View from the Road – Q4 2019
Over the last few weeks we have been hitting the road and spending some time with investors. It is always insightful to hear how our clients view life and markets; and as usual some interesting perspectives emerged…
Over the last few weeks we have been hitting the road and spending some time with investors. It is always insightful to hear how our clients view life and markets; and as usual some interesting perspectives emerged:
- There has been a massive shift in investor perceptions towards value strategies. Many of them are, at long last, beginning to increase their exposure to “value” styled funds. Perhaps the rotation from “over-valued” defensive shares in September and October helped focus investor minds.
- We are being asked about how we incorporate “ESG” into our investment process at virtually every meeting.
- Many clients are now taking a fresh look at Carnival post the recent share price weakness.
- Numerous investors were surprised at how lowly valued Hugo Boss shares are.
- We encounter mass investor apathy towards Imperial Brands – which is normally a positive sign! Those that owned it wished they didn’t and are not willing to buy any more despite the valuation and there was no desire from non-holders to get involved. The shares are ripe for corporate activity or an activist investor to become involved…
We have written extensively on the merits of value investing and how out of favour the strategy has become over the last 12 years.
During previous roadshows, whilst many investors understood our argument that “valuation must matter”, they searched for a catalyst for the strategy to outperform! Sadly, catalysts are only obvious in hindsight but perhaps a combination of polarised investor positioning and the extreme valuation differentials between value and growth/quality stocks at the end of August have finally led to a rotation back to “value”.
Given these differentials, we were not surprised that the shift away from quality/growth to value was sudden and very aggressive. The MSCI Europe Value index outperformed Growth by 2.1% on 10th Sep – which is the biggest one-day move in more than 10 years!!
Source: Barclays Research, Datastream
With value beginning to outperform, the value versus growth/quality debate was front and centre of our conversations with investors. We sensed that the aggressive rotation in the first 2 weeks in September caught many by surprise and they now want to be more balanced in their blending of manager investment styles.
Clearly given the dismal performance of value of the last 12 years and the remaining significant valuation anomoly, we believe this mean reversion has a long way to go!
We believe that our fund, with its significant value bias, is well placed to benefit from this. The fund remains attractively valued trading on 11.4X Year 1 PER and yields 4.5%.
Our strict investment process ensures no style drift – we only own cheap shares!
ESG is also clearly front and centre of investors minds now. Investors want to understand how fund mangers think about ESG at a corporate level but also how we integrate it into our investment process.
We take ESG very seriously and have recently signed up to the UN PRI.
In addition, we have included a detailed ESG scorecard into our research template. This is Bloomberg data which screens for 85 ESG factors for each investment. A low rating triggers further investigation and potential exclusion.
We bought a position in Carnival towards the end of 2018 as the shares had de-rated to extreme levels. As is usual for us, we bought it too early as the share price has continued to follow newsflow and not earnings! The result is that the shares now trade on 10X Year 1 PER and yield 4.6%, which we view as highly attractive. It is clear from the roadshow that many investors share our view on valuation and non-holders are now doing a lot of work on the name! Perhaps we are close to a bottoming of the share price.
We discussed our recent purchase of Hugo Boss with investors, as it exemplifies many facets of our investment style and process. We want to buy great businesses when they are cheap and out of favour. We believe that Hugo Boss, which enjoys returns on invested capital of over 20%, and is now trading on a 13X Year 1 PER and yield of over 6% with an ungeared Balance Sheet ticks all our boxes. Many investors were surpised at how far the shares had fallen in October given the low rating and attractive dividend yield. They also noted how cheap it looked when compared to some of its peers in the “luxury” sector.
Our holding in Imperial Brands is a talking point for our investors due to the current valuation extremity of the shares – they trade on 6X earnings and yield 13%!
It was noticeable that “valuation” is currently not enough for either current shareholders to buy any more shares or for non-holders to get involved. Mass apathy is prevailing!!
We continue to believe that these shares are significantly undervalued. With a new Chairwoman recently installed and the CEO leaving the business shortly, we believe the current situation is unsustainable. The shares are ripe for corporate activity or an activist investor to become involved……..
Many thanks for your patience and continued support.
David Keir (David@saracenfundmanagers.com)
Graham Campbell (firstname.lastname@example.org)
Co-Managers, TB Saracen Global Income & Growth Fund