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Matthew Beddall

March 8, 2022 By Matthew Beddall

What’s our edge?

As an active investment manager, we put ourselves forward as being able to deliver better than average performance for our clients. This is a tall order. To believe it is possible requires either hubris or a belief that we have an edge over other investors.

Setting out to manage other people’s money based on excessive self-confidence alone is not a great plan. Despite this, the investment industry can often encourage such behaviour. In the short-term you can get lucky, whereas it takes years to demonstrate true skill. Narratives are often crafted retrospectively, which can draw both investment manager and client into a belief that everything the former touches turns to gold.

Real investors understand the importance of remaining humble.

So, what then, do I think is our edge? I see three distinct sources, one that is transient and two that are permanent.

A Value Investing Tail Wind

The “growth” style of investing has had a prolonged period of outperforming “value”, such that there are many more proponents of the former than the latter. As I have written about before, the evidence suggests that this out-performance was driven much more by the price investors are willing to pay to own a high growth company than by actual growth in earnings.

In the long run we believe that the returns from owning a company will mirror the underlying earnings from their business and I think many investors are proceeding in the belief that this is not so.

Relative to history the optimism pessimism “gap” between “growth” and “value” styles looks extreme (as measured by the price-earnings multiples of indices on the two cohorts). As a value investor I believe this means we are fishing in a pond with less future success “baked” into the share price of companies at a moment in time when there is less competition to land these catches. It is this that I think could provide us with a transient edge.

Time horizon

If you can think like a long-term investor, I believe it conveys an advantage. It is however easier said than done.

One of the companies that we are a part owner of recently experienced a bump in the road. The company shut down a new initiative, at great expense and much embarrassment, because they believed it would never deliver an acceptable return. The company’s share price fell in response to this news, as many investors decided to walk away.

A recent broker research note on the company shared their latest valuation, with a base-case of £26 per share and an optimistic-case of £33. At the time the note was written the share price was around £19. With a potential 30% upside, you would have thought the brokerage house would be tripping over themselves to recommend buying the shares. However, their outlook was “neutral” because the “path and timing of the potential value crystallization remains unclear”.

This story is typical of the unhealthy focus on the short-term that I see in markets. In the case of this company we may, or may not, be right and we certainly do not know what the catalyst for a share price increase will be. What I do believe is that attempting to “time” a purchase or sales based on second guessing what the short-term will hold leads you down a path of missed opportunity. Being a long-term investor requires patience, often in the face of discomfort, which is a virtue I do not see being widely practiced.

Ignoring the noise

We live in an age where we receive a virtual firehose of information on a 24/7 basis. This leads to the stereotype of the investment professional sat in front of banks of screens full of scrolling news and flashing numbers. As you get drawn into this world, the nuggets of information give our brains little dopamine hits and draw you into thinking they have an exaggerated importance.  

My formal training (many years ago) was in statistics. This taught me the importance of looking beyond the noise that we are confronted with in so many aspects of life. I see this skill as related to, but distinct from, being a long-term investor. All investors have limited bandwidth – which means that time is your most valuable commodity. Even a long-term investor can squander their time with distractions that are ultimately not important.

When we make an investment decision, it is based on a thesis, which sets out why we think it will be successful. In my opinion a good investment thesis normally depends on one or two “big” things, rather than many “small” ones – being able to see the “wood for the trees”. I think that the human brain is wired to be distracted by “noise”, and if you can overcome this it will help to make better investment decisions.

Alignment of interest

My savings are invested in our fund, which provides an alignment of interest with our customers that seems surprisingly rare in an industry where you are not expected to eat your own cooking. Furthermore, Neil and I are owner-operators of our business, which I think means that our decisions are less clouded by career risk than is often the case.

I believe that being a large investor in the fund, and part-owner of the management company, helps reinforce the edges that I describe above. I believe it makes me more able to focus on long term investment decisions and less distracted by short-term noise.

I do not know the extent to which these advantages will help us deliver on our goal of delivering good long term compound returns. What I hope you are reassured by is that we are not proceeding based on hubris. In the land of the blind, the one-eyed man is king!

Filed Under: Commentary

January 20, 2022 By Matthew Beddall

Could one bad Apple spoil the whole barrel?

The extent to which a small number of large companies supported the major stock index returns in 2021 has been well written about in the financial press. For example, a recent Bloomberg article told how the “number of Nasdaq stocks down 50% of more is almost at a record” with “40% of index’s firms having fallen by half from one-year highs”.

As of writing the 10 largest Nasdaq stocks account for more than 50% of the index, with the largest company, Apple, having recently hit a $3 trillion valuation. Apple is an impressive company, and one that, via Berkshire Hathaway’s holding, we have some exposure to. It has been a clear beneficiary of the lock down economy and has seen a year of “bumper” profits. The chart below shows a history of the company’s net income or earnings, together with the average analyst forecast of the next two years.

Source: Bloomberg

The next chart shows the company’s revenue by line of business for each of the last five years. This shows how the “services” revenue has been growing as we all watch more movies and download more apps from Apple. It also shows how sales of their iPhone are the dominant source of revenue, and one that had a big lift in the last year.

Source: Bloomberg

Apple’s share price is currently around 30x the value of its earnings. Prior to 2020 the company had spent ten years during which this ratio was almost always less than 20x. Furthermore, its most recent earnings are substantially higher than it has ever seen before, arguably helped by lots of lock-down induced iPhone purchases.

In my experience, it is a fundamental human tendency to like to extrapolate recent history into the future. This makes good sense as it is a good heuristic for many aspects of life. I believe that stock analysts are particularly susceptible to this, with company forecasts for the near future typically being “like last year plus a bit”.

The risk I see in owning a company, like Apple, at its current price is that not only are you susceptible to its price earnings multiple reverting back to historic levels (which would equate to a circa 30% price fall), but to the company struggling to deliver results that match last year’s “blow out” success. This is the type of situation that I am happy to leave to other investors with a more optimistic disposition than my own.

Filed Under: Commentary

December 6, 2021 By Matthew Beddall

A Healthy Opportunity Set

The movements of popular stock indices dominate the headlines, and all too often the psyche of investors. Given the large price increases in most stock indices for the year, it is tempting to think that the “opportunity set” for investors has been diminished. This is not, however, what we are seeing.

As of 6th December, the S&P 500 is up almost 21% for the year to date and only 3% below its recent all-time high. It’s global counterpart, the MSCI World index, is up almost 15% and around 5% below its all-time high. These indices are, however, weighted by the size of their constituents and so their movements do not reflect that of the typical company.

It is the case that many companies have seen price falls far greater than those of the popular indices. The average distance from the high of the last 52 weeks is 14% for S&P 500 companies, and 16% for MSCI World companies. The chart below shows the percentage of companies in these indices, together with the Russell 2000, that have seen large price falls. The chart contains three definitions of “large”, distinguished by the different coloured bars.

The analysis illustrates that almost one third of the companies in the MSCI World index have seen their prices fall by more than 20% from their 52-week high. The Russell 2000 index contains small and mid-cap American companies, is up 11% for the year and is 11% below its all-time high. This index has around two thirds of its constituents now more than 20% below their 52-week high. This all hints at the extent to which recent strong performance in the stock market has been driven by the very largest companies.

The technical definition of a “bear market” is a price fall exceeding 20%, and there are many individual companies that now meet this criteria. A fall in price does not automatically make something a bargain, but with large numbers of companies having seen price declines we believe it improves our chances of finding attractive investments.

A good number of the companies that we follow have experienced price declines in the past few weeks, influenced in part by the list being dominated by smaller “mid cap” companies.

Our job, as active investors, is to ascertain the extent to which these price declines reflect changes in underlying business prospects, versus changes in the animal spirits that we believe also drive markets. Where we believe that a price decline is far more driven by the latter, it gives us an opportunity to make an investment at an incrementally more attractive price.

We believe our opportunity set has materially improved in the last three months because we have seen many companies where the decline in their share price appears out of step with any reasonable analysis of their prospects. Whilst there can be no guarantee that any single investment will play out as per our analysis, we believe that broad price declines tend to tilt the odds in our favour.

One of the cornerstones of our investment approach is to value every business that we own and track. We use these valuations to estimate the intrinsic value of our portfolio, and its discount to current market prices. This gives us a way of quantifying the strength of our opportunity set, from the bottom-up, that we label “excess value”.

This bottom-up “excess value” measure says that we see more opportunity now, than we did at this time last year, having already produced some healthy returns so far in 2021. It is against this backdrop we feel a sense of optimism and, more importantly, have started to deploy some of our “dry powder” cash holdings.

Filed Under: Commentary

October 21, 2021 By Matthew Beddall

Stealing from the poor to give to the rich

I have written before about my concerns over the optimism that is required to justify the valuations of many popular “growth” stocks. The analysis that follows will further explain why I have these concerns.

The chart below shows the total market capitalisation of the ten largest “growth” stocks, as defined by the MSCI World Growth index. Their total value is expressed as a percentage of the regular MSCI World index. Hence, if you were to purchase a MSCI World tracker fund you would currently have around 17% of your money invested into these ten large businesses (as an aside this compares to UK stocks having a circa 4% weight in the index).

The second, black, line on the chart shows the percentage of earnings that these ten companies represent. Hence, their earnings, or profits, currently represent around 10.5% of the total earnings of all the companies in the MSCI World index.

How should we interpret this disparity between the current market value of these companies and their earnings?

The share price of a company, in theory, represents expectations about its future cashflows to shareholders. Hence, the disparity between the two measure tells us that the consensus view of market participants is that these ten large businesses will grow their earnings at a much faster rate than the other 1,590 companies in the index. This is possible, but given that they are the largest growth companies, it is surely a tall order?

For the curious reader, the table below shows the ten largest constituents of the MSCI World Growth index that were used to produce the chart. Together with their total market capitalisations, the table also includes the total value of shares sold by company insiders in the last 12 months.

Although the value of shares sold by company Directors appear small relative to the companies’ market capitalisations, the proceeds are concentrated in the hands of a very small number of beneficiaries. This represents a transfer of money between purchasers, who will have included retail investors and pension savers, and the people who have an intimate knowledge of these businesses. This leaves me thinking that the empowerment of retail investors could, in fact, be stealing from the poor to give to the rich, rather than the other way around!

As long-term investors, company valuations matter to us, as a great business will only make for a great investment at the “right” price. We cannot know that these businesses will not live up to current lofty expectations, but our approach is to avoid investing when we think the price paid requires undue optimism. Our core objective is to make sure that our portfolio is robust in a range of future scenarios. By managing the risk of financial loss in this way, we believe we can increase our chances of delivering superior long-term compound returns.

Filed Under: Commentary

August 24, 2021 By Matthew Beddall

A letter from Matthew Beddall

Three years have now passed since Neil and I launched the Havelock Global Select Fund. In this time the fund has returned 29.9% and is ranked in the top quartile of its sector. As a value-orientated global fund it has outperformed the MSCI World Value index* by 12.4% and outperformed the largest UK listed MSCI World Value ETF** by 21.4%. It has achieved this without investing in any of the large tech companies that have dominated the performance of many market indices and funds, and despite having never been fully invested in equity securities.

We founded Havelock in the belief that a long-term objective focus on a small number of well understood businesses was an increasingly rare investment approach and so offered an advantage. Despite this, even I could not have predicted seeing such folly as investors clamouring to buy shares in a bankrupt company or being induced to invest in a cinema chain with an offer of free popcorn!

Although the last three years has seen several “bumps in the road”, financial markets have been kind to investors. The rising prices of almost all assets have left many either consciously, or sub-consciously, believing that markets only ever go up, with the importance of exercising judgement looking like a quaint relic of the past. History suggests that such complacency is dangerous.

I remain resolute that patiently studying companies, trying to be objective and having a healthy disregard for share price movements increases the chances of superior investment results – even more so if we see an environment where markets are more discriminating. In the long run, better than average performance cannot come from average behaviour, and right now, our approach feels like a road less well travelled.

A further key aspect of our philosophy is the importance of having skin-in-the-game, and to this end most of my own wealth is invested in the fund on the same terms as every other client. If the current euphoric market environment subsides, I suspect that this will look increasingly appealing since all too often the interests of those entrusted with other people’s money are aligned with the gains but not the losses.

I believe that our approach has been validated by the strength of our track-record. The three-year anniversary serves as a widely recognised milestone in the life of a fund, and one that we are now only too happy to be judged against.

Alongside the third anniversary of the fund, I am celebrating my own 21st anniversary of working in the investment management industry. Despite this I did not anticipate just how big a challenge we had set ourselves and it is against this backdrop that I am deeply proud of what we have achieved.

We have been fortunate to have had many supporters along our way and I would like to finish by thanking our staff, clients, friends, and family for all that you have done. The experience of the last three years has taught me to value these relationships even more and I look forward to continuing to find ways to repay the displays of belief that you have shown us.


Matthew Beddall
CEO Havelock London


*The MSCI World Value index net total return expressed in British Pounds.
**The iShares MSCI World Value Factor ETF which tracks the “enhanced” MSCI World Value index.

INVESTMENT RISKS

The value of investments in LF Havelock Global Select (the fund) may fall as well as rise. Investors may not get back the amount they originally invested. Investments will also be affected by currency fluctuations if made from a currency other than the fund’s base currency. Past performance is not a reliable indicator of future results. Potential investors should not use this document as the basis of an investment decision. Decisions to invest in the fund should be informed only by the fund’s Key Investor Information Document (KIID) and prospectus. Potential investors should carefully consider the risks described in those documents and, if required, consult a financial adviser before deciding to invest. The fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state listed in the prospectus.

IMPORTANT INFORMATION

This document has been issued by Havelock London Ltd, which is authorised and regulated by the Financial Conduct Authority (FCA reference number: 799920). It is confidential and must not be distributed or copied – either in whole or in part – without our consent. This material is provided for information only and is not intended to offer, solicit, recommend or advise on the purchase or sale of any investment. It should not be used to make investment decisions. This material is not intended for any person in the United States. None of Havelock London’s services or related funds is registered under the US Investment Company Act of 1940 or the US Securities Act of 1933. This material is not an offer to sell or solicitation of offers to buy securities or investment services to or from any US person. The data for the LF Havelock Global Select Fund was sourced from the fund accountants. The data used for the MSCI Global Value Index and iShares MSCI World Value ETF was sourced from Bloomberg. The data used to judge the funds ranking in the IA Flexible Investment Sector was sourced from FE Trustnet.

Filed Under: News

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