Tuesday, May 26, 2015

Notes From the 2015 London Value Investor's Conference

From Market Folly:

London Value Investor Conference Notes 2015: Woodford, Ruffer, Brandes & More
Neil Woodford – Woodford Investment Management
Q&A Session.  Neil Woodford is one of the UK’s most respected and successful fund managers. After 26 years at Invesco Perpetual where he managed £30bn in 2013, he left to set up his own fund management business. Woodford has a background in economics and finds it natural to combine bottom up stock picking with top down analysis. He focuses on the medium and long term. Trying to value a business without taking into account the macro and competitive environment is like music without instruments; it doesn’t work. He places emphasis on portfolio construction – not just the cheapest stocks. Trying to be scientific about the future is an inherently odd thing to do. Portfolio construction is not a science, more an art and involves lots of judgement. Valuation should always involve a range of intrinsic values and not an absolute number. He uses revenues, earnings and cash flows to value a business and spends a lot of time getting close to businesses including meetings with management.  Considering history and the past is important when making a valuation but they are only part of the judgement because companies, management and technology can change. He does not spend time worrying about what other managers are doing. 
On how to value early stage companies – he uses the same tools and valuation methods and flexes them. It is possible to value pre-revenue businesses. They project cash flows just as they would for established companies. 
On fund management - smaller scale boutique style fund managers have advantages as smaller teams are often more effective than large. Fund management lends itself to being a cottage industry. The industry generally charges too much in fees. The thing that offends him most is charging high fees for closet indexing. The industry needs to become more open and transparent. 
On the £18m fine that Invesco received after Woodford had left - he said the FCA report is pretty comprehensive and makes good reading. The fine related to disclosure rather than the use of excess leverage. He has learnt from the incident to keep his new fund’s model very simple. They will only use derivatives for currency hedging and nothing else.
On how to deal with underperformance - all investors go through difficult periods.  He underperformed in the tech bubble of the late 90s. It was a draining and emotional experience. Woodford said you must trust your discipline in good times and bad. You need investment anchors to stay consistent. 
On what he saw that made him sell out of Tesco at the same time that Warren Buffett was buying - he did not like the way Tesco were deploying capital and he became less convinced about future returns. “They were planting flags.” He thought that competition would increase in the sector but he did not foresee the rise of the discounters, Aldi and Lidl. After a 30-minute conference call with the new CEO, Philip Clarke, he thought the problems facing Tesco were structural and not cyclical and sold all of the stock within a few weeks.
Jonathan Ruffer – Ruffer LLP
“Value investor,” like “democrat,” is one of those words that it is hard to say you are not. Ruffer thinks of himself as value investor but in the negative sense that he is not a momentum investor.  Unlike some value investors, Ruffer believes we must grapple with and try to predict the future. The Romans distinguished between futurum and adventus. Futurum refers to events that roll away from us. For example, a turnip farmer was reasonably sure that he was going to eat boiled turnip for dinner but the further ahead one looks the harder it becomes to predict the future. Adventus refers to those events or shocks that come at us and hit us, things that we could not possibly have seen coming. The momentum investor concentrates on the futurum.  Unlike the Roman view of adventus (which sees the challenges that come at us as acts of god) it is the task of the value investor to spot the next crisis coming. This can be done by studying history, starting from the beginning of limited liability in 1840. Stock market crashes do not come out of a blue sky. The big question for investors now is how the huge amount of debt in the world will be resolved? Collateral is a crucial part of the lending process but today central banks have made too many gifts through QE and taken collateral out of circulation. Since 2009, the money supply in the US, Europe and Japan has been expanded. By keeping interest rates below the rate of inflation a new asset bubble has been created. There is a crisis on the way in which all asset classes will fall in value but it is hard to say exactly when. When the crisis does arrive “safe” investments will be the most dangerous. As in Britain in the 1970s, inflation of 10-20% is likely.
Tim Hartch – Brown Brothers Harriman
Looks for companies with: a loyal customer base, a sustainable competitive advantage, essential products and services, leaders in attractive markets, strong balance sheets, high returns on capital, disciplined capital allocation. Looks to own 25-35 stocks and invests with a 3-5 year horizon. He sells investments when they approach intrinsic value. How is intrinsic value calculated? Hartch takes into account revenue growth, margins, business mix, capital intensity, ROIC, acquisitions, discount rate and terminal value. He is looking for a 15% return per annum over five years....MORE