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You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice, so please do your own research.
Peter Higgins 00:16
Hello, and welcome to the Investing Matters podcast. We are live at the QE II, Westminster London for this live panel session got a five star panel for you, of Stephen Yiu, Gervais Williams, Gabrielle Boyle, George Barrow and Algy Hall will look forward to hearing from them talking about difficult to the markets giving some stock selections, and much much more.
Peter Higgins 00:45
Hello there Algy Hall of City Wire, Lead Companies Editor, thank you ever so much for joining me on this Investing matters panel talking about how to find quality stocks in difficult market, and can you give me a little synopsis of what your talk is going to be about today, please?
Algy Hall 00:58
Yeah I'm really excited, I’ll be talking about City Wire lead companies, and the unique rating system that we've developed, which basically tells you how much smart money the best fund managers in the world, it's being put behind different stocks, it's very simple to interpret.
And the reason why I think it's so relevant to what we're talking about today about uncertainty is because it's pure signal, it's not noise, it's all about following the money. And the money really tells us a very pure indicator of the judgments being made by some of the world's very best investors.
Peter Higgins 01:37
That sounds like an elite panel you're going to be given there. Algy thank you ever so much, look forward to hearing from you.
Algy Hall 01:43
Thank You.
Peter Higgins 01:44
God bless you.
Peter Higgins 01:45
Hello, and welcome to the UK investors show. George, what are you going to be talking about today regarding investing in difficult markets? What's the synopsis of the conversation going to be?
George Barrow 01:45
Hi Peter, thank you for having us.
So we thought it'd be helpful today to talk about some of the lessons that we've learned of investing in challenging markets.
There's certainly been one or two of those in the financial sector over the last 10 years. So we thought we'd share that with investors and try to work out how to drive good long term performance in that kind of volatility.
Peter Higgins 02:10
Brilliant. So that's going to be George Barrow, Polar Capital.
Look forward to hearing your chat later on thanks for joining us today.
George Barrow 02:15
Thank you.
Peter Higgins 02:16
A very good morning to you Gabrielle Boyle. Gabrielle, can you just give us a synopsis of your conversation this morning regarding finding positive stocks in difficult markets, please?
Gabrielle Boyle 02:27
Yes, So we've been talking about how challenging the current macro-economic backdrop is, and navigating through that as a stock picker.
Our contention is very much that markets persistently underestimate compounding power very rare and special businesses and high rates of return over time.
Our view is that in order to navigate markets, you need to be invested in companies that are resilient, that are adaptable, that are in practice.
That means businesses that have high returns are well managed or reinvesting in themselves.
But very importantly, you have to be very sensitive to valuation. And that's particularly true in periods where you have big interest rates, rising inflation, etc. so being able to do that in a small boutique asset management firm like Troy where we have strong alignment of interests is a big advantage.
So that's what we spoke about today. And the Trojan Global Equity Fund, which is, which is a concentrated strategy, very long-term perspective, low turnover, seeks to deliver consistent growth.
Peter Higgins 03:42
Brilliant. Looking forward to thank you ever so much Gabrielle Boyle, Troy Asset Management.
Gabrielle Boyle 03:46
Thank you very much.
Stephen Yiu 03:47
Hello there, Stephen, you have Blue Whale Capital. Thank you for joining me on this Investing Matters panel.
What's going to be your talk today you're going to give on how to find quality stocks in difficult markets? Can you give us a little synopsis please Stephen?
Stephen Yiu 04:00
Yeah, so I'm going to talk about the new era. Like we think that there's going to be a new regime in the next five years compared to the last five years. And certain opportunities that we were involved with before that we're no longer in. But at the same time equally within the tech space that we are heavily involved with that we think there's some new exciting opportunities, especially in the AI space. So that's what I'm going to focus on today.
Peter Higgins 04:24
Really looking forward to it Stephen, thank everyone for joining us today.
Stephen Yiu 04:27
Thank you.
Peter Higgins 04:29
Very good morning to you Gervais Williams of Premier Miton. We're going to do a talk today about how to find stocks through difficult market conditions. Gervais would you give us a little synopsis of what that's going to be?
Gervais Williams 04:40
I mean in summary clearly what comes with safety margins is a safe balance sheets, cash generating surplus cash and stuff.
That's all the conventional stuff.
Really what I really want to talk about is the unconventional stuff and the opportunities for quoted companies which have the advantage during the recession that most particularly quoted companies which are small which can take advantage of weakness of others to expand that list particularly through acquisition to generate not this good but actually enhanced return more upside more option upside. That's really what I want to talk about today.
Peter Higgins 05:10
Brilliant. We're looking forward to hearing it Gervais. Thanks for joining us today.
Gervais Williams 05:12
Great.
Peter Higgins 05:14
Take care.
Peter Higgins 05:17
Welcome to the Investing Matters Podcast live at the UK Investor Show.
My name is Peter Higgins and I'm your host for this panel session.
And I'm the host for the series of Investing Matters podcast, which have been with numerous fund managers, journalists, economists, etc. and the City of London and globally as well.
And today I'm really really chuffed because we've got a five-star panel for you guys, ladies and gents here today. And we've got Algy Hall, Citywire, Editor of Elite Companies, Gervais Williams, author, fund manager, veteran with the City at various different points in the year can see him talking about stocks and shares at various events. So we're really pleased that Gervais is able to join us today.
And he's here, he's going to be giving you lots of different information about stocks or shares.
We've also got Stephen Yiu, Blue Whale fund manager, who's speaking with us today, Gabrielle Boyle, Troy Asset Management and we've got George Barrow of Polar Capital.
So, give a round of applause for our guests, please.
Thank you very much. So I'd like to start with my very, very first guest. And my very first guest today is the author, journalist, award-winning journalist, Algy Hall.
And later on today, before we finish this session, I'll be giving all of you a chance to win one of his books. Okay, author of the new book, which I've got here. So I'll just hold please take the stand for me, please.
Algy Hall 07:01
So I'm a believer in being very upfront. And so from the off, I wanted to tell you that my talk is a blatant pitch for Citywire Elite Companies, which is a project that I've been involved in developing for just over a year now. But importantly, this blatant pitch is a pitch with a point. Why is because I believe what we've developed is very relevant to today's discussion about uncertainty. I feel what we're working on the Elite Companies project, it's very relevant to today's discussion.
And also, it's free. And I'll explain a bit more about both those things a bit later.
But first, what is Citywire Elite Companies?
So today, we've got four excellent fund managers who you're going to hear from in a minute after me.
But imagine if you had 400 of them. In fact, imagine if the world's 400 best fund managers, were vetting investment ideas for you all day, every day, all their resources, research, wisdom and brainpower.
At Citywire we've created a company rating system that does just that. It's a bold claim.
So you want to know, how do we do it, we start by using Citywire’s 20 plus years of experience assessing fund managers skill to identify the very best equity managers globally out of the 10,000 that we monitor, we call them elite managers, we then get full details of all their portfolios, and assess the conviction with which they're backing each of their holdings.
Then for each stock, we aggregate the conviction of all elite managers that we’re holding.
And from this, we derive our ratings, the top 10% of companies get a treble A rating, the next 20% get a double A rating. The next 30% get a single a rating and the remaining 40% get A plus rating.
The methodology we've developed draws on a growing body of research that suggests managers most high conviction positions tend to perform best and the methodology is also independently approved by a leading actuary called AKG.
So anyway, circling back to the programme, beyond the attractions of knowing where some of the world's best investors have put their money, why do I think this system of rating shares is so relevant at times of uncertainty?
The answer is because as well as being very powerful, the rating system is objective. It's all about signal not noise. There are plenty of subjective takes on stocks, like broker recommendations, press tips, tweets, and even TikTok.
But by following the money, we've created an objective measure of the investment case for companies based on one of the purest indicators of judgement that there is share ownership, and it's a judgement of some of the world's smartest and best resourced investors. So let's take a vote of the moment example of this in action.
And its chip company Nvidia, and everyone today is talking about Nvidia in terms of AI and the amazing growth opportunities on offer.
But if we rewind back to last August, the company released really quite disappointing quarterly results and all the commentary, or the majority of the commentary seemed to be about fears of a cyclical downturn.
However, at the time by focusing on the interest in shares of elite managers, we were able to tell our readers the long-term growth from data centres was really the signal that was attracting the smart money still, and that all the angst at the time really looked like it replicated noise.
I think since then, when I last looked to the shares, they were up 135% on the back of that, and that part of that to do with an incredible upgrade that they received the time their last quarterly, however the more importantly than looking at a single case, is the fact that after doing this over the year, so far, it feels right there a very good ideas thrown up by the ratings.
A case in point is our monitoring of the 10 most popular stocks globally, since late June last year, which we've been reassessing on a quarterly basis.
So far, these stocks have produced a total return of 39%, which is almost three times the 14% from the MSCI World Index that isn't scientific by any means.
But it's fairly encouraging we think I also said I'd explain why all this is free.
Citywire has always had a model with its ratings when it makes money by licensing them.
In this case to companies, this means the more people who use our ratings, the better it is for us. And on that point, if you like the idea, this is where the pitch turns into a plug.
If you if you like the idea, please do check out Citywire Elite Companies website, and that's fund managers included.
Tell your friends, and also please sign up to our weekly newsletter, which is always chock full of ideas and their ideas that we where we use our data to sort signal from noise. Anyway, that's for me, thank you very much.
Peter Higgins 13:37
Okay, so thank you Algy. What I'd like to do now is enable you ladies and gents in the audience to pose two questions to Algy regarding this presentation. Is there anyone in the audience that would like to pose a question to Algy?
Audience member 13:56
Martin Ingram here. How much of that is driven by quants, rather than qualities analysis?
Algy Hall 14:05
Martin that’s a very intriguing question and I mean, because also when I start, when we started on this project, there was a term real intelligence as opposed to artificial intelligence, because what we're doing is very quantitative, the way we're approaching these ratings, and we're assessing, you know, we're looking at what people are holding, where they've actually got money, and the conviction with which they're, you know, backing shares.
So, it's all these processes, you know, the individuals are using, you know, a lot of its qualitative, I mean, they will use quantitative techniques inside what they're doing.
So there's that, you know, we're focusing in on judgement, but then we're being very qualitative. I mean, I've got that the wrong way around, we've been very quantitative in terms of how we're actually assessing it.
So we're giving a very pure indication, we like to think of, you know, where that money is, and how meaningful those that investment is.
So I guess I'd say, you know, it's blending the two is kind of taking real human intelligence, and, you know, these really smart decisions that fund managers make, and it's turning them into something, which is just very easy to understand for everyone involved.
So, if you go to the site, and you see a company has a treble A rating, then you know that, you know, there have been a lot of really smart people kicking the tires, and buying in and that, you know, we're talking about the top 5% of fund managers here that we're interested in, and they're buying in with conviction.
They're not just making, you know, a small overweight when we say shares are treblw A, we said that tells you there's probably quite a lot of them in there.
And some of them are making really meaningful bets in terms of the future performance of their portfolios. So that's yeah, that's a blend, I suppose.
Peter Higgins 15:57
Brilliant reply. Thank you ever so much Algy can have a round of applause for Algy Hall, please?
Algy Hall 16:01
Thank you.
Peter Higgins 16:06
Okay, we've got another guest up for you and after this person has spoken, have a think about two questions posed to this next panel guests. And we're going to ask George Barrow of Polar Capital to speak next. Please George take a stand for us.
George Barrow 16:31
Thanks, Peter. Good morning, everyone. My name is George Barrow. I am a co-fund manager on the Polar Capital, Global Financial Trust.
So focusing on the financial sector, you know, we are reasonably familiar with investing in challenging times the last few years or so.
And Peter asked me to present on what have we learned from investing during those kinds of periods, I just thought I'd share with you some lessons from our time to help drive good, good long-term performance.
And I think, you know, first lesson would be recoveries happen really quickly.
So yes, you'll get a sharp sell off. But you can't wait for macro visibility to come through for non-performing loans to peak and come down because you'll have missed a lot of the recovery already.
So from our perspective is important that we do the balance sheet analysis during that crisis time we stress balance sheets, we stress capital and funding, we get to a position where we put the companies through a really adverse scenario, and we're comfortable that they can come through that we can then apply a normalised level of profitability.
So investing during those times enables you to capture that upside when it happens because it's very fast, so thinking about the financial crisis.
From the lows, US banks were up 50% in the, in the following two months, from the low, we think about the pandemic, you know, similar US banks, they're up 36%, from the lows in November 2020.
So again, it happens very quickly. And so you have to be invested for that for that time, because you weren't time for that that time.
The second point I make is the regulatory response to crises in the sector is not uniform, but you do get a broad base set off. And that really opens up opportunities.
So at the moment, you know, post SVB, a lot of concerns in the US about how they're going to increase regulation for US banks, that's certainly going to come.
So regional banks in the US are going to face tighter regulation, they're probably going to lower the threshold at which banks are brought into that regime to run 100 billion.
But because there's been a broad sell off, that also opens up opportunities. So for the smaller banks below 100 billion of assets, they've sold off significantly, we think a number of those are really good opportunities. So names like East West Bank on the West Coast, names like Esquire, Webster, these will flow fall below that threshold, they probably won't see much tightening and regulation. And they're good quality banks.
Similarly, in Europe, we've seen a big sell-off in the sector because of what's happened in the US, we're not sure that that read across Is that valid, to be honest, from a regulatory perspective, and we expect yields to be very attractive. So a number of our holdings are yielding sort of high single digit cash yields, we expect them to be able to return maybe 30% of their market cap over the next three years. So there's some mispricing going on at the moment.
I think a story from a conversation with BNP CFO recently, is quite revealing in that he was in the US when SVB crisis happened.
He was trying to get a buyback approved with the ECB. And that day, he spoke to the head of the Supervisory Board of the ECB. And he said, you know, I have some concerns, you're now going to delay or cancel the buyback. And he said, actually, on the contrary, I'm going to accelerate our approval, because we want to demonstrate to the market that we're confident in the levels of capital that you have.
So again, that derating, I'm not sure it's that justified in terms of the regulatory response. The third lesson will be important to look at the relative winners during a crisis. And you know, as often you'll make long-term performance from owning those compounders that gradually look to take market share and grow over time. And that's definitely the focus of the trust.
So we have a quality bias to what we look at, we're looking for those that can reinforce their capacity to position, particularly during times of market stress. And we're seeing that at the moment.
So names like JP Morgan, they've definitely been a beneficiary of what's happened in the US, they took in 50 billion worth of deposits inflows during March during the crisis, they acquired first republic and what we think are very attractive terms.
And I'll certainly generate good long-term value from the acquisition, we saw HSBC acquire SVB UK, again, you would think that's an attractive acquisition.
So there will be relative winners from this. And it's trying to find those companies with strong balance sheets that can capitalise on that market dislocation. And that's very much the focus of the trust.
And lastly, I'd say there's no substitute for good on the ground research, particularly during times of market crisis. So you know, I'll be travelling to the US next week to visit those banks on the West Coast that are in the eye of the storm, to see the commercial real estate companies that there's a lot of pressure about.
But also remember, during 2016, the demonetisation that happened in India, so they cancelled all the 500 and 1,000 Rupee notes caused a lot of market disruption, big sell off.
And we were there that week after was really helpful to visit Mumbai, visit Chennai, really understand on the ground, what is happening, and you could see yes there are queues around the block for ATMs, people trying to get cash out.
But you can already see businesses finding a workaround that they were using Visa debit cards, cheques are still being accepted people using prepaid instruments.
So we can see that businesses and consumers were adapting already, and it was pushing the economy towards digitization as a long-term positive.
So that gave us the confidence to actually use that, that sell off to invest. So yes, I'd leave it there for the lessons that we've learned.
Peter Higgins 22:11
Thank you, George Barrow, Polar Capital. Do we have any questions for George, please, anyone in the audience got a question for George?
Audience member 22:27
Just to understand the companies you invest in? How is AI impacting those companies? And how do you take those AI development considerations in your own investments relating to those companies?
Peter Higgins 22:41
Thank you. Thank you very much. Did you hear that question?
George Barrow 22:44
I got it… because of AI affecting the industry….
Yeah, I mean, I would, it is impacting, but it's not the extended, it's really driving the investment case at the moment.
So at the margin, you're hearing some companies talking about using it within aspects of their customer service for the big banks. We were hearing Fintech using it a bit in terms of their underwriting abilities to score customer credit. So we're hearing about it, but not to the extent that I would place the full investment case on but it's certainly coming.
Peter Higgins 23:12
Thank you very much, George. Anyone else for the question for George Barrow?
Audience member 23:23
A quick question. What changes have you made since the SPV bankruptcy?
George Barrow 23:30
Good question. So we have, we have gone more defensive initially.
So as it happens, we concentrate our exposure more within the large cap companies, particularly within the US, we raise our exposure to more defensive sectors.
So we raised non-life insurance, some of the data providers, some of the exchanges, but we also use the sell off to add to some of the names, we've got conviction in within Europe, for instance. So we're adding to some of the banks that we hold there, we think the sell off is overdone.
So some of the names like AIB or HSBC, we think there's real value opportunities there. So becoming more defensive in the US but then actually using the sell off to add the names, we've got conviction in, we didn't really change our Emerging Markets or Asian exposure too much.
They didn't see the same sort of sell off, as we saw in developed markets. But we became more defensive initially, but actually now we're actually seeing some opportunities to go back into some of the regional banks names in the US so we think the sell off has become a bit overdone.
Peter Higgins 24:32
Okay. Thank you very much, George. That was George Barrow, Polar Capital, can you give George a round of applause, please. Thank you very much. Our next guest is Gabrielle Boyle of Troy Asset Management, round of applause for Gabrielle, please.
Gabrielle Boyle 24:58
Good morning, everyone. I manage the Trojan Global Equity Fund at Troy Asset Management.
I also am Head of Research. I've been at Troy for 12 years prior to that I was worked at Lazard for many years, managing global and prior to that European portfolios.
So I've been in this business for quite a long time. And you know, on the subject of how to find quality stocks during difficult market conditions.
I mean, to be honest, I can't really remember a time when there weren't difficult market conditions in one form or another.
The market is always challenging, whether it's going up or whether it's going down.
It's there's always something to worry about. And our very strong conviction is as equity investors that we believe that markets persistently underestimate the compounding power of really rare and special businesses that can grow with sustainably high returns over time. So, you know, that's our sort of conviction.
And our whole investment process. Our research process is about exploiting that inefficiency, and trying to find those really special companies trying to avoid the less special companies.
And so we avoid fragility. And we seek to own businesses that are very resilient, and adaptable, but most importantly, to own them at what we consider to be a fair valuation.
So it's those combination, that combination of looking for really special businesses, owning resilient ones, businesses that are adapting and reinvesting in themselves, but not paying too much for them. And the thing about times of volatility and challenge is that you're presented with opportunities. And one of the biggest challenges that we face in our industry is it's very noisy, it's very emotional, it can be very difficult at times. So actually, the environment in which you work in is really important.
So in our business at Troy, we've tried to create a business, which first of all is thinks very long-term, it's very aligned with our investors, we take our sort of responsibilities as stewards of capital, very seriously, we are invested in our funds, we are investors in our business, and we know what we're looking for.
So if you've got a clearer idea of what you're looking for, it allows you to sort of not have the FOMO all the time and not get too engaged in in the sort of frenetic noise that happens.
So we, we manage concentrated portfolios, we have very low turnover. So we typically will have our long-term turnover as 8%, which means we're holding stocks for longer than 10 years in many instances. But it's not no turnover.
So we are active, we do take advantage of changes. So I mean, just sort of taking those points, resilience, adaptability, valuation, and then the kind of softer issues of the way in which we kind of manage the psychology.
So in terms of resilience, we were looking to own businesses that are very profitable, or growing and often sell stuff, which is, you know, fundamental to our lives. If we look too often, what we don't do is as important as what we what we do.
So we don't like companies that are very cyclical, very capital intensive, we avoid companies with lots of debt management is really important. We try to avoid issues of corporate governance, we actually do not invest in banks, because of some of the issues George was talking about.
We're talking about that it's a challenging space, a very specialist space. And we avoid that financial leverage. We don't like businesses that are built on leverage. We like companies that have got a clear competitive advantage and where that's very predictable and sustainable.
And so and so that's the sort of key part of the resilience that oftentimes our companies have got intangible assets, they have pricing power, none of this will sound like rocket science, but the challenge comes in the sort of execution of it and the practice of it on a consistent basis because it's so easy to get sucked into the noise.
I think the other big challenge of this style of investing is that you can become very set, you know, you can become very caught in certain types of businesses. And of course, the reality is that the world is very dynamic.
And therefore, to us adaptability of these businesses is really important. And we are, we're so reminded of that given you know, what's happened this year, we're operating in a world where the macro-economic backdrop is really tough.
But yet, out of nowhere comes Chat GPT, and open AI. And we were reminded how important that ability to technology and change is to our lives. And for us, we will invest in a number of companies that are direct beneficiaries of that.
So Microsoft, for example, Alphabet, but also, when we look at our companies, we're looking to see that they're reinvesting in themselves, and that they're able to reinvest and grow at high rates of return.
So we'll look at the average company in our portfolio has very high rates of R&D as a percentage of sales, much higher than the average in the market.
They investing in capex, they tend to have strong balance sheets, and are very cash generative. So they can they can do that. And so you're that element of adaptability is absolutely critical.
The third piece in all of this and one, which is sort of impossible to overestimate is that a valuation, so you a great business doesn’t make necessarily make a great investment.
So you got to think about the valuation side. And we always look at companies in terms of what are we paying? And what are we getting on the other side?
So what are we getting is all the fun, the sort of financial productivity, the growth rates of return on capital, the margin structure, but then what are we being asked to pay for that, and managing that valuation component is is very important to us.
And we try to sort of be again be on the front foot and taking advantage when share prices move very fast, and also being objective and looking to take advantage of volatility.
And so for example, you know, addressing the specific question of how to find quality companies in a difficult market environment, actually, we've been presented with lots of opportunities over the past 18 months or so, in our fund.
For example, we started a position in LVMH, which is a company we've loved for years, but it always felt a bit expensive. They sold off a lot at the beginning of last year, that gave us an opportunity.
We started position, London Stock Exchange, which has also been a company that's had challenges, but one we thought was very interesting. We've been taking money out of the tech businesses this year, as they've been doing very well, for example.
And so just being on the front foot, and again, that comes back to this point about working in a firm where you know, we have a clear investment philosophy, we know where we're going, we're thinking long-term, we can be patient, and be objective.
And so that, for us is absolutely critical.
So I mean, in summary, managing money through challenging markets, markets are always challenging, keeping your objectivity looking to invest very clearly and consistently.
Stephen Yiu 33:24
If you are consumer facing businesses, whether it's technology company or not technology, you are going to face bigger headwinds going forward to get money from our pockets, because a lot of our money now are being sucked into paying higher energy bills, paying for more expensive goods if you go to supermarkets.
And at the same time, if you need to remortgage we will be paying a much higher rate servicing our mortgage compared to the last few years.
But then if you think about some of the names that I talked about earlier, like Google, Facebook, or PayPal, or Amazon, they are all consumer facing in a way that they is fairly discretionary based on a very discretionary spending basis.
At the same time, that if, for example, like during the pandemic, people were sitting at home getting paycheck from the government is quite easy that you just go on to Amazon or go to Google to search for certain things and complete a transaction.
I'm sure people still do that. But then I think the conversion rate will be much lower now because we need to be more selective in terms of what we can afford and what we cannot afford in the near future.
So over the last 18 months, we have exited a lot of these names that we no longer own. And we have made the transition going into some of the sectors that we did have before the likes of the US railroads which we recognise that will be reshoring opportunities in the US in North America.
We gone into a Charles Schwab which we think interest rates going to stay higher for longer for the next couple of years. And then we also have gone into some of the names like semiconductors, equipment, etc.
So we think certain things have changed. But then the thing that people will be excited about, which we're still very excited about is AI.
And we were quite big backer of Nvidia shares back in 2021. Now, and of course, if you follow the shares last year that it, that market cap fell from $800 billion in 2021, back to about 300 billion in October last year. And now it just was touching about a trillion.
So it's gone up a lot, as some other speakers talked about earlier. But what we think is quite real is, is going to give a second leg to some of the digital transformation opportunities that we talk about. But it's going to be a lot more specific.
So within the technology space, that we think there's certain things that used to work during the pandemic, that you want to get exposure to which in a new regime, you probably don't want to have as much exposure.
But within a subset of that technology bucket such as semiconductors, likes of Nvidia, such as Adobe, these names are going to capture the dynamics to the next level.
And we think that is going to be very exciting.
So that have not changed. But then equally, I think it's important to recognise certain things have changed within the tech space.
So I think the last point I want to probably leave today is, I think, historically, it's quite easy just to think about, oh, whether it's tech or not tech, because during the pandemic, any company with better technology would have done quite well because they would be deemed as pandemic winners.
But then going forward, we think within a tech bucket that you need to be highly selective what technology company you are referring to, and names that we have in the fund, we would think that they are the clear winners, things that were not in the fund that either we deem that maybe that are going to face some challenges, or maybe they will be losing out to certain competitors. So I would stop here. Happy to do questions.
Peter Higgins 37:11
Thank you very much, Stephen Yiu, Blue Whale Fund. You have any questions for Stephen, anyone in the audience?
Audience member 37:25
What is your view on Palantir?
Stephen Yiu 37:30
We have actually done quite a bit of work on the stock, we have not owned it, we're not planning to own it for the time being is, is a company that's fairly difficult to work out exactly what they do.
Because obviously, I mean, they, you go through the presentation, you listen to the management team, we've done all this stuff.
But it is very unclear exactly what they are producing as a service. Because I mean, you will hear them talking about our contract with all these different governments in the world and tried to piece all this data together to give you a bit of intelligence on the back of the data. But then, at the end of the day, it's not entirely clear what they're doing.
So for us, is going back to the investment philosophies, we want to invest into high quality businesses, which we understand that we can analyse that we can make projection that we can be a financial model, and as far as Palantir is concerned for in today's context is very difficult for us to do.
So we were passing on Palantir. But yeah, you could argue that there's a bit of AI going on that maybe they would come up with a very innovative product, that would be game changing.
Peter Higgins 38:39
Thank you very much for that reply. Stephen. Any other questions for Stephen?
Audience member 38:50
What do you think gives you the edge spotting the winners earlier than others?
Stephen Yiu 38:58
So we I mean, I said earlier that we run a highly concentrated portfolio of about 25 to 35 stocks globally.
There are five of us on the investment team. I mean, we all we do on a day to day basis is to try to find the best opportunities.
So obviously, some people would have asked it the other way around. Like there's only five of you how can you cover the world?
I mean, we couldn't. So what we think we're adding value is the stocks that ended up into the fund that we would deem that we have an edge over others as far as that's concerned.
But of course, I mean, many other stocks that we probably haven't spent as much time and we wouldn't have an edge. But as far as the stocks that we have in the fund, then we think that we have done a lot more work on a bank of those company compared to others when you have quite a few people just focusing on less opportunities.
Peter Higgins 39:47
Right, Stephen Yiu of Blue Whale Capital. Thank you Stephen. Okay, we have our final guest, Gervais Williams Head of Equities at Premier Miton. Round of applause for Gervais Please.
Gervais Williams 40:10
Thanks very much for the opportunity to speak today. Difficult market conditions.
Yep, I think they can get more difficult, unfortunately, we don't know how difficult they’re going to be or how long they're going to last.
Quality stocks…. I'm going to talk a little bit I'd probably spend about a minute on the conventional stuff.
And then I'm going to talk about something which is a bit more controversial.
There are advantages to being listed. And during difficult market conditions, the advantages of being unlisted are much less significant. In fact, they are some major disadvantages just being listed often you're much more reliant on debt. The bank's changed their minds, they've actually been listed, of course, related in part to your much more substantial kind of investment in terms of risk capital, you've got much more resiliency in the balance sheet as specifically you know, when you do get margin pressure when you do find that companies and banking is more tough when you do find you got to start getting bad debts.
Yes. We're going to get lots of bad debts, I think we're coming into a recession at the moment, then obviously, having a strong balance sheet is a very great advantage.
And particularly if you're listed, you have the advantage of a higher profile. And that can help when you're discussing things with suppliers and customers, they can feel more resilient, you can deal with them more often.
So I think first thing to say if we are in difficult markets, there's an advantage to be listed.
The second thing to say is if you are investing is to pick for companies which are already have an established market position.
Whilst it's nice to have an immature market position and companies which are coming through, it's not a great time to invest in difficult market conditions, recessions, it's harder to succeed.
So coming back to it, I think you look for businesses where there's established market positions, clearly you can time invest in companies which are immature rather than mature, they're probably investing in an operating in an area which is at this stage, a structural growth story, rather than a cyclical growth story.
We heard from Gabrielle about that before.
And most particularly you want companies with good safety margins, you're going to get some wrong, we're going to get some wrong good safety margins really, in equals highly cash generative, it means you might be less cash generative.
But that's a massive difference between less cash generative and negatively affected by cash outflows. And the last point is, clearly you want companies with very strong balance sheets, but net cash is even better. Again, it means you can be agile, you can move with the markets.
And most particularly, we look for management teams, which are very close to the front door, there's a lot of management teams who sit in slightly isolated sort of C-suites, and they're fed peeled grapes, and all a lot of it.
And quite honestly, they're really not very close to the front line, you want companies which are really close to the front door of their business.
And then we think things like staff surveys are very good on that. And we're very keen even on very small companies to do staff surveys to pick up that. So that's all the conventional stuff, let's talk about a little bit more unconventional stuff in difficult markets.
And our view is that small quota companies succeed better than bigger companies. And that's not just related to the fact that actually they are more small and agile.
The real reason why they have the upside is when companies go bust.
There's great advantages for those who are acquiring them in the middle of recessions. We did see last year, a company called made.com, go bust. If you remember that came to the market probably five years ago, there's a market cap of about 500 million, I think it touched 700 million and our friends at Next and I think was very good deal for them bought made.com for 3.4 million. Now we don't know what the valuation of may.com is, in truth, it probably isn't 500 million or 700 million, let's be honest, they probably had to put 25 million in working capital in maybe more I don't know what the number was.
But they probably had to put say 30 million in to make that acquisition, but just assume it's worth 330, then it may be worth an extra 300 million in market cap to Next.
Next is an £8.5 billion company, every 300 million is worth having, but it's only 4% or three or 4%.
In additional earnings and profits. The real advantage to buying insolvent companies isn't just for quoting companies, but most particularly for smaller quoted companies.
So as you move down the market cap range, if you think perhaps of a company, maybe it's 850 million market cap 1/10 the size of Next, if they made the same acquisition, delivering 300 million uplift to an 850 million pound company, boy, the maths gets much more interesting.
You're talking about maybe 30% improvement, maybe 40% improvement in market cap. And as you move down the market cap range into the smaller micro caps. And the UK leaves the world in quoted micro caps.
If you're an 85 million pound company, or 100 of the size of Next, clearly, you haven't got 30 or 40 million to put into an acquisition without the support of institutions.
But you can come and see people like me, and you're going to say we're going to make an acquisition, which might yield 300 million of uplift, we'd like to write a cheque, or 30 or 40 million, would you like to be involved?
And the answer is yes, we would very much like to be involved because there we are a company say of 150 million market cap after they've written the cheques or less issued the shares.
Well, on that basis, you start to get into uplift.
So perhaps 200%. Now these are all notional figures, let's not get too excited. Lots of small quoted, companies are going to have a tough time, there will be quite a few big companies and indeed small companies which go bust.
But for the first time for 30 years, I think it's an advantage to be listed.
Because I think with inflation, I think we are in difficult times and I think they're going to be persistently difficult.
I don't think inflation is going to be here forever. It'll go away quite soon. I think if we do nothing, I think we'll get negative inflation next year.
But we'll get a recession in the meantime. But I think as soon as that unemployment picks up and things governments will throw money at the problem again, we'll be back into inflation sort of two years out and the rest of it so so I think we've got persistent inflation. I think it's very uncomfortable for highly geared companies.
I think unquoted companies have a disadvantage quoted companies own advantage. And the areas which are going to have the greatest advantage with option like upsides are the smaller micro-cap sector.
I'm tremendously excited because actually, as you probably know, the share prices have actually been extraordinarily weak for technical reasons recently.
So you haven't just got the upside from being you know, the advantage of the upside option value, but you're actually getting in at low valuations at the moment. Thank you very much indeed.
Peter Higgins 46:17
Gervais Williams of Premier Miton, any questions for Gervais please?
Audience member 46:22
Hello, thanks very much. Thanks for the talk. I’ve heard you lots of times I've read your book. I like you.
I noticed you've got a rather large number of companies in your fund, maybe over 100 Why don't you have more confidence in your best, say 25 ideas?
Gervais Williams 40:04
So coming back to it, why can't we have the confidence that a lot of other fund managers have in terms of shortlist? And the answer is because we invest in smallness.
If we had a billion of clients money, they were kind enough to give us a billion.
And if we invested in 50, stocks that would invest 20 million in each holding, you know, I mean, last week, I don't know if you saw that Yu Group, which is our largest holding in our small cap fund. And that's the 42% upgrade in earnings.
So if you bought Yu Group you would two years ago, we bought it two years ago, it was less than 20 million market cap, we would have excluded that from our portfolio, market caps a bit over 100.
Now, to be fair, they haven't issued any shares kind of five times. But most particularly if you just believe the analysts forecasts, I think they'll do better than this forecast. But we'll see in time, then by then two years out, I when January 24-25, when they announced their figures, they'll have 17 million of cash on their balance sheet.
They've got 18 at the moment. In a way, it doesn't get more complicated than that. So coming back to the portfolios, the reason for over 100 holdings is because we want to invest in these companies when they're disgustingly cheap. And when they're disgustingly the cheap, you can't put much in because they're very low market caps.
It's not that we lack conviction, no, no, completely opposite. Nearly all institutions won't come anywhere near the 20 million pound companies. But you can get risk reward ratios, which are sensational at the bottom end. That's what we're interested in.
Peter Higgins 48:20
Thank you very much for that question, Michael.
Thank you very much Gervais Williams, at Premier Miton. Thank you.
Okay, at the beginning of this panel discussion, I raised the opportunity of one of you lovely fellas and ladies, winning this book Four Ways to Beat the Market, which I think we need right now written by our fantastic guest here Algy Hall.
I have one question to pose to you. And it's a very famous investor by the name of Benjamin Grossbaum.
Who is that individual? Benjamin Graham, the book is yours sir.
Because that back there. Okay. I have a second question. Regarding Benjamin Graham. Where was he born? Anybody got a reply to that question? Wins the second book?
Not you can't answer that question Gervais. Not correct. Sorry, sir. Anybody else?
Not correct. Sorry. Okay. Yes, the UK you're getting closer who? And where? In the UK? Anybody? Go for it?
His mum Yes, that's that's the answer. But which location was she when he arrived from his mum? Anybody? Any takers?
London. He was one years of age before he moved to New York.
So this book is yours. I'll get that book to you in a minute. Okey dokey.
Very well done. And I'd like you will just give our panel guests Algy Hall, Gervais Williams. Stephen Yiu, Gabrielle Boyle and George Barrow a round of applause.
Thank you all for listening to this live Investing Matters podcast recording at the UK Investor Show with our five star panel.
Lots more fantastic fund managers, analysts and journalists and economists going forward.
And we hope you enjoyed this one. Please subscribe to all of our platforms including YouTube, LinkedIn, and Twitter for all of your educational needs via the Investing Matters podcast. Take care and God bless you all.
LSE 50:50
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