Highly regarded portfolio manager Alex Crooke explains how he picks winning stocks, what he thinks of the US tech sector, which shares he’s been buying and selling, and the odds of a sharp stock-market correction.
Lee Wild, head of equity strategy at interactive investor: “The trust has a great track record of performance, and even after the coronavirus crash, the share price is back to where it was before and near a record high. Could you please explain your stock-picking process and why you think it's been so successful?”
Alex Crook, portfolio manager at the Bankers Investment Trust: “Well, we employ a lot of expert stock-pickers from Janus Henderson covering specialist markets, so it’s the US and Europe, or Japan [and] China, and these experts know their markets extremely well and are picking the best stocks in the sort of smallest portfolios, so that’s 20 to 30 names in each sort of geographic region. And then I act as aggregating those and act as asset allocators as well, so trying to get the decisions right [about] where to put more of our investments into different [areas] of those regions.
“And I think what's been successful over the years is an emphasis on quality. So, we try and buy good quality names, companies, with sound balance sheets, so not too much debt to put things under pressure, and really good, strong cash-flow generation.
“So, we think actually the best companies to own over the long term are those that generate more cash than they consume in simple terms. So, they’re still able to invest, they’re able, hopefully, to pay us dividends, which we can pass through to our shareholders, but it puts you into these better-quality names.
“And then, finally, we look to try and not overpay for those names, so looking for some element of value, but we clearly want growth as well in terms of profit growth, and I think it's stitching all that together with maybe that attitude of taking sort of [a] longer-term view of life, trying not always to get things in the short term right, but get things in the long term right that I think has stood us very well over time.”
Lee: “I mean, the trust has a significant holding in the big American tech stocks, which include some of the best performers of 2020 so far.
“Now that was a great call owning those stocks, but what’s your view on them now? Very much in the news at the moment, they’ve be flying. Are you still a buyer at today’s prices, or do you think the time to sell is getting closer?”
Alex: “Well, we are finding opportunities, maybe not in some of the more obvious names in the market, the largest Amazon’s and so, so we own them, but we’re not particularly selling just at this point. I think what the lockdown did is accelerate some of those trends that were [already] there. So, where there’s that digitalisation, pushing things online, shopping online, it just accelerated those trends again for these companies, so actually they’ve benefited very well. So, we’re still holding on to most of those.
“We have been taking some profits in some names around the social media sort of companies, but we've also been finding new investments, so something like Intuit (NASDAQ:INTU), which is a financial software business, which we think some of those trends of remote working should work very well for a business like that. So, there's still opportunities, but on aggregate, yes, I think we're more of a holder and moving towards probably the phase where we start to take some profits in these companies.”
Lee: “OK. Of some of the ones that you have been pruning, are you able to name some of them?”
Alex: “I think, yes, we can. I mean, Facebook (NASDAQ:FB), we've taken a little bit out of that stock, is the most obvious one. You know, there's lots of challenges in some of these names. I’d rather not name all of them, but we took profits last year when share prices had risen, as I said some of the trends have accelerated and been beneficial in this phase, but we really, on the whole, haven't taken a lot of profits. Some of our largest holdings such as Microsoft (NASDAQ:MSFT) still very keen on some of the themes. They're printing very good earnings numbers, very good profit growth, and very strong revenue growth as well, so these businesses are strong and getting stronger.”
Lee: “Were you active in the market during the pandemic? Were you looking to take advantage of the lower prices during the worst of the March sell-off? And, if so, which stocks have you been buying and why?”
Alex: “I think there's been three phases this year to navigate. The first one was to identify, I suppose, that the virus and resulting lockdowns were going to be a lot more fundamentally economically damaging than maybe we thought back in January, early February, when it seemed to be more isolated to Asia. Now that involves selling positions we've held for a long time such as American Express (NYSE:AXP) with the big travel business tucked in there, booking.com we owned, Carnival (LSE:CCL), some of the airports, so, again, removing some of these businesses that clearly were going to, you know, suffer from a very sharp shutdown.
“But in the phase, really as you say, markets collapsed very sharply and it threw up some interesting investments that we've already owned and some companies we couldn't quite get to the share price in terms of the valuation we thought justified them, and gave us a chance to buy quality names again. So, not buying distressed companies or financials, but buying companies that had just got thrown out with the market disruption. And key names in there are the obvious ones, the healthcare sector which, again, is clearly going to be a big beneficiary of investment spending in here. So, we’ve bought more holding of Sanofi (EURONEXT:SAN), AstraZeneca (LSE:AZN), some of the large names, Roche (SIX:RO), across there, Novo Nordisk (NYSE:NVO), so a lot of names in healthcare, and actually some more technology names. So, Amazon, again, we topped up. It seemed a bit odd that it should fall.
“And we're moving now to phase three, which is where, you know, some share prices [have] probably run too far beyond fundamentals. And we still see the outlook as being a little bit clouded, unemployment is clearly rising and the furlough scheme both here and in Europe will have to end at some point. So, we're beginning to take some profits in some of the stocks that have just moved too far.”
Lee: “Tesla (NASDAQ:TSLA) doesn't feature among some of your sort of big-name stocks. Were you ever interested in taking a stake in the business?”
Alex: “It’s not one we’ve ever owned. You know, these businesses that have a lot of capital up front, it’s not being cash-positive, it’s consumed cash for a long time. We're willing sometimes to take a short-term view that these businesses are sometimes worth owning if we can see how the cash generation comes through maybe in the next year or two. So probably into that camp would be a Netflix (NASDAQ:NFLX), where, again, you know, on most metrics it hasn't been generating a huge amount of cash flow, but we do feel it's in that inflection point.
“Subscriber growth has been very strong and we can see how we can get to cash positive, but Tesla’s always been a bit more of a struggle from that point of view. For our investment style, you know, it’s clearly been a good investment in where it's gone, but it just doesn't fit with the way we pick stocks.”
Lee: “Sure. Now it looks like you're keeping some of your powder dry at the moment. The latest trust factsheet shows net gearing levels at around 0%. So, is this a sign that you're expecting a market correction to materialise in the coming months? And will gearing be utilised if markets do fall notably?”
Alex: “So, I always think of gearing as a bit like sails on a boat. You put the sails up when you feel the wind is sort of fair and you’re heading in the direction you want to travel. And then when it gets a bit more choppy, and a bit more indecisive, you reduce the sails, and so that is sort of how we're feeling with markets at the moment. We had some net cash from last year and 2019 was a strong year for markets, and as I say, some of the holdings we had we started to sell, and we raised cash. I don't think I was seeing a collapse in the market, but I was certainly seeing less opportunities to make cash work for us.
“And I’m sort of seeing that now, really. I don't think I'd forecast a big collapse in share prices. Maybe some of the excitable investments that's gone into some of the technology names might come out, but I think that should be at the edges of [the] market, really. But I was just struggling to find new names to put in to replace ones where we think price targets have been reached and that they're expensive. So, it's exactly, as you say, [keeping our] powder dry a little bit. If the market comes back, or we see a rotation into more economically sensitive stocks, such as the financials or industrials, we've got some powder to invest in those areas of the market.”
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