The London South East, Investing Matters Podcast, Episode 21, Gervais Williams, Head of Equities at Premier Miton

LSE 00:01

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Peter Higgins 00:17

Hello, and welcome to the investing matters podcast. My name is Peter Higgins. And I'm here with the award winning fund manager Gervais Williams, who's also an author and currently the head of equities at Premier Miton as a managing director of Miton and one of the most sought after prescient commentators in the City of London, Gervais has also written three books, Slow Finance 2001, The Future is Small, and Retreat of Globalisation: Anticipating a Radical Change in the Culture of Financial Markets 2006.

And I highly recommend our listeners to purchase those books. Now Gervais, you've been an equity portfolio manager since 1985. Your career includes five years at Throgmorton Investment Management lately called Framlington group, three years at Thornton investment management part of Dresdner Bank 17 years at Gartmore, and obviously now you're at Premier Miton.

So I want to congratulate you on your longevity. But I also want to talk about first if I may, your early learning from 1985 coming into the investment industry, if I may?

Gervais Williams 01:29

Essentially maybe because back in the 80s actually the investment world was not perceived as a particularly exciting career. It sounds strange now, because obviously it's become very popular. But in those days, you know, markets gyrated around a bit, but it wasn't anything like the position where we've been for last 30 years where investment returns have been outstanding and such like.

So this is really prior to globalisation. And prior to globalisation, growth, global growth was very patchy. Many big companies, you know, they grew with inflation, but they didn't grow much beyond inflation. And people looking for investment returns needs to move beyond the mainstream companies need to invest in small companies. And they were much more sort of vibrant sector in those days where most institutions had a significant weighting of small and indeed, micro cap companies. Sounds strange now, but that's what it used to be. And so that's really the industry I joined, really, in 85 was one where smallness was already embraced alongside with bigness.

And what's been interesting, really about the last 30 years, specifically with globalisation with a scale and the excitement of all the rising markets and asset values, is how actually smallness has been missed out of, in the last 30 years.

And, and why I think in a way, it's interesting that I've stuck to what I did previously, I still love doing it, it may be not the most fashionable end of the town, but it's been an area where you can continue to make very good returns. And it's been an area where you know, as the cycle turns, perhaps to become more fashion again in future.

Peter Higgins 02:56

Indeed, I mean, you wrote in this Retreat of Globalisation, regarding supply chains, now, we're talking about those particular things that we were seeing the impact of energy prices, inflation is quite changed, etc. And many of the factors that are basically affecting the company's retreat from globalisation. If so, which companies do you see currently that are the beneficiaries of this retreats?

Gervais Williams 03:24

Well, I think, in a way, one of the ways to, to answer that question is to think about what's been the beneficiaries of globalisation, it's been very much about scale, it's been very much about companies taking risks. So often, perhaps companies, which are growing rapidly, but investing very, very fast, you know, the equivalent of early stages of Apple and Amazon and those kinds of things.

Companies, which perhaps have done well, because financial assets have done well. So that's including various property businesses, perhaps private equity, and businesses, which are quite involved in in long duration bonds, you know, so we're talking not just about debt, but debt, which is long duration debt, and those areas have done best.

So going forward, I think most of those areas won't do very well. So coming back to answer your question, Peter, really, we need to find areas which aren't exposed to what's been doing so well in the last 30 years. And of course, small companies ticked the box every time in that regard, because many of them are perfectly good companies, often dominant industries. They're nothing like the scale of Shell and BP, but most particularly, they've still got the opportunity being immature businesses to grow when the world is not growing.

Now, that's been largely irrelevant. For the last 30 years global growth has been outstanding Chinese growth has been sensational. Asset valuations have improved as bond valuations have come up and up and up.

But most particularly, if we are getting into a more unsettled period, perhaps global growth is going to be more patchy if inflation is a bit more persistent, there may be you're going to get involved in companies which are able to grow when there was growing, so the prime beneficiary of the change in trend, I think, is going to be smallest and small quoted companies in particular.

Peter Higgins 04:54

Indeed, I mean, that the stats say it all got to here over the last 30 years the FTSE All Share massively underperformed the S&P 500 due to its high beta stocks, high volatility stocks, when the market is rising, they're rising more. However, in your book, you stated 2004. But you stated the future is small, which is what we're talking about here. Please may you share with our listeners how you go about it identifying these innovative companies that potentially can outperform their much larger and often overseas peers and competitors?

Gervais Williams 05:28

Well, I think there's two things the first is being starting small, it's easier to double. I know, that sounds like a sort of simple point. But the point is, when you're the size of Apple, and Apple has doubled in the last few years, so you can still double as a very large companies too. But it gets harder, law of large numbers gets harder.

That doesn't mean it's easy for small companies to double. But it does mean there's more potential for them to double. And sometimes they double and then double again, and they're double again. And that's where Apple came from. So specifically, I think smallest has the advantage that you've got numbers on your side, without saying anything else.

The second feature is, so many of these companies are very overlooked institutionally, because they're relatively illiquid, they don't tend to trade very often the institutions don't think they can get very large amounts of capital to work in individual companies, their share prices can be more out of line with the prospects, which means that if you choose a winner, if you get involved in a company, which is well positioned for the future, which ultimately succeeds, then it's not just the case that you know, perhaps it gets bigger and succeeds.

But as it gets bigger, it becomes more interesting to a wider range of institutions, and they chase it on and so the valuation improves as well as the earnings. And you get this kind of tailwind where the valuations can improve the share prices can improve.

And you can get, you know, very, very good returns out of that. So, so coming back to specific your question, how do you choose them, we just tend to meet all large numbers of companies, the ones which are outstanding, aren't actually that difficult to pick out. It's not that difficult. It's just a matter of getting around and seeing a very large number of management teams.

And hopefully, if we're lucky enough to meet a few outstanding management teams, and that's a way which allows us not just to build portfolios, but actually to diversify risk across a range of different holdings. So that it's sort of relatively consistent the return is not every year, but it means that long term, hopefully, the prospects are in your favour, and you've got the tailwinds working for you.

Peter Higgins 07:22

Now, it's noted and I've seen often in bits of research that fund managers, private equity firms and investment bankers often look to value companies using their own bespoke discounted cash flow models, as this value is the business based on their future cash flow, hence, so many unloved companies that you've spoken about, they're often spike in value and predatory large premium takeovers and merger approaches a launch, Gervais, please, could you explain to our listeners, how you go about assessing the DCF of a potential investee company?

Gervais Williams 07:58

Well, well, I mean, I'm sorry to disappoint you, Peter, but I don't use DCFs, very much discounted cash.

Peter Higgins 08:02

Oh, wow. Okay.

Gervais Williams 08:04

So the problem is with those is that, you know, you make an assumption in the next five, or maybe 10 years, and you do get, you know, some very good mathematics and some good ideas as to what the ultimate value might be. But just look at the last 10 years. And what's happened the last 10 years in the world isn't a consistent place.

You know, in the last 10 years, we've not just had the pandemic, we've had the Ukrainian conflict, we've had all sorts of uncertainties along the way in terms of interest rate rises and inflation. So from that point of view, just assuming the world's going to be the same, it's not a good place to start, in my view, where you need to start is the business needs to be robust in its own marketplace, which means that all being well, hopefully, you not lose a lot of money as a starting point, you know, the business is a relatively safe business, perhaps it's generating some cash, perhaps it's got a strong group of clients in a relatively defendable market position. So as a starting point, that's where we start, which is we want a business where even the things don't turn out as we expect going forward.

It's still a relatively robust business. And then the second peak feature is, we're really interested in cash not so much in terms of earnings or different IFRS standards, or even EBITDA and all those kind of things. Just tell us about the cash you're going to generate. And many of these businesses which are listed on the market have been investing hard.

Sometimes they get into the end of a period on investment, where perhaps the cap in capital investment needs to be less substantial going forward. But all the benefits of all the previous capex are coming through. And you get into a period where you generate not just cash but surplus cash and plenty of it. And if you are lucky enough to pick a company out, which actually has these characteristics, it doesn't really matter where the markets going up at much, very much. It doesn't really matter if you get an uncertainty because of a global recession, or perhaps a setback in terms of local politics.

Ultimately, your company generating surplus cash is in a position to generate a very good return. And if it can't do so, because the share price hasn't gone up well, it can buy back some shares, or it can pay dividends or it can acquire some assets in largest business invest harder with the cash flow in, in scaling up their business, they have so many options to them. But the secret is to have the cash in the first place. So picking out companies which are generating significant cash in the next two or three years is pretty much the main process we go for in terms of selecting winners for the future.

Peter Higgins 10:26

Fantastic, good reply, thank you very much. Now, part of any successful of being a successful fund manager or investor is learning over the years what to avoid also, Gervais. So given your vast experience, what are the amber, and red flags that you're looking to avoid when you're screening you the small cap companies that you're looking for?

Gervais Williams 10:46

There are two or three I mean, the first is we do meet quite low management teams who have done very well over the years. But there is a real danger that if you have a good run of success, that some management teams become overconfident. And when they're overconfident, they tend to be perhaps, underestimate risk.

So specifically, anything moving towards arrogance, or perhaps under estimating the future risks is an absolute red light. For us, we are very, very cautious and management teams who are overconfident. The second feature is that you can have a business which is successful, and between now and say, a couple of years’ time, the business goes on to be really, really successful.

But between now and then something awful happens not just a pandemic, but perhaps a big setback, a global recession, whatever it is. And if you've got a business which has got too much debt, then it's not so much whether succeeding in two years’ time, it's whether it's going to stay alive for now. And businesses which get into financial difficulty, it's not so much just their share prices go down. And of course, a lot of our share prices don't just go up politely, the zig and zag along the way.

But if they go down, and then they need emergency funding along the way, then you find that you can actually end up diluting many of the long term returns. And that very much happened to the bank, say in 2008-2009, lots of banks had extra share issuance, and the share prices, many of the banks in the UK indeed around the world, are never going to get anywhere near to where they were prior to 2008.

Because they've issued so many shares at such a low level, that actually the upside is heavily diluted in a permanent way. So again, we want to avoid companies with too much debt. And we're very sensitive on that. We're not against that entirely. But we really want very small amounts of it, plenty of headroom for that. And the third element is very much valuation.

You know, we all emotional, we get very excited about companies, we think about the success and the opportunity and the scale of the business, which might be in the next few years. And perhaps we sometimes gets so enthusiastic with the share price rising up. And there's good notes and good announcements from the company that we end up overpaying. And I think overpaying is another feature which actually can end up you still want a successful company.

But because you've overpaid to start with you never get quite the commercial return that you expected. And that's quite disappointing.

Clearly, if you are lucky enough to pick a company which actually has a problem, then overpaying at the start means that actually you end up with big capital loss as well. So those are the three areas were very, very cautious about overconfident management teams balance sheets, which are too stretched, and most particularly valuation.

Peter Higgins 13:16

Indeed, indeed, I agree with that. I want to go back if I may. And part of what you said there. I'm using this quote because I've been quoted as saying avoid companies overburdened with debt, and is likened to poison. For the benefit of our listeners, please, can you expand a little bit more on that, and the importance of looking really, at the regular occurrences of diluted fundraisings placing and at worse, which we've had of late and de-listings of some companies.

Gervais Williams 13:43

Yeah, so the trouble is with the world is that it zigs and zags all the time. So you can feel that you've got a successful company. And it may be that it does need extra capital to get the finishing posts, which is absolutely fine. And it may be that you feel it's good thing to get involved in putting cash into the company.

But it's not good just to be one shareholder doing that you need to have a body of shareholders around you who also have the same view. And if you've got a shareholding group, perhaps who aren't confident or perhaps the momentum in the market is very against you. It doesn't matter what you think you can find, actually, that the price and the issuance cost is so diluted that actually, in spite of the fact that you may have been writing in technical terms over the three year period, you end up actually costing yourself a lot of money.

So coming back to this issue of poison debt in itself. It is very different from capital, capital, you know, you have it and it goes up and down a bit, but you never have to repay it long term. You may have to pay dividends to raise more capital, but most particularly, it's a very long term open ended liability. The problem with debt is it's very specific.

You have to pay certain interest payments every year. And most particularly have to repay the whole debt at a certain time in the future. And it may be just going into that period, when you have to repay the whole debt, you end up actually in the middle of a global financial crisis, or perhaps you end up with a period where individual prospects for some sectors, perhaps the technology sector, or maybe the energy sector have moved against you.

And as a result of that, you end up just at the wrong moment having to raise cash, and you can't borrow more money because people are worried about it. And you end up hugely reducing the upside potential for the equities. So that's why we call it poison, it's in danger of really having a very adverse effect, even though all the other features, you know, the business and the prospects and the management team, and the opportunity are still very much where you expect them to be along the way. Those fixed liabilities actually can catch you out in a big way. And that's why we're so sensitive to those features.

Peter Higgins 15:56

And rightly so. Thanks. Thank you for that explanation. That takes me on to another point I wanted to ask you.

Now Gervais you're a member of the AIM Advisory Council, and a board member of quotes of the quoted companies Alliance, following the Neil Woodford/Patient Capital Trust debacle. You were a member of the Patient Capital review panel with the Chancellor of the Exchequer, where recommendations were put into legislation in the subsequent budget. What did the industry learn most from this episode? And what has changed because of it?

Gervais Williams 16:27

I think the nature of the problem with Woodford he's clearly a very talented manager had a long successful record was that he was investing in companies with cashflow liabilities, these work businesses which were having to invest to generate lots of long term profit.

So he's having to have the confidence to be able to put capital in and more capital in to get these companies to the finishing posts. And there are, you know, biotechs and other types of companies like that out there, which are very successful investments, but there's nothing wrong with that. But he was doing so in an unquoted form. So if you've got an open ended investment company, for example, then you've got commitment to pay to your shareholders or unit holders.

Every time they want their cash out, you have to kind of raise some cash and sell some things. Because some of these were unquoted, you could only sell the listed companies. And you know, as the listed companies go down, then the proportions of those in unquoted go up. And you get to regulatory problems, and you get into anxiety about whether you can liquidate enough. And that's ultimately why the fund was gated. And gating isn't just a bad news for the investors because they can't get the cash out in the short term. But it does mean therefore, that the management of the fund changes from just you know, trying to maximise return to just trying to get exits. And it's been a very unhappy outcome for those clients who happen to have the fund at the time of gating.

So coming back to it all, the main issue is that if you are going to invest in in unquoted companies, you need to find an introduction fund structure which is more appropriate than open ended investment companies. And that's particularly investment trusts. But you can use other structures as well. So coming back to our investment holdings, yes, we have some investment trusts. Yes, we have open ended investment companies. But in general, we don't have any unquoted companies at all. The truth is, we can make heaps and heaps of money over the long term.

By investing in many of the quoted companies, we don't need to make that extra little bit which you might make from unquoted. So keep it simple. There's plenty of opportunity, especially in the UK market with lots of micro caps as well as mainstream companies to invest in. And I think the problem was, the mass works against you. I talked about the mass earlier, if you've got holdings there, which are unquoted, and, and the portfolio starts to get smaller and smaller because you get redemptions that problem becomes more significant. And that was ultimately the nightmare for Mr. Woodford.

Peter Higgins 18:56

You give me that thorough reply, really appreciate that Gervais, thank you. Now many of our listeners love the enjoyment of picking individual stocks and funds and trusts. Please, could you share with us the importance you've touched on it a little bit there already, with regards to selecting stocks with management and leadership have the highest quality?

Gervais Williams 19:15

This is interesting, isn't it? I mean, we've certainly want very good management teams. And the great advantage of the PLC world is of course, that this is companies which are in the public arena, you get lots of data, you get lots of opportunity to meet them, even online, you may not be able to meet them in physical times other than the AGMs, but you'll get opportunities to listen to them online and hear what they're saying. And the opportunity therefore is for you to get aligned with certain investment themes which give you an opportunity to going forward.

The as I mentioned very previously, the nightmare is that have good plans your management team may have they may get disrupted by the real world as I say unusual events, setbacks, cash problems, all of those things can turn up. And you want a management team, which isn't just able to hold its own, but actually is able to foresee some of these problems, and do their best to stay around it. So coming back to it, yes, you want a management team, which are effective in terms of leadership and strategy. But ultimately, you really need a management team, which actually has the emotional content to actually bring not just clients with them, but they're particularly their employees with them, you want the employees to be sufficiently confident about the management team, that they're not just happy to stay at the business.

But actually, they're happy to carry on and see through the problems. So the business recovers. And so from that point of view, when we meet management teams, we're very, very interested in things like customer service.

So if you're not really not just interested, but obsessively interested in customer service, then from that point of view, your customers might well find that actually, when they when there's tough times, they may find other people cutting their prices. And if you're not delivering outstanding customer service, you may lose some of your customers. And the same is true for your staff, you really want your staff not just to be thrilled to working for your business, but actually engaged and confident about the future. So that even when there's unsettled world out there, they're staying with your business, that continue to look after customers that continue to deliver outstanding service. And that means that business has a better terms of prospects.

So coming back to management teams, we think a lot of these softer skills, rather than just a strategy rather than just being convincing about how the numbers have come out and why they've done well. But some of the softer skills like looking after customers looking after their staff, delivering a good outcome is very, very important, ultimately, because it means that they're more robust, they're more sustainable businesses in the long term.

Peter Higgins 21:42

Yeah, I've noticed that I mean, some of your recordings regarding speaking about, especially like retail and consumer facing companies, you also you often talk about the consumer metrics and asking the management teams are they aware of and what the numbers are, you just expand on why that's so important to ask those sort of questions.

Gervais Williams 22:00

Or what's interesting is, when you meet management teams, they often have a slow pack with them, we will have looked obviously, at the annual report, maybe perhaps some broker reports prior to the meeting, perhaps online, look at the business and see what they have they portray themselves. And what's interesting about nearly all of those different sources of information about the company, is how little information there is on customer service, for example, there are some companies which say, you know, our net promoter score, it's a kind of measure of customer outcome is this. So that's not impossible, but it's quite unusual.

Certainly, there's very, very little information often even in annual reports about, you know, not just about the staff, our staff, our most important asset is what they often say, but then you say, Well, you know, how are you checking to make sure that they're having a good outcome? You know, when did you last your staff survey?

What was the outcomes of staff survey, you know, etc. So from that point of view, these kind of metrics have almost what very little visibility in terms of the presentation, which they often set in front of you, that's kind of interesting in itself, it may be that most of our managers don't ask about this, and therefore, they're covering the agenda points, which are covered by most other fund managers. But most particularly, as I mentioned previously, the nature of it is that a successful business is one which does look after its customers really well and does get engagement and success in terms of the, the body of the staff.

So from that point of view, it's an interesting area to talk about, if only because many of the many of the management teams we meet are unrehearsed, you know, they haven't got their party line, they haven't got their little econometrics, which they can use in terms of the slides that haven't got their props. So from that point of view, you actually get to hard rock very quickly, real information. And that helps, of course, identify the management teams who say they're interested in customer service, as opposed to those which are actually more demonstrative, very interested in customer service. And, and that gives us huge insight, I think into the management teams, which are hopefully you're going to have duration, as opposed to those which may get unsettled by unexpected events.

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Peter Higgins 24:19

Thank you, thank you very much. And currently, in the environment that we're in, it's prudent to be defensive in nature Gervais. So please, please share with our listeners how you go, how you and your team go about assessing the best quality companies regarding recurring revenue, which obviously can offset some of the noise and the flux in their revenue streams?

Gervais Williams 24:38

Yeah, I mean, it sort of comes back to things like, you know, if you have got customers, you know, how many come back again, you know, so some of those kinds of metrics. So in a way, recurring revenue is rather a nice, comfortable feature. You get lots of software businesses, which charge a maintenance fee and they get that in every year. And it probably it nice to kind of number that, but there's quite a lot of businesses out there, which actually knew they don't have that opportunity, they have to go and find new customers, some of their old customers come back at construction business, perhaps Galliford for something from that point of view, they've got to go and not just deliver a good outcome for buyers, but they've got to find other clients who are wanting to build large projects and such, like.

So coming back to that, yes, recurring revenue is important. But what you really need to find is the company which has got the confidence to actually continue to fill the harbour with new clients, even if some of your existing clients are, you know, finishing your finishing projects for them. So we're not against that kind of thing. It's nice to have a recurring revenue. But it's got to be actually ultimately about the ability to fill the harbour. And that's about how people perceive your business, about long term relationships. It's to do with things like how you, how you how you invest in your own business, so you're more six have more to offer than perhaps some competitive businesses, all of these things come through. Because some areas like the oil industry, for example, there's probably in the 10s, of stocks to choose from even the UK, let alone internationally.

And so in a way, it's there was almost too many to choose from. So you need to kind of find, again, the kinds of companies and the kind of ways that invest and the way they manage risk, to give you the confidence that even if revenues peak out from customers, maybe there's a downturn in the industry, they've still got enough momentum in terms of bringing new customers to offset that, ultimately generate sales, but most particularly cover their cost base, so they don't end up in loss, making positions and ultimately running out of cash.

Peter Higgins 26:32

Brilliant, love that. Right, I'm going to ask you this question regarding two stocks, you're currently hold, in whichever portfolio you've got, trust of fund that you feel would thrive or will thrive during these uncertain times, and potentially over the next 12 to 36 months? Yeah, given all the parameters that you've set regarding, you know, choosing the best companies that are out there at the moment?

Gervais Williams 26:55

Yes, it's interesting. I mean, we're quite unusual getting involved in early stage companies, because in a way, you know, there's more uncertainty about an early stage company. On the other side, you know, often the markets they serve of an image or market are those which are early stage, and therefore, they're not dependent on global growth to succeed, they're dependent upon the image or sector. So a company which is well represented in many of our portfolios, a company called Saietta, S-a-i double t-a, Saietta came to market a bit over a year ago. And it's a business which is involved in electric motors, a lot of companies are involved in electric motors, they like to think there's a little bit better than others, you know, that that's interesting, because many of their customer relationships seem pretty strong. So they must feel that they've, you know, those customers must feel pretty excited about it.

But what's been interesting about it, since it's come to market, and this is the advantage of being listed, is they've been able to move quite fast. So it's not just about the motors, they were able to take over a business called e-Traction, which was a business which someone else had put a lot of money in. And, and because they were running out of cash, they were able to buy it for a very, very low valuation, and that widen their range of products, from electric motors into inverters, and chassis. And then more recently, they've also extended their business into making more volume.

And they've taken on the factory lease of our business, which used to make electric motors, for other markets. And now, they can make most but what's been very interesting about the recent announcement is the business has actually now brought in a very large relationship, a company called Comnet. It's a US Corporation, heavily involved in truck sort of hubs, and could get motors in those hubs to actually drive the business ultimately, and, and it's the scale of the opportunity and the visibility of that opportunity, which has meant that the company has not just succeed in terms of growing the business fast.

But it's some of those, the advantages of some of those deals they've done and the state scale of those opportunities, has been just amazing to share price has gone up, it's not going up enormously, it's done okay to time perhaps when other share price has gone down. It's still quite a small business 125 million market cap. But most particularly, what we've been amazed by and thrilled is how the scale of that market footprint demonstrated by the quality of their customer relationships, and the new customer relationships they brought in, has built a business there, which we think is very exciting, irrespective of whether it's a global recession coming irrespective of whether the price goes up or down going forward. And that's the kind of business we all want in our portfolio business which has great prospects but isn't reliant on things which may be uncertain going forward.

Another example perhaps is Yu Group, Yu Group is a much smaller business, in terms of it's only 30 million market cap is tiny. But this is a business which is involved in helping particularly UK quoted companies but also some private businesses by energy. They're their supplier. So a bit like Centrica that they're a supplier of energy. They're not a broker. They actually are the supplier of energy and gas and energy, electricity and such like, they've built a business, which has got better customer service than many others. It's more flexible.

They brought in staff, it's based around Leicester, and they've had terrific momentum, the share price got a bit too high at one stage, they had some accounting issues, the share price came down. But the underlying momentum and the quality of the business and the management team and the leadership are still very much there.

They've just been through the most extraordinary stress test or price, of course, energy prices, electricity prices gone crazy.

Have they gone bust? No, they haven't, they just generate more cash. And that's a lovely business. So again, lots of these tiny companies, these micro caps, they quoted that sometimes, you know, their share prices drift, not because there's anything going wrong, but there's a small seller, no buyers, and you get these share prices moving down. And it's just amazing when you see the quality of some of these businesses, the scale of the investment that's gone into the past and momentum for the future. And then current market cap, in this case, only 30 million, again, just perfect for our client base.

Peter Higgins 31:01

This is the beauty of getting into small caps early that you can participate in their profits in generating revenue generating journey.

Now, I wanted to carry on on that on that sort of day. And if I may, please, please share with us your greatest successful investment and telling us initially what how you identified it, and how you went about profiting and scaling out if you did regarding capturing your investment returns regarding that particular investment Gervais?

Gervais Williams 31:27

Yeah, I suppose I don't know the exact word because I don't always measure how much they've gone up. And I know from actually writing my first book, in finance, that when I looked back, one of the one of the successful investments I had was a company called Severfield-Rowen, and it's a business which is involved in structural steel work very, very efficient business, what was interesting about that business wasn't so much that they were doing structural steel, but they found a way of painting the steel that drive the lugs in the right place, and all rest of it with less lifting of the beams.

And that's because they had cranes above, actually, which move the stuff around. But they also in the factory itself, they had these very wide ranging kind of rail wagons, that they're not traditional wagons, but they're on railway lines, and they could move them up, either using the crane overhead or just using the railway underneath. And it was that opportunity for them, which meant that they could do things more efficiently their competitors, that they had less movements, they were they were quicker to turn around, there was less errors as a result of the systems, which meant that actually, they've gone on not just to have one line, but they built eventually seven lines of these up in fast that was where they are.

And it and being a very small business to start with. And being an industry where there was a lot of expansion because there was a lot of warehouses and different shopping centres going up. And all the rest of it meant that actually the business expanded enormously quickly back in the late 90s and 2000 period. And so it actually the share price rose extraordinarily. And it wasn't just the share price rose, they pay the dividends. And so you've got the income and if you reinvest the income that made it even faster, so extraordinary, that but not unique.

There are many other companies which have gone up by more than 5-10-15 times when you look at it. And so the opportunity is very much there. That just happened to be an old example. I haven't got one right to mine now perhaps because the markets have been more unsettled. Maybe I don't concentrate on my successes, I mainly concentrate on my least successful companies, which I worry about.

Peter Higgins 33:30

Well, we'll touch on that if you want now, with regards to your least successful companies, the mistakes and lessons, what's been the greatest one, you've gone, how did that go wrong? You know, everything you've identified was right.

But it still went wrong to cause I think, as you as you pointed out, often our greatest learnings are from our mistakes or our errors. So would you share an example of one for us, please, Gervais?

Gervais Williams 33:52

Yeah, so when I've lost money for my clients, quickest, most completely. And most disappointedly, in terms of I didn't expect it is probably in the more sophisticated company. So if you've got a company, which is more, you know, it's more things to think about the business model, say complicated financial perhaps. So when you get a complicated financial wrong, it's not just that the share price goes down.

But obviously if they are business perhaps involved in lending, for example, it's not so much the money's gone out, but it can't come back again, because money is going out. So perhaps a current example might be Morse Group. It's a very good company that they're in the home of collecting credit. But ultimately, they lend money.

The FCA was involved originally with private financial and they were unsure about whether all the checks had been done to make sure that when people borrow that they were in a position to pay back and it wasn't good enough to just say well, they did pay back you actually had to go back and demonstrate it and then all the ambulance chasing kind of claims companies came in and and we believed that Morses Group was robust in these areas.

And in the end, it's turned out that that in spite of their safety checks and care, ultimately they've been caught out as well. The business hasn't gone bust like it did at Provident Financial but they are having to change their business model and look back and the Financial Conduct Authority something and in a way, you know, there's it's just a change in attitude really to regulate the regulator the past was probably more tolerant of those kind of businesses.

It's less tolerant, or perhaps went through a period of being less tolerant. I think it's becoming more tolerant, again, bizarrely. So from that point of view, it's complicated financials, when we get those wrong. It's not just that we lose money. It's the complexity and of course, the average balance sheet. Again, Morses, fortunately, wasn't very levered. So from that point of view, business has survived. But it's, again, it's the complicated financials really where we tend to, if you want to look at the ones which we've lost most money and most quickly, it's those areas, I think.

Peter Higgins 35:57

Thank you for that reply, I really appreciate that. Now, I wanted to touch on stock market, academics, Paul Marsh, and Scott Evans of the London Business School, who compiled the numerous indices. And they know that small caps have historically done badly when interest rates are tightening the cycle and recessions. However, over the long term, they tend to outperform, Gervais does this mean that you will be buying certain shares whilst the markets are fearful, and selling when some markets are doing well, when people are being greedy going forward?

Gervais Williams 36:28

Yes, I mean, we obviously always looked at by buying companies, which we think are overlooked and selling companies, which are already successful, to reinvest in other companies, which are overlooked on an ongoing basis. I know, there are people who worry about, you know, interest rate rises, and economic slowdowns.

And some of the other features, which tends to worry people, I think sometimes you can be too complex, you look at all these factors, uh, you know, our interest rates going to go up or down in the next three months or six months, perhaps we should think about that. Ultimately, the great advantage of small quoted companies is that in general, they grow a little faster than the main market. Specifically, when things get really tough back in the 70s, for example, when there was a lot of companies going bust, a lot of private businesses with too much debt, unfortunately, got went insolvent. As a quoted company, you had a better balance sheet, you were less likely to go bust because you had a stronger or a more robust balance sheet.

But most particularly, you could keep those teams of, of staff together from businesses, which combust because they were viable businesses, they were just over borrowed. And that indebtedness ultimately meant that they weren't safe at the time. But you could keep the business together, buy it from the receivers, inject a little bit of working capital and generate extra cash as well, the result of that business succeeding going forward.

So coming back to this, I think whether interest rates going up or down, or whether the global economy is going up or down, I think in a way is a secondary issue. The main issue about small credit companies is that longer term, and Marsh and Evans is data. And indeed, Elroy Dimson, who was originally involved in this, ultimately demonstrate that since 1985, as you move down the size bands on average, the better the performance. So if you move into mid caps, it's better than the mainstream companies. If you go into small caps, it's better than mid caps. And if you go into micro caps, they tend to do even better.

So and that's particularly true if you have a bias towards companies, which are lowly valued. I mentioned earlier, that one of the things you need to be careful about is overpaying for some of these companies.

If you have a bias towards lowly valued companies and smallness, the both effects combined and you get extra return. So I think that's the most important feature. So rather than worry about whether, you know, small caps are going to outperform this year or last year, ultimately, try and pick a good weighting of some of those companies. And then you'll get certain spurts when it tends to perform. I mean, who would have thought with a pandemic, after the pandemic, just when we had a global recession, and massive uncertainty about the global economy, that small quota companies would have had their best period of performance for years.

But that's what happened. And it would have been very hard to pick that beforehand. But that was the outcomes. So don't become too intellectual about it. Just look at the opportunities and spread your risks, not just in the individual, small quota companies, but have other assets as well, perhaps property, your house or whatever. So you've got different assets, which do different things at different times. And I think ultimately, yes, I mean, I think small quoted companies will continue to outperform. What I'm less certain about is whether the mainstream markets continue to generate the returns they've generated in the last 30 years, I think, you know, global growth is going to be more unsettled.

I think we're going to be in a period where perhaps margins come under pressure, many of the big companies perhaps won't make the same profit margins they made in the past. And I think from that point of view, we also may find that China's not growing at the same rate, it turns into sort of Japanese type, no growth economy. And if all of those things are half true, or perhaps all three come back, then I think perhaps markets themselves don't make a lot of money.

But the advantages of small quoted companies the ability to grow when there was not growing the immature nature of their businesses, the ability to make acquisitions from the receiver will keep them going and I think they will continue to generate very attractive returns irrespective of those features.

Peter Higgins 40:02

Thank you for that response. Appreciate it. Now, I want to ask a slightly different question. If I may, I want to ask you to various about your personal investing style away from Premier Miton. What's your investing style for your own ISA/SIPP? If you own any of those things?

Gervais Williams 40:16

Yes, of course I do. I mean, I'm afraid it's terribly simple, apart from a shareholding in Premier Miton, which came from the Miton PLC business, I put all my capital into my own funds. If it doesn't perform, I know why it doesn't perform. But most particularly, ultimately, you know, I think Martin and I, and some of the other teams at Premier Miton are well positioned for the future.

And so from that point of view, I think the environment is good. I think the opportunities there, they have been out of fashion somewhat, with Brexit and uncertainty about global growth, which has led to perhaps, anxiety about small companies and share price terms.

So ultimately, the risk or ratio, from my point of view is one which I feel comfortable with. And therefore, it's very easy for me to back that.

Peter Higgins 41:02

Brilliant. Now, I've got a final question for you, if I may. Now, without giving away the secret sauce, what would you say, has enabled you to have such a successful and expanded longevity since 1985, as a fund manager, what's been your secret to your success Gervais?

Gervais Williams 41:21

Well, what I think is quite interesting is that I think we can all be a little bit purist in certain things, you think, Well, you know, the markets role in this area, and it's going to come right in time. And that might be right, that ultimately, if you don't deliver returns to clients over a three or five year period, then you won't have any clients.

So at the end of the day, whatever I'm I think about it long term or opportunities. The main focus has been the relentless desire to deliver an attractive return a good client outcome, irrespective of the market clients. And you know, as I say, for the last 30 years, I think we've been in a period where I think asset prices have risen, small companies have been out of fashion, UK assets have been out of fashion, we still had to find a way to make some very attractive returns so that clients can justify holding our funds.

Even at a time when NASDAQ's doing incredibly well, long dated bonds are outperforming private equity funds have done incredibly well, we've got to deliver an attractive return irrespective. So that's the first thing, we found a way to deliver an attractive return, even in conditions which haven't entirely suited us. As you probably realise, I'm much more cautious. And most investors, a lot of the ratios in my funds, the beaters, and things are sub normal, which means that really, I should have my clients who have had a very big bad outcome in the last 10 or 20 years. But we haven't, because we've found ways to live about it.

So that's the first thing. The second thing, which I think is overwhelmingly important, I think all fund managers need to take this, this priority, right up there is you need to be very clear and engaging as best you can about the nature of the risks which you need to take on behalf of your clients to generate return. As we all know, if you take no risk, you won't generate a return. So it is we need to take risks on behalf of clients.

That doesn't mean some things don't always turn out well. Sometimes things take longer to come through or rest of it, you've got to be as best you can really helpful and giving clients a really good understanding of the nature of the risks you're happy to take. And in our case, perhaps we're happy to get involved in more smallness than many others, not just mid caps, small caps, micro caps as well, perhaps we were willing to go across a wider range of different industry sectors to diversify risk, but perhaps getting involved in sectors such as energy, such as mining, such as complicated financials to diversify risk and generate more upside, because there's more risk involved.

But ultimately, you've got to be very, very clear and prioritise that communication, as well as, ultimately the long term delivery. And I think it's those two, side by side, which ultimately, we believe is absolutely essential, not just to be successful, but to continue to have a client base so that you're successful in the future.

Peter Higgins 43:59

Fantastic replies Gervais as always, it's a pleasure to speak to you. And you're always so thorough in your response and as loved the fact that you're constantly on in all in in the market sharing your 30 plus years of wisdom. So I really appreciate you taking the time speaking with myself on, on the Investing Matters Podcast.

Gervais Williams 44:19

The same goes for you. I mean, you know, in a way, you're in a more difficult position for me that you know, you haven't got necessarily the large business behind you and all other things. So I you know, I think it's terrific, not just what you do, but many these different perceptions which all come together to help people become engaged and informed and fought for and hopefully making good decisions. And so in a way, I think, you know, my job's easy compared with your job. I'm more impressed by what you've done than what I’ve achieved.

Peter Higgins 44:49

Oh that’s so kind of you so very, very kind of you. For me Gervais, the beauty of what you do, and I do and other people do. It's about sharing. It's about education, and we're trying to enable as many people as you possibly can, you know that listen to the Investing Matters Podcast and other podcasts and other things I do to become almost independent, you know, they can choose the right fund manager, they can choose the right stock.

And this is what we're trying to do on these podcasts is trying to enable people to learn and to improve and to get better, you know, because we all want to get to the place where we're at financially secure. And I think given all the noise we're hearing right now, people are going to have more and more pressures to actually secure that going forward.

Gervais Williams 45:28

I wholly agree. I think I think, you know, I think the challenges are quite significant out there. Unfortunately, that probably means some of the risks which people are taking will turn out badly, perhaps more than usual. And indeed, the importance of generating some cash and having a nest egg for the future is probably going to be more important than it was previously.

So if anything, the risk reward ratio has gone a little harder. And so anything we can do collectively with you and the other people like us, is terrifically important.

Peter Higgins 45:58

Brilliant. No, I completely agree. Thank you very much. Now, that was author, fund manager and Head of Equities at Premier Miton, Gervais Williams. Gervais. Thank you ever so much. Take care, God bless and all to your continued success and the team success as well at Premier Miton take care, God bless.

Gervais Williams 46:16

Thank you very much Peter, really enjoyed it.

LSE 46:29

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