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Ranmore Global Equity manager Sean Peche discusses the stocks cropping up in his value fund, and why he wants high portfolio turnover.

He also deals with concerns about the fund’s rapid growth in 2025 and how it might affect the investment strategy.

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Dave Baxter, senior fund content specialist at interactive investor: Hello and welcome to our latest Insider Interview. My name is Dave Baxter, and joining me today is Sean Peche, manager of the Ranmore Global Equity Fund. Sean, thanks for coming in.

Sean Peche, manager of Ranmore Global Equity: Dave, thank you. It’s great to be here. Thank you for the opportunity.

Dave Baxter: Sean, many of our customers are now pretty familiar with your fund. But for those who don’t know it, just take us through what you guys do.

Sean Peche: Yes, thanks Dave, so we are value managers. Despite my accent, I’ve been in the UK for some 24 years and we run an Irish UCITS, so a highly regulated Irish fund, which is approved to market here in the UK, South Africa, Ireland, and to sophisticated investors in Switzerland.

We just look around the world for companies that we think are undervalued, and when we find them, we buy them and we don’t worry about the benchmark.

When I speak to people and they say, well, but doesn’t everybody do that? And I say, no, surprisingly not. Everybody’s worried about benchmarks and they are worried about tracking error and about how they did relative to the S&P 500 or whatever. And we go, well, we’re just going to buy good businesses at sensible prices, where we think we’ve got the odds of making a decent real return. And that’s what we’re going to do. And that’s what we’ve been doing, so we are a little different.

Dave Baxter: So, turning to portfolio activity, tell me about an interesting recent buy for the fund and an interesting recent sell.

Sean Peche: So, an interesting recent buy that is perhaps familiar to to the audience is Greggs (LSE:GRG). I have to admit I did have a Greggs on the way here. Just thought I’d check - there’s one just around the corner. But you know, Greggs has been a great business for many years and it’s a compelling value proposition to the client base. Coffees are half the price of many of the other high street chains.

What’s interesting is if you go into many of the other high street chains and you think, well, hang on, how can they be so price competitive? Well, if you go into many of the other high street chains, one person is taking the order, one person is grinding the beans, one person is frothing the milk, one person is writing your name on a cup. But if you go into Greggs, you’ve got a bean-to-cup machine, so they’ve got slightly lower staffing levels. You can’t have the oat milk with the extra hazelnut syrup, and that helps on the wastage, it helps on the staffing costs, and that’s how they can get a lower price.

So, you’ve got a compelling product, value proposition, and here was this company that had grown stores, but the growth was just slightly lower than people wanted, so the share price fell in a heap. This year I think it’s down over 50%. In December or January, they reported their last year’s results, and the growth slowed a bit. I think it was about 7% or so, but the year was 11% same-store sales. Then, of course, in July we had a hot summer. And who wants hot coffee and vegan sausage rolls in the middle of summer?

So, again, they warned that sales are going to be a little bit challenged over this period, but many investors are very short-term focused. We’re looking at this going, well, they are in, whatever it is, seven hospitals and there are 300 hospitals and 20 underground stations or whatever, and they could be 500, whatever.  You have a look at their presentation.

The point being that their growth trajectory is enormous still. If you look at how many petrol forecourts they are in, how many hospitals, how many underground stations. So, you’ve got this good business, which pays an attractive dividend of 4.5% yield, and with a nice growth trajectory, but it’s fallen out of favour because the investors who bought it because it was a great business and they paid too much for it, are underwater to the extent of 50% and it’s causing them a lot of pain and they don’t want to be there.

So, you know, that’s what we try and do. We all want growing businesses, we all want great businesses. The key is don’t pay too much because if you pay too much when the company is priced for perfection and they just hit a wobble, I mean, let’s face it, how many companies in their growth trajectory don’t hit a wobble at some point? So, if you can step up and be there when these great businesses hit a wobble, you can do all right.

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Dave Baxter: And what about a sell?

Sean Peche: A recent sell? Well, we sold our European banks, to be honest, a little bit too early. That accounts for why we’ve got some cash.

I mean, we were buying these things when nobody wanted banks. In fact, I wrote a piece in Citywire. You’ll recall that Silicon Valley Bank went bust, and a famous fund manager wrote an article in the FT saying this is why banks are bad businesses and you don’t want to own banks. I wrote a rebuttal in CityWire, and basically said that some of the oldest businesses in the world are banks. So, they can’t be bad businesses if they survived recessions and wars and all the rest.

They are terrible businesses if they are badly managed because they have a lot of debt. So, if you lend money out at very low rates and a portion of those loans go bad, well, you’re going to go out of business. So, we’ve had the Lehman Brothers and the Bear Stearns, and all the rest.

But many banks have survived the test of time and they can be good businesses. The point I made is that Apple Inc (NASDAQ:AAPL) doesn’t know how many iPhones are going to sell next quarter. My bank knows what they are going to make from my mortgage for the next five years. So, they shouldn’t be bad businesses. You’ve got annuity income, they pay a nice dividend, but they were unloved and they were tricky businesses when interest rates were so low. But interest rates weren’t going to stay low forever. 

But we sold those a little bit early, but that’s fine. It’s a bit like when you’re squeezing a lemon. You want to get 80% of the juice of the lemon. If you keep squeezing, you’re going to get the pips. We don’t want the pips. So, we’ll let somebody else take the last little bit. So, if we sell too early, that’s fine, as long as we are redeploying those funds back into other opportunities with a high expected rate of return from that point.

Dave Baxter: You’re not allergic to portfolio turnover and you do trade around positions. What’s your level of turnover been in the last year? And what have your notable bouts of activity been?

Sean Peche: We’ve got quite a different view on this turnover thing. Actually, I want high turnover. That might sound a bit odd, but if you think about it, Dave, if you sit down with somebody and say, OK, what percentage of stock picks, stock calls, do you think we’re going to get right? Maybe a good fund manager gets 60% right and 40% wrong, OK? Well, what do people want us to do with the 40% we get wrong? Surely you want us to sell those shares and redeploy those assets into others which have got a prospect of being right? Well, that causes turnover.

Then, of course, when those shares reach what you think is fair value, well surely you want us to sell at that point too. Because that also causes turnover.

So, if you think about it, if I buy a 2% position in Microsoft Corp (NASDAQ:MSFT) and I think it can double, and it does double, well it’s now 4% of my portfolio. So, it’s twice the exposure than it was, but with no upside, unless it’s got even more greater upside at that point. But when you go from 2% to 4%, for you to justify not doing anything about it suggests that you actually think the prospects are twice as good once it’s doubled than it was right at the beginning. So, we actually think turnover makes sense.

So, why do I want high turnover? Because it means I’m either correcting mistakes, or it means that my stocks are hitting fair value and we’re taking that money and rotating it. I was asked a little while ago, what is your average holding period? And I said, I don’t know, and I don’t waste time thinking about it because if I’m trimming and adding and all the rest, I’m still holding it.

But, how do you work the average holding period? My favourite holding period’s a day. And they said, what on earth do you mean by a day? And I said, well, think about it. If I think something is worth 100 and I pay 50, I want it to get to a 100 as quickly as possible, because then I can sell it at 100 and take that 100 and find two other things worth 50. So, that’s what you want, and then we compound it.

So, you can do it in two ways. I guess you can give the money to a company and hope that they compound it for you. That’s, I think, the popular view. What we’d rather do is say, we’ll be in charge of compounding, thank you, because we don’t want to give it to that company, and then five years down the track, maybe it’s a Pfizer Inc (NYSE:PFE) or whatever, and you find that all the profits that they made from Covid, the £30 billion of surplus cash they basically spent on acquisitions and revenues declined, and now they’ve got a buck a bunch of debt. So, I don’t want management to be in charge of compounding for me, we’ll compound it.

That’s our view on turnover, but it’s very different. The other thing is the academic literature suggests that high turnover hits returns, we know that. But all that academic stuff was done when brokerage rates were far higher than they are now. You know, if you’re buying and selling at two and three basis points, it’s very different to the old days when your brokerage rate was a per cent.

If your brokerage rate was a per cent and you’re buying and selling, well, there’s high friction, but that’s not the case these days. So, that’s our view on turnover. Each to their own, I guess, but it works for us.

Sorry, one last thing. My gurus, if you look at some of the best money managers throughout history, who’ve survived decades, not just those who’ve done well in the last 10 years when interest rates were at their lows - I’m talking about decades - they are guys like Paul Tudor Jones, Stanley Druckenmiller, some of those best money managers.

I’ve never heard any of them say, even Anthony Bolton, I can’t recall any of them saying low turnover’s the answer. Then, of course, people say, what about Warren Buffett? He says his favourite holding period’s forever. And I go, yeah, my favourite holding period, not my only holding period.

He sold Apple Inc (NASDAQ:AAPL), most of it. Thank goodness he sold his textile mill way back when. And if you look at some of the holdings in the late 1970s, he had Kaiser Aluminium and Interpublic, and all these businesses. Well, it’s a good thing he sold those and moved on. So, that’s our view on turnover.

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Dave Baxter: The fund has grown massively this year. At the time of recording, in mid November, it was approaching $1.9 billion. That’s versus less than $500 million at the start of the year. How does this growth affect your investment process, particularly given that you like to invest in small and mid-cap shares?

Sean Peche: Yes, so that’s a good question. And you’re quite right, we have grown a lot. I guess what’s interesting as well is prior to this year, we were for most of our life being less than $100 million. So, even at the beginning of this year, we’re sort of four times what we’ve been historically, and yet we’re having a great year. It just shows you that size hasn’t held us back.

I think a couple of things. The one is as value investors, typically value investors buy too early and we sell too early. We sold our European banks too early. If we’d been $1.9 billion back in June or whatever, maybe we’d still be selling, it’d just take us longer to sell. So, the point being that as value investors, you buy too early. So, if your assets are bigger, it takes you longer to buy, so you’re buying deeper into the dip, and it takes you longer to sell, so you’re selling higher into the rally. That’s the theory. That’ll help offset.

Whereas if you’re a go-go momentum investor in small caps, let’s say, well, that’s going to be a problem. We’re not confined to small caps or or mid caps, we want where there’s value, we go where there’s value. Because of the rise in passives and the popularity of the large caps, the mid caps and small caps have fallen by the wayside. So, that’s where we find value.

I don’t think that’s always going to be the case. I think the passives, the large funds could...the large passives could be in for a tricky period over the next couple of years, and if they fall out of favour and people start selling the large caps, chances are we’d be able to pick up some large-cap bargains.

Dave Baxter: You’re not a high-conviction manager, you don’t take massive position sizes unlike some investors. What’s your case against high conviction?

Sean Peche: Yes, so well it’s a couple of things, I guess. The first is I find behavioural psychology quite interesting. There’s a great book for anybody who likes reading about these things called The Little Book of Behavioral Investing by James Montier. You talk about things like biases, anchoring biases. Now, as soon as I say I’ve got high conviction, what does that do? I think it creates a bias to not being really open to any information that doesn’t suit your thesis.

As soon as I pound the table and write in a factsheet that we’ve got high conviction about this, that and the other, and then the future turns out to be different to what we expected, then it’s like, ‘Oh, I can’t go sell it. I’ve just been on interactive investor and told everyone that I like B&M or whatever’.

You know, let’s say there was some disaster in B&M and actually it wasn’t an accounting error of only seven million, in fact, the whole thing was wrong or whatever. So, by saying I’m high conviction, I think you’re creating a bias against being flexible and changing your mind when the facts suggest you should. So, that’s the first thing.

The second thing is we’re dealing with the future here, and the future’s unpredictable. How can anyone have high conviction? I mean, you could have said, let’s pick on Novo Nordisk AS ADR (NYSE:NVO) because it’s a great business and it was a duopoly, and the world has got an obesity epidemic. So, if in June last year, you said, I’ve got a high conviction about Novo Nordisk because we’ve got an obesity epidemic, there’s only two companies that are going to fix it, and if you look at the analysts, they all say they’re going to make a $100 billion in the next couple of years. Well, you bought Novo Nordisk and it’s a great company and it’s great management and all the rest. You’re down 50%, 60%.

And we don’t want to be in that position, I don’t want to be in that position. We’d rather just say, listen, the future’s unpredictable. So, what does that mean? It means we don’t pay too much for the future. That’s why we’re value investors. But we also recognise that we’re going to get stuff wrong. and we’ve got the whole world to choose from. So, 50 stocks, 2% each, sounds like a good idea to us.

I mean, thank goodness B&M wasn’t bigger than 2%. Imagine if we’d had an 8% position in B&M because it’s a great business and it’s got a good value proposition, you know, etc, and then it has the troubles it has? You’ve now lost a lot. So, we’d rather lose a little. So that’s the thing.

Also, how about this? In 2014, NVIDIA Corp (NASDAQ:NVDA) was in our top 10. If we’d held on to that, I’d be telling you we’re a buy and hold investor, but that would have been great. But the point being that, with the future, you just don’t know how things are going to work out.

If we’d held Nvidia and then you look at our track record and all our profits and all our growth and all our return was because we got Nvidia right, well, how does anybody know we’re going to get the next Nvidia, you know? Whereas if your returns are not dependent on one outsized winner, well, then it’s more process-driven.

For example, our biggest contributor to performance this year is, I think, ABN AMRO Bank NV NLDR (EURONEXT:ABN), then followed by Alibaba Group Holding Ltd ADR (NYSE:BABA), and they’ve only contributed in dollar terms 1.5% in dollars, and we’re up 34% or whatever in dollars. So, it’s not like all our return is dependent on one or two winners.

It’s like playing five-day cricket. We’re not playing IPL cricket here. We’re not trying to slug a six off every ball. We’re going to stay at the crease, score a couple of ones, you know, a couple of twos, but stay at the crease. Don’t try and swing wildly and smash a six off every ball.

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Dave Baxter: And our usual question, do you have skin in the game?

Sean Peche: Absolutely. I don’t do PA trading, and I have all my money in the fund or in a bit of cash, that’s it. Our business is now paying dividends. We’re about to pay our first dividend, and about half of that’s going to go to charity. We’ve got a charity called Helpmore, and all the rest of it’s all going back in the fund.

I am, importantly, in the same classes that our clients are in. So, there’s no special classes for family and friends with low fees or anything like that, like many of the hedge funds do.

My mum’s in the fund, my sister, my wife, my kids have both got ISAs in the fund. If we can’t charge them a fee that you’re happy to charge them, well then how can you charge that to your clients? So yeah, absolutely.

Somebody said to me, are you strapped to the mast? And I said, no, look, I’m like that bearded guy on the bowsprit, like smashing the waves, you know. That’s how I think it should be. So, yes.

Dave Baxter: Sean, many thanks.

Sean Peche: Thank you, Dave.

Dave Baxter: Thank you for watching. Please do let us know what you think in the comments. And if you’re enjoying this series, do hit the like button and the subscribe button. Take care.