As a general rule, winning companies don’t change their economic shape over time. Stock market sectors and business classifications certainly change. So do generations of entrepreneurs and the managers of businesses. Fads and cads come and go, usually without much in the way of lasting success. But the companies that sail on from year to year most often have similar characteristics: relatively predictable scalable growth; superior returns on capital and equity; prodigious cash generation.
These ultimate characteristics are not always sufficiently prized by investors though. Fifty-odd years ago, shares were simply valued in relation to the dividends they paid. Cherished business models were based on just making things that people demanded and reinvesting any surplus cash in the production facilities. This was light years away from the innovative approach to business practiced today by the likes of Apple, Google or Microsoft, whose customers are born to follow them in the companies’ chosen direction.
Even so, with the benefits of 50 years’ experience of equity investment in the rear view mirror, there are still those for whom the grail is chasing the latest hot idea, buying shares that show the greatest relative strength against ‘the market’ or whose share prices trace out nice little patterns on a sheet of graph paper.
There is certainly a lot of money to be made by moving the chess pieces around the stock market board. But it is usually made by the promotors who sell the promotion, not by the investor who buys into it. So the doors keep revolving. Conglomeration or buy-and-build consolidation, followed by break-ups and spin- outs; financial and property vehicles; hi-tech, low-tech, no-tech. For most investors, the ephemeral promise turns out to be real-life, hard-cash value destruction.
‘Business Perspective’ investors eschew all this frenetic activity. We seek out successful companies with the right economic shape. These businesses are the Crombie overcoats of investing. Not always at the forefront of fashion but ones you can count upon to keep you dry in a storm. Over time, their owners get rich. Think James Halstead – a seemingly dull business making floor coverings. Yet it has had only a couple of downturns over almost 40 years. During this time, the owners have seen dividends increase year-on-year and been rewarded with a few specials thrown in for good measure! This has to be the gold standard of proper investing. Spare me the excitement of the stock market, please.
This strategy of investing in a business based on its fundamentals, always making sure to buy more in value than you are paying for in price and ignoring whether the price is likely to move up or down in the short term, is producing good results.
With the first half of 2015 now complete, it is pleasing to report that the Fund share price is up by 11.2% compared to just 1.1% for the UK stock market. FE Trustnet continues to place the Fund top quartile in the IA UK All Companies sector. It is 40th out of 270 funds over 1 year and 20th out of 262 funds over 3 years. It also has the 6th lowest FE risk score in the sector.
Reflecting these factors, UK Buffettology received the Money Observer Best Smaller UK Growth Fund Award towards the end of June. This is based on it having the best risk-adjusted performance over the last three years among funds with between £15m and £150m under management.
Watch this video interview with Keith Ashworth-Lord to learn more about his value investing style.