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. ●
