As a business transformation investor focused on the UK, we rarely get to invest in disruptive technology. Our usual market is companies that are more established, going through tough periods, but which – under new management and armed with new strategies – are becoming better versions of themselves.
To the casual observer these companies are often viewed as dinosaurs, soon to be facing the risk of extinction as the trading environment changes.
However, over the last 20 years the dizzying cocktail of breakneck technological shifts, breath-taking monetary easing and more latterly innovative investment products that allow access to investment themes far more easily than ever before, has led investor preferences in a particular direction. A growth direction.
A review of the pandemic
For our Fund and its investors, the pandemic was unkind. Having peaked at 316p on December 27th the Fund NAV bottomed in March 2021, at 180p erasing c. 25% of the accumulated outperformance over the past 12 years. More frustratingly for our clients, whilst the Fund recovered from its absolute lows, successive waves of the pandemic meant that the path was not smooth and in relative terms the nadir was later in the year.
Our belief in strategic adaptability meant that early on we were convinced that the same stocks that had led the Fund into the pandemic crisis would lead the Fund out of it. Later in 2020, the nature of conversations with management teams started to shift, progressing first from panic to stability, and then on to thinking about the future. Corporates were starting to learn and adapt. The rebellion was on, and then there were three distinct changes – insider interest in our high conviction picked up materially, sentiment turned, and then the opportunists came.
In the main these were real asset businesses being bought. Typically, they were trading at or near historically low valuations. Moreover, as owners of assets with long useful lives deployable over lengthy periods to generate consistent cash flows, these businesses had infrastructure-like characteristics – a trait we often look for and value highly.
It did not escape our attention that some of these companies could also be seen as amongst our most threatened: by the pandemic, the energy transition, or by technological disruption. Yet they were piquing the interest of long-term and highly sophisticated investors.
The boom in interest for our type of stocks helped the Fund recover its poise and hit a new absolute high by 2021. Extinction thwarted.
Look ahead to the future
Remember, we look for established businesses with market position, real cash flows and critically, large pockets of value where there are not threats but opportunity. If a business is faced with threats, better to have the established position, cash flows, and asset base to be able to do something about it.
Crucially, we also look for value-creating management teams. Business transformation does not happen in isolation; there must be an agent for change, and that agent has to have full stakeholder support and exhibit real commitment to better capital allocation.
As 2021 progressed, large global asset allocators saw large, established and highly cash generative companies with real asset bases and real market positions being aggressively managed for change to fight the successive and often existential threats they might face.
They saw companies, often with new boards, committed to dealing with their issues, allocating capital accordingly and making revolutionary strategic decisions that call into question the very basis on which we have thought about and valued these shares for many years. They have rebelled against their own extinction, becoming better, less challenged versions of themselves. Results are most definitely therefore improving.
It has been fascinating to hear in the last few months from WPP, ITV, Landsec and Vodafone management that there are lasting improvements being seen. The pandemic has not been and will not be an extinction level event. Not for the FTSE 100, not for value investing, not for the UK and not for UK Dynamic.