wide-ranging than that.

Dan: One obvious, but often overlooked, secret that lies behind both successful investing and planning is harnessing the power of long-term compounding. The earlier someone starts saving, and the less of their hard-earned money they give away to HMRC, the better off they will be. Tax leakage can occur in all sorts of ways, so it is important that income and capital gains tax allowances and shelters are used effectively too. We also encourage all our clients to carry

W E A LT H P L A N N I N G R O U N D TA B L E

out regular reviews as the rules have a habit of changing and therefore financial plans need to be adaptable.

Another aspect of good planning is to recognise that whilst tax-efficiency is a vital component, decisions must always be taken with an end-goal in mind. So, for example, if we know the level of what we call “peak savings” a client will need before they can start enjoying their wealth, rather than just building it up, then we can aim to get them there via the quickest but safest possible route. It is important that people keep their eye on this end goal and do not get drawn into the trap of thinking “if I just worked five years longer, I could add so much more to my savings”. They may be right about the amount, but why sacrifice that time unnecessarily when they could be enjoying themselves or spending more time with their children or grandchildren? I accept that a lot of people no longer want to fall off the job cliff into full retirement, but they need to be clear about when they will reach the point where they are working through choice, rather than necessity.

Svenja: Adding to that last point, one of the secrets to successful planning for me is flexibility. Over a 20, 30 or 40-year horizon an awful lot can change in someone’s life and circumstances. Too often I have seen people boxing themselves into a corner by trying to be super tax-efficient and snapping up every new product as it becomes available.

The problem is those same products might be quite rigid and tricky to unwind later. Better to keep things simple and to avoid any arrangement

that is difficult to understand or subsequently unwind. It is also important that our clients accept the trade-off between flexibility and tax-efficiency and therefore strike the right balance between the two.

What would be your single tip for someone new to planning?

Will: If in doubt, ask for advice. The initial conversation with a reputable planner probably won’t cost you anything and it is a good chance to start building both a relationship and the confidence to seek help later when things get more complicated, financially or emotionally.

In short, people shouldn’t wait until they feel they have to throw themselves in at the deep end because something has gone wrong.

Dan: Be wary of the quality of information on the internet. Beyond some very simple things, such as setting up an ISA, planning can get quite nuanced and the key to doing it successfully often lies in the detail, particularly when it comes to interpreting legislative changes.

Once people realise that they don’t know what they don’t know, our job becomes easier as they are less likely to cut corners and make mistakes.

If I had a pound for every scheme I have had to try to unwind for a client who was lured into it on the promise of some creative tax savings, I would be a wealthy man!

Svenja: My top tip would be not to be put off by the word “wealth”. It means many different things, a fact reflected in its origins in the concept of wellbeing. It is therefore important that people don’t assume that they need to start with lots of cash in the bank before they contact a wealth manager or planner. We deal with many types of individuals and, as we have hopefully explained here, we can help them in many ways, whether simple or more complex. Everyone has to start from somewhere, and we would rather be able to offer support from the beginning of their financial journey. ●

Killik & Co Security Risk Ratings All research recommendations are issued with a security-specific risk rating, represented by a number between 1 and 9. Assessing the relative risk of any security (specific risk) is highly subjective and may change over time. The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows: 1. Restricted Lower Risk Securities in this category are what we believe to be lower risk investments such as cash, cash equivalents and short dated gilts, and the collective investment vehicles that invest in those instruments.

2-3. Restricted Medium Risk Securities in this category are what we believe to be medium and lower risk investments including medium and long-dated gilts, investment grade bonds and certain collective investment vehicles investing predominantly in these securities.

4-9. Unrestricted Securities in this category are what we believe to be higher risk and are drawn from across the United Kingdom and international markets. These are normally direct equity investment and collective investment vehicles which predominantly hold securities other than investment grade bonds and money market instruments.

The vast majority of the Killik & Co Research recommendations are likely to fall in the unrestricted/ higher risk category (4-9) above.

For further details on the Killik & Co Risk Rating system please see the Killik & Co terms and conditions.

Spring 2021 — 15

FUND MANAGER INTERVIEW

Moving on Terry Smith CEO and CIO of Fundsmith Are we in a stock market bubble?

Terry reflects on the impact of the pandemic and explains why it has not altered his core investing approach.

After a bull run that has lasted over a decade, it is something that people undoubtedly worry about. However, I am more sanguine for two reasons.

What conclusions should investors draw from the last 12 months?

The period after the Spanish Flu of 1918/19 offers some insights. A terrible death toll triggered a big reduction in the workforce. That, in turn, led to the widespread adoption of the assembly line for mass production. The result was a huge increase in productivity – all sorts of household items became a lot cheaper to make and were therefore made more widely available.

Post-war spending completed a virtuous economic circle and ushered in the “roaring ‘20s”.

Fast forward and whilst there are grounds for pessimism when it comes to sectors such as hospitality, travel and traditional retail, the sheer pace and breadth of recent digital transformation, encompassing cloud technology, online business products and e-commerce across many others, is staggering. The impact has been obvious on everything from digital advertising, online retailing and electronic payments, to the way we work and access services ranging from medical advice to education.

If I had to pick an economic “letter” to sum all this up, it would be a “K”. Some areas of the economy will continue to power ahead whilst others seem destined to languish. The key, as an investor, is to therefore ensure you are positioned correctly.

16 — Spring 2021

How helpful is the technology label in 2021?

Not very. Take the so-called “FAAANS” – Facebook, Apple, Alphabet, Amazon, and Netflix. Although they are often lumped together, they are all very different businesses, spanning online entertainment, e-commerce, distributed computing (“the cloud”), social media, digital advertising and consumer devices. Each has its own distinct profile in terms of predictability, product longevity, returns and valuation. Equally, there is a world of difference between the payment services, accounting software and airline booking companies we own, yet they are often loosely badged as technology firms by some investors.

A more useful approach is to look at how well firms have innovated, regardless of their sector classification.

Look at retailing. Management teams that have failed to grasp the importance of developments such as digital advertising, the “social influencer” method of marketing, and e-commerce order fulfilment have been left behind. Meanwhile, the likes of L’Oréal went through ten years’ worth of change in ten weeks last Spring. They have grasped the importance of attracting a younger generation in key new markets such as China – to do that they cannot remain a pure bricks and mortar operation.

Firstly, in a world where the equity benchmark, the long bond yield, remains so low by historic standards, we cannot compare today’s higher share valuations to those 20 years ago.

In the absence of a step-change move in that yield, I do not therefore foresee an imminent cliff edge for share prices.

Secondly, the shift in the percentage of the average US firm’s assets that are intangible, as opposed to tangible, since the mid-1990’s raises a separate important point around valuations.

As a fund, we have always favoured intangible assets (whether intellectual property, goodwill, or unique licenses) as we think they can generate higher future returns than their tangible peers (plant, machinery and buildings). Yet, because the latter can be pledged as security to underpin bank loans, firms often borrow against them with the result that their balance sheets take on lots of debt relative to equity. That drives their returns and valuations because the associated interest expense, and often the asset depreciation cost, do not touch the profit number analysts focus on.

Intangibles, on the other hand, need to be funded with equity. Moreover, the costs of building and maintaining intangible assets, whether research and development, product development or digital marketing and promotion, are usually expensed against profits and operating cashflow rather than being locked into the balance sheet.

The net result is you simply cannot compare two firms using a conventional price to earnings (P/E) ratio, when one has adopted technology and e-commerce to build, say, a branded consumer goods empire whilst the other has stuck with a classic manufacturing and selling model. The adjustments required to make a valid value comparison will be subjective, but I agree with Sir David Tweedie who once said, “it is better to be roughly right than precisely wrong”.

The net result is that I think you can ascribe bigger multiples to businesses that carry a higher proportion of intangible balance sheet assets.

Is value investing “dead” as some claim?

Far from it. We do not believe that the type of growth investing we do can ever be fully separated from value principles. The misperception that it can arises, in part, because traditional value investing has been bent out of shape. In today’s market, asking “is this business trading on a low valuation?”, without considering what you are comparing it to (for example, its ability to deliver future growth and returns on capital) is pointless.

Pure value investing will have its time in the sun again but only once we enter a period of strong postrecession economic recovery, something we are not yet seeing.

It will also require some sort of runway for share prices. At the moment, even stocks that took a huge pandemic hit, such as IAG, are trading not too far off their all-time highs which does not leave much room for undiscovered upside.

PERSONAL VIEW

You need to know what level of return you expect on a pound invested in anything, whether a bank account, bond, share, or something else.

such, it also reveals something about the strength of a company’s defences against inflation, in terms of the extent to which they can pass on cost increases.

For me, it comes way ahead of earnings (or “EPS”) growth, something other investors get distracted by in my view. This happens because they focus too hard on making a quick profit – buying today and then flipping a share onto someone else.

Further, I use it to get an insight into a firm’s resilience. A high gross margin acts like a shock absorber. Take L’Oréal as an example again – their gross margin is about 80%, largely because cosmetics don’t cost much to make, even if they cost a lot more to package and advertise. So, if the firm suddenly hits some price competition that erodes the gross margin by 2-3%, it will not suffer a big hit to its operating profitability (see below). Contrast that with a general retailer such as Walmart, where the gross margin might be more like 25% with an operating profit in the low single digits. A 2-3% hit to the former could wipe out the latter.

That is why it makes sense to monitor both numbers.

My perspective is different. I want to know whether a firm can generate consistently high returns on capital over the very long term. As Buffett’s investing partner Charlie Munger noted, if you hold a stock for long enough, the return will gravitate towards a firm’s ROCE regardless of the price you pay.

I also don’t worry too much about how far this number is above a firm’s cost of capital because the latter is far too subjective. If I achieve a 25% ROCE, on average, across the firms in our portfolio then I can be confident that we are delivering value.

By contrast, we have looked at the average ROCE for some of the major car producers over the last five years. At just under five percent, I don’t need a rocket scientist to advise me not to invest.

Have your favourite financial metrics changed at all?

The next metric on my list is gross margin, which is also one of the most overlooked. Companies combine components, ingredients, commodities and people to make a product or service that they then sell to clients – gross margin measures the mark-up.

For our average portfolio company last year, it was 65%, meaning that they made things for 35p and sold them for a pound. For the FTSE index, the equivalent number is about 40%. I know which I would rather hold!

No, not really. Number one has always been the return on capital employed (ROCE). It was US investor Warren Buffett’s favourite as far back as 1979 and I agree with him that it is fundamental to stock selection.

Aside from its clarity, there are two other things I like about the gross margin.

Firstly, it is the single biggest indicator of pricing power in a business. It tells me an awful lot about market share, brand strength and competitive position. As

FUND MANAGER INTERVIEW

Cash conversion is another key metric – the percentage of profits that turn into cash, which we calculate at the operating profit level. Some businesses convert more than 100% of their profits and some significantly less. For us, a number much below 90% is a potential red flag, given that a typical company in the main index might average 80%. Ultimately cash conversion reflects a firm’s ability to manage its suppliers and customers.

Even today people still ask me why profitable businesses run into trouble, to which the simplest answer is often, “profits are not cashflow”.

One more ratio I want to mention is interest cover. A company might offer terrific returns on capital, wonderful margins and great cash conversion, but I need to know if this has been achieved via a debt binge. My method takes operating cash flow as a multiple of interest charges and rentals (to reflect the fact that some firms rely heavily on leased assets). Our portfolio companies have historically offered about sixteen times interest cover, against an index average of more like six.

Spring 2021 — 17

FUND MANAGER INTERVIEW

This means that they are much more likely to survive a torrid patch. Take airline online booking system specialist Amadeus – they flew into a very stormy patch last year but were cushioned by interest cover of 32 times.

How have you chosen your recent consumer brand targets?

I will start with Nike. As the world’s largest sportswear apparel retailer and the market leader in trainers by a considerable margin, this is the 800lb gorilla in its space. It is also extremely well adapted to online markets. Nike has been right at the forefront of e-commerce for some time, so it was clear that the firm would power through last year’s disruption and even benefit from it.

The brand also has one of the key characteristics that we like – it is becoming a virtual business. Just as Coke and Pepsi do not make their own drinks anymore, so Nike no longer manufactures its own shoes. As such it can focus on marketing and distribution, which is how it commands huge brand loyalty. This should enable Nike to generate strong returns on capital and future growth.

Next, Starbucks. They were hit hard initially by the pandemic, as city centres closed, and office workers started operating from home. However, they have counterbalanced that with their drive throughs and kiosk businesses, which are more profitable. The traffic jams at their sites in places as diverse as the US and Kuwait are testament to this.

18 — Spring 2021

They have also done well in China, in part because their biggest rival turned out to be a fraud.

Then there is LVMH, which is all about luxury goods. In short, we have long sought the right exposure to accessories, apparel, designer goods, jewellery, watches and the like and we did not think we were going to get a better opportunity than last year to invest in this global leader.

Which sectors do you avoid?

Plenty! We do not own any banks, insurers or real estate companies and we also avoid highly cyclical sectors, such as engineering, construction, and heavy manufacturing. We also don’t buy utility firms, or any of the asset exploiters, so we own no mining, minerals or oil and gas companies.

We steer clear of transport too, which rules out airlines. In short, quite a large chunk of the stock market is not of much interest to us and has not been so for some time.

The reasons differ but there is an underlying theme. Look at the first category I mentioned, retail banking.

The core business model is simple – taking deposits, lending money and enabling payments – which is why it is under attack. Established payments firms, such as Mastercard, Visa and PayPal are encroaching further into their territory as are starts-ups, such as Square and Revolut. Meanwhile in lending, a chunk of their business is being taken away by peer-to-peer operators. Couple that with expensive premises and old, legacy systems and you have an unattractive commercial proposition. Worse, their leverage makes them heavily cyclical. Even the return of inflation will not help them much beyond the short-term – banks had a grim time during the inflationary 1970s and could do so again. As such, they are typical of the kind of “old economy” stock we tend to stay away from.

What do investors get wrong most often?

Firstly, market timing. Let’s say in January 2020 I had predicted a pandemic, the global economy going into recession, and America suffering a 9.5% fall in GDP in a single quarter.

What would you have done? Anyone who chose to stay invested in the broad US market made an annual return close to 12%, whereas those who panicked and sold up would have lost out. My point is that to successfully time the market, you not only need a crystal ball when it comes to what will happen next, you need a second one to tell you how the market will react.

It is therefore a fool’s game.

The other big mistake people make is confusing quality and price. Whilst valuations are not unimportant, they are secondary. The key question I ask myself is, “do I want to own this business forever?” For almost any rolling 10-year period for, say, the MSCI and its sub-sectors, quality has beaten value. So, I always focus on the former much more than the latter.

What book would you recommend to a young investor?

Robert Hagstrom’s “The Warren Buffett Way”. It offers a clear insight into how one of the world’s greatest investors thinks and operates. Another good read is Buffett’s annual Berkshire Hathaway shareholder letter. Over the years his wealth and sense of humour have grown in tandem, making them increasingly entertaining as well as hugely informative. ●

BOND RESEARCH

Jumping yields Mateusz Malek Head of Bond Research Mat analyses the sudden rise in government bond yields earlier this quarter and assesses the outlook for investors.

Government bonds have been hitting the headlines this year, with prices falling and yields rising sharply (at the time of writing). The key questions are why and whether investors should be worried.

The changing global economic outlook is certainly a key part of the explanation. With vaccine rollouts happening at pace across the US and UK in particular, markets have started demanding higher bond yields to reflect renewed growth prospects.

Furthermore, the unprecedented level of US fiscal stimulus, arriving in conjunction with the potential release of excess household savings, as economies reopen from lockdowns and consumers are free to spend again, has stoked speculation about a spending splurge. Rising commodity prices have also added to this picture of recovering demand (see page 6). If higher inflation is the result, it could spell bad news for bond prices as it reduces the return from fixed coupons.

Digging down So how far have yields risen? At the time of writing, the 10-year US Treasury yield is up by over 75bps so far in 2021 and has breached the psychologically important level of 1.5%. Meanwhile, the 10-year UK gilt yield has quadrupled to 0.82% (see chart). Although German government bond yields have generally remained negative, they too have moved higher since the beginning of the year.

This has impacted prices. Noting that they move in the opposite direction to yields, the UK 10-year government bond has lost 5.7% year-to-date, a truly awful performance from an instrument that at

the beginning of the year was offering a yield-to-maturity of just 0.2%. Even this, however, pales in comparison to the performance of the longestdated gilts, some of which have fallen steeply since the start of the year.

US Treasury and UK gilt yields 3.5 3.0 2.5 2.0 1.5 1.0 10-yr UK Gilt Yield 10-yr US Treasury Yield

0.5 0.0 2016

2017

2018

2019

2020

2021

Source: Bloomberg Finance.

This data is a stark reminder that although UK government bonds remain some of the safest in the world, they are not immune from duration risk. And although the market’s correction has been largely triggered by the ‘reflation trade’, rising inflation expectations have only partly offset the broader government bond sell-off – even the 10-year UK government inflation-linked bond is down so far this year at the time of writing.

Since corporate bonds are generally priced relative to government bonds, they have been affected too, particularly those with longer maturities. Indeed, only the high-yield part of the bond market, which tends to be much shorter dated, has not cost investors money so far.

Looking back To put this in a historical context, we need to go back nearly a decade to find an example of another meaningful government bond yield retracement – 2013’s so-called ‘taper tantrum’. Back then, the 10-year gilt yield increased from 1.8% to 3.0% over the course of the year, or by twice as much as it has so far in 2021. The difficulty with this

comparison, however, is that there are not many other similarities between the two periods.

The 2013 sell-off was initially triggered by fears of the Federal Reserve implementing monetary tightening prematurely. This time, central banks are being careful not make the same mistake, which is why the current forward guidance remains that quantitative easing and ultralow interest rates are here to stay.

This is reflected in some relatively small yield increases amongst shortdated maturities. Indeed, with the current alignment in yields seemingly consistent with expectations for an economic recovery, the Federal Reserve and the Bank of England have not pushed back on the recent rises.

Fed Chairman Jay Powell has said that he would only be concerned if conditions become “disorderly”.

Closing out Investors mulling whether further rises in yields will have an adverse impact on their bond portfolios may note that yields are still very low by historic standards. For example, despite a sharp rise, the 10-year gilt yield is only back to the pre-pandemic levels and is still well below the Bank of England’s inflation target. Meanwhile, globally nearly 14 trillion dollars’ worth of negatively yielding bonds remain in issue.

Assuming we see a strong economic recovery from the pandemic, keeping average durations short may still look like a sensible strategy, as it reduces a bond’s exposure to rising yields.

Further, for a portfolio consisting mainly of bonds that are approaching their respective maturities, an environment of rising yields is likely to create improved reinvestment opportunities. ● Spring 2021 — 19

S P E C I A L S I T U AT I O N S

Roaring back Peter Bate Portfolio Manager Peter highlights three shares that should benefit from a post-lockdown consumer rebound. Please note that these are not covered by Killik & Co research.

In the last edition of Confidant, we focused on transportation-linked companies that we think are well positioned as the economy unlocks. They were Redde Northgate, DFCH, Halfords and Cambria Automobiles. This quarter, now that we have an exit timetable from the government, we are widening our remit to consider firms that will benefit from a broader consumer spending revival. In the cases of Jet2.com and Restaurant Group, we foresee a fundamental shift in the competitive landscape as the pandemic fades, which will create the scope for both companies to generate accelerated earnings for quite some period. We also include our updated thoughts on Redde Northgate, as it remains a standout value play.

Jet2.com – booking revenue Jet2.com is a leisure travel company that has grown over the last decade to become the second largest tour operator in the UK. In the wake of the pandemic, it may even overtake TUI to claim the number one spot. However, in common with the rest of the sector – and indeed any business that relies on the movement of people – it has been in a state of hibernation for some months due to the wide-ranging travel bans imposed after the coronavirus outbreak. Having raised equity once during this crisis (in a deal which we backed for clients at the time), it came back to the market on 12th February to raise a further £422m at a price of 1180p. This was a prudent move, as it removed the need for the firm to rely on government-backed loan schemes.

20 — Spring 2021

become the “category killer” in the UK packaged holiday industry thanks to the fragility of both the competition’s customer service levels (for example, when it comes to processing refunds) and constrained funding models.

Restaurant Group – feeding growth In the near-term, we would expect the share price to be driven largely by sentiment, as plans to unlock travel become clearer with late May currently looking promising. However, our investment case is not predicated on any great level of trading this year. Instead, we are looking ahead to Summer 2022, which falls into Jet2’s 2023 financial year. By then we expect earnings to have done more than just recover, as we think an excellent management team should be able to generate super-normal profits for a number of years. Our view is underpinned by several factors including; reductions in industry capacity as weaker players retrench, improved pricing opportunities as pentup consumer demand is released, and better overall margins as Jet2 drives its product mix towards package holidays.

So, what might earnings look like once the firm has recovered fully from the pandemic? If we use 2020 as a base, we note that the group generated £3.75bn of revenue and around £265m of profit before tax, without reaping any benefit over the summer season from the collapse of Thomas Cook (which failed in September 2019). Whilst we have no crystal ball, we would like to think that, in a post-Covid world, the structure of the market in which the firm operates supports a materially higher profit number. Jet2 could even

Restaurant Group is a casual dining chain with around 400 outlets across the UK. The Group’s main brands are Wagamama (which accounts for 37% of the ongoing estate) and Frankie & Benny’s (about 26%). In addition, the company has a portfolio of rural & suburban pubs (representing about 19%, most of which trade under the Brunning and Price brand) plus a small concessions operation (9%). The remainder is made up of a handful of other brands, the most noteworthy of which is Chiquito (about 6%).

Our investment case has two broad elements. The first is that the pandemic has spurred the company to accelerate plans to exit from a very large proportion of its loss-making leisure sites, specifically the combined Franky & Benny’s and Chiquito estate.

The management team had already outlined a five-year plan that would see the firm relinquish many of these sites organically, by not renewing leases as they expire. However, last year’s events effectively forced their hand, such that they have entered a company voluntary arrangement (CVA) across 128 sites. The net result is a reduction in the previous leisure estate of around 60% with a commensurate 30% drop in the group’s overall lease obligations. This process is delivering a higher quality business that offers a more concentrated exposure to the differentiated, highly-rated Wagamama

brand, which was still growing very strongly as the pandemic hit.

Meanwhile, the group’s remaining rural and suburban pubs will become more structurally robust, should the current shift to greater working from home become more permanent.

The second strand of our investment case is built on the fact that recent events have triggered the loss of around 30- 35% of existing capacity across the casual dining sector. Whilst we acknowledge that the barriers to entry in the industry are low, we foresee a period of several years during which the number of outlets will remain below its previous level.

The operators that can continue to trade during this period will therefore disproportionately benefit from a backdrop of pent-up demand from consumers who have been unable to dine out for almost a year and have healthy levels of “forced” savings.

In that context, the £175m equity raising round, announced on 10th March, seems sensible and will help the group to reduce its net debt position from a current level of around £400million whilst rapidly reducing leverage below two times earnings before interest, tax, depreciation and amortisation (EBITDA).

Overall, our case for investing here is not built solely on a vaccine-enabled rebound for the UK dining market.

Having undergone a fundamental restructuring, the core of this business is now solid enough to support a better rating. Further, falling competitive capacity should help to drive earnings ahead of expectations as the economy unlocks.

Redde Northgate – driving profit Redde Northgate is a mobility services business. It was created via the allshare merger of Northgate, a light commercial vehicle hire operation that contributed about 60% of combined group EBIT at the time, and Redde, a credit hire and repair

PERSONAL VIEW

firm that accounted for the remaining 40%. The rationale was that the two businesses, each with large vehicle fleets, offered multiple touch points into the transportation industry.

In combination, they could wield stronger buying power with original equipment manufacturers (OEMs), boost fleet utilisation and create significant operational synergies. The characteristics of the combined group can be likened to those of EnterpriseRent-A-Car. Best known for its light vehicle rental business, it is also a significant credit hire player, and a major competitor on the Redde side of the business.

In common with other companies involved in transportation, the business suffered during the first lockdown. As restrictions were eased, however, Northgate’s fortunes improved such that, when it last reported, the firm was trading ahead of pre-Covid levels in the UK, Ireland and Spain. Having seen no discernible impact from the second lockdown we are hopeful about the impact of the third, as this division has benefitted from strong residuals in the UK light commercial vehicles market. These have helped to drive substantial returns and cashflows from disposals.

The Redde Division, on the other hand, has been slower to recover. As the first UK lockdown was lifted, trading improved to reach around 20% below normal volumes in September. However, as restrictions were reimposed, activity fell to 30% below the monthly average for October and subsequently weakened further in November. With trading at reduced levels, management have continued to review costs and kept a proportion of the workforce in the UK Government’s furlough scheme.

We understand, however, that the firm is participating in three live tenders with major insurers across both credit hire and repair services, so they will be keen not to cut too many more costs until the outcome is clear.

S P E C I A L S I T U AT I O N S

Redde is fundamentally a very profitable business, that generates a run rate EBIT of £4m per month based upon pre-Covid trade volumes. Yet, the market seems to be assuming that much of this contribution will evaporate. We believe that a surge in activity as the UK vaccine roll out progresses, alongside the scope for some large tender wins that will drive market share, could result in material upgrades to earnings expectations in the 2022 financial year.

Meanwhile, although the significant synergies that have flowed from the merger have not been totally ignored by the market, we also believe that they have not been fully appreciated.

In particular, we are excited by the expanded service proposition that the combined group can offer. It appears that the management team has been able to pitch for, and win, the sorts of major project that the two businesses could not have secured in isolation (for example in the e-commerce space, possibly with the likes of Amazon). The ability to hold down this type of larger contract that offers a greater service component and the ability to create true “turnkey” mobility solutions, should boost the quality of earnings and margins whilst reducing capital intensity. Given that, at the time of writing, the shares only trade on around eight times 2022 earnings, with a 6% dividend yield, we continue to see significant upside. ●

Winning ways Mike Savage and Peter Bate manage around £130m in their discretionary segregated service that focuses on UK smaller companies.

We are delighted to let our clients know that Mike Savage has made the shortlist for the Fund Manager of the Year at the prestigious 2021 PLC Awards.

For further details, please speak to your Investment Manager.

Spring 2021 — 21

YOUNG ENTREPRENEUR

Making it Rebecca Page CEO and entrepreneur The founder of Rebecca Page discusses how she launched a successful home sewing pattern business and overcame the challenges of growing it during a pandemic.

Where did your passion for home crafts, and sewing in particular, come from?

I learned to sew aged eight and immediately fell in love with it. Back then I naturally had no idea that I would one day turn it into a business.

People are sometimes surprised to learn that, even years later, I am still learning and developing my sewing skills. The same is true when it comes to sharpening the very different ones required to set up and run a commercial enterprise. In both cases, I think the key is to remain curious, keep expanding my range and never stop listening to people, whether they are my mentors, staff or customers.

How did you turn home sewing into a business?

Since a young age, I have always had the kind of mind that constantly comes up with new products, different ways to solve existing problems and creative solutions to fill gaps in the market.

However, entrepreneurship demands other skills too, otherwise the results would too often be scattergun – nothing would get properly converted into a commercial proposition.

22 — Spring 2021

For me, a big challenge when it came to creating a business was having to learn to slow down, be more patient and to systematically identify my best ideas for further testing.

It helps that I am secretly a bit of a data nerd – indeed, it is crucial to business success nowadays.

I genuinely get excited about digging into numbers and carrying out detailed analysis on what is working and what is not. It is that side of my brain that helps me to sieve ideas and pick out one that is going to move us to the next stage of our business journey.

Without rigorous testing, ideas are just that. The iterative process I now follow of constant testing, tweaking, and reviewing lies at the heart of the Rebecca Page business model.

I owe a lot of this rigour to my very experienced business partner, Janine Manning. We met at the New Zealand Business Women’s Association, where she was the mentor on an entrepreneurship program. Her background in starting, advising, funding, and growing many small businesses made her invaluable and I am hugely grateful that she agreed to support me. Since our first meeting, the business has grown from just the two of us to one that employs over 40 people.

Right from the start, she channelled my abundant energy and forced me to focus on designing and delivering the best patterns for customers, underpinned by detailed testing. Until we know how far a product can go in terms of sales, we can’t make an informed decision about whether, or not, to scale it. Nothing is left to chance – if the data supports an initiative, we take it forward and if it does not, we modify or drop it.

This approach has brought us to the point where we can already look to scale up to pursue some aggressive growth targets.

Who is your typical customer?

Our biggest market is the US, which accounts for around 45% of our customers. The UK represents about 15%. After that, the next biggest segment is Australia, which fits into what we call the “rest of world” category.

As for our demographic, our newsletter and social media profiling tell us that we appeal heavily to women aged over 45. Interestingly, however, those aged between 35 and 45 spend the most money, per head, with us. Meanwhile, our fastest growing segment is the 25 to 35 age group.

That’s exciting because home sewing has tended, traditionally, to be seen as rather cottagey and cute – something for an older market. Yet, as our brand evolves, we are serving a growing younger audience too. I believe we can reconcile the two by recognising that our customers all want to wear something which is comfortable yet fashionable, rather than dated and staid.

That is true whether they are 35 or 65.

In contrast to some of the biggest firms in our space, who are very conservative when it comes to patterns and designs, we aim to offer something fresher and sharper. Take the simple cardigan – many of the traditional home sewing patterns generate a product that is frankly old-fashioned. Our templates, on the other hand, allow for more individual styling, whether that comes through a more loosely fitted look, oversized sleeves, or both.

YOUNG ENTREPRENEUR

Another interesting trend we are seeing is a shift away from home sewing as a market dominated entirely by women. Lockdown boredom may have played a part in bringing more men into home crafts such as sewing and baking, but I also think it reflects a broader willingness to widen their creative skills.

How has the pandemic affected your business?

We have been relatively fortunate.

Firstly, national lockdowns have stranded people at home with time and money on their hands. We have found that many of them have gradually migrated to a whole new way of dressing for the office Zoom call.

My husband, a barrister, is a prime example – he dresses completely differently away from his Chambers, or the Courts, to the way he did 18 months ago. More broadly, we have benefited from people moving away from wearing the first clothes they can find in their wardrobes. We have seen demand for our patterns grow as customers in all categories look around for new ideas that combine comfort with individualised fashion.

We are also well-positioned to service a growing segment of people who want to know how their clothes are made, where they come from, and how far they have been shipped, or flown.

Naturally, not everyone who shares these concerns wants to have to make their clothes themselves at home using our designs. That is why a key stage in our near-term development is to offer local seamstresses who can make garments from one of our patterns on behalf of customers.

What is your growth strategy?

Although home sewing is the primary and largest market we are targeting – worth around $150bn across its various verticals – it is not the only one. We also want to enter the education space as more people try classes online to learn

As we scale up, we will be filling the more senior positions too. That will present some new challenges for me, in terms of letting go of parts of the business. That is where having Janine at my side will be a huge help as she has successfully managed that transition many times elsewhere.

new skills, such as sewing, crochet or knitting. A third strategy strand, which I mentioned earlier, is creating a marketplace for customers who like our philosophy but do not have the time or the skills to make garments themselves. We want to therefore create a network of specialists who can fill that gap, in many cases by running their own local, franchised businesses.

How have you built your team?

Expanding from a base of two to over 40 members of staff in under three years has put the spotlight firmly on recruitment. We have sometimes used low-cost platforms, such as Upwork, but we have also had a lot of success from advertising through our own community on social media. Often, we will flag a position and within hours we’ll have 500 applications for it. The key is to be disciplined – we have broken down the pattern-creation, production and delivery process and hired each of the different functions in a way that makes it completely systemised. That model should allow us to move easily into other verticals, such as crochet or knitting.

Technology is also a key part of our offering. We are therefore focusing time and effort into getting the right people engaged with our website to improve its functionality and speed. Our future success will be built, in no small part, on our ability to harness data in a much cleverer way than the incumbent players in the patterns space. The advantage of being relatively small is that we can design new products and processes, unencumbered by legacy ideas and overheads.

What is the key requirement for a budding entrepreneur in 2021?

I would single out data-awareness.

Gut feel only gets you so far in today’s e-commerce dominated world. For example, I may believe that one web page will work better than another, but how do I really know? Data-driven insights are critical – if I can lift engagement on a social media campaign by three percent, it might quadruple my projected first month of revenue on a product line. That, in turn, could be the difference between a decision to scaleup, or change course. Without that sort of insight, we would just be a collection of ideas and talented people.

At a higher level, data is also the key to our company valuation, because future investors will expect our growth projections to be underpinned by rigorously tested assumptions. Hard metrics, such as our conversion rates, are the key to building financial models that will supports a business valuation at each stage of our growth path.

What keeps you awake at night?

Very little, thankfully, when it comes to my personal life. I am happily married with three great children. Juggling my work and home life has been a challenge during lockdown but we are not too different, in that regard, to many other families.

In business terms, it can sometimes be a different story. If we are having a below-target month for example, I toss and turn like every other entrepreneur.

I am also regularly plagued by my brain’s constant stream of new ideas. Some nights it is therefore a relief when my mind finally goes blank – I just wish it would happen more often! ● Spring 2021 — 23

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