August 2024

What are your top three criteria / considerations when assessing an investment opportunity?

When I am looking at an investment opportunity the top three things I look at, in no particular order are:

Does demand exceed supply for the product which gives me an idea on how sustainable the margins are for the company? You only have to look at the finance industry to see how, in many areas, it has just been a race to the bottom in terms of pricing as supply has exceeded demand.

How conservative are the accounts? It might surprise a lot of people that Frasers have, in my view, the most conservative accounts in the London market, not many companies make £500m + after writing off £85m of goodwill in admin expenses. Exceptional items are a red flag to me.

There is always more value in the second-hand market, and I have made a career of avoiding new issues, especially anything coming out of private equity.

What are the most common misconceptions a board has about attracting institutional investment?

Attracting institutional investment is a long-term game where both parties have to be comfortable with the expectations of each other. Investors can't always expect profits to go up every year so they will want to trust the management team to tell it how it is. Investors are increasingly being judged on shorter and shorter time horizons so management teams have to realise that as well. At the end of a company meeting I will sometimes be asked by the CEO why I have been selling shares in the company. My reply will be that I thought you were going to ask that question so I popped into HR on the way to the meeting and looked up my job description, it said fund manager: buys and sells shares - you never asked me why I was buying them!

How have you seen the equities market change and what is your advice to boards and companies in terms of communications in this context?

The main changes to the market in the 145 quarters I have been managing money is the demise of the market makers and the rise in algorithmic trading. With no market makers there is no capital to absorb lines of stock so prices react very quickly and the size of the moves is much larger. In terms of the algorithms every company announcement is scrutinised for particular words which might indicate a change in the expectations for profits. This will immediately be pounced on by the machines and the shares will either go up or down very quickly.

In addition, those companies who are used to beating expectations will be expected to do that forever and so that gets priced in until they don't, and the shares get whacked. It seems you can't win. My advice to companies would be to act conservatively in terms of the numbers, tell it as you see it, have a dividend cover of 3/4x and interest cover of at least 4x so you are protected against the unexpected. Don't be afraid of keeping a cash rich balance sheet and ignore the siren voices of doing a buyback. Only buy back shares if you would actually buy them for your family. See the Next report and accounts for the way to do it.

What is the most interesting thing you’ve read / watched / listened to recently?

I have just finished reading The Trading Game by the ex-Citibank trader Gary Stevenson, that book is a good description of how the market works. At the end of the day people forget that it is a market and for it to function correctly information must be timely, honest and enable all participants to have a greater understanding of the company’s business and the industry in which it operates.

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Please note: The views and opinions expressed in this interview are those of the individual financial professional(s) and do not necessarily reflect the views or opinions of Alma Strategic. These insights are provided for informational purposes only and may not be relevant at the time of reading, as market conditions can change rapidly. The information provided should not be construed as investment advice or a recommendation to buy, sell, or hold any financial product or security. Individuals should conduct their own research and consult with a qualified financial advisor before making any investment decisions. Alma Strategic disclaims any responsibility for the accuracy or completeness of the information provided in this interview.