In difficult markets, who better to consult than the UK’s very own Warren Buffett? It is why interactive investor’s head of equity strategy Lee Wild talked to Keith Ashworth-Lord about the stocks he has been buying and selling, 25 purchases in one week, and how he plans to invest his spare cash.
[Video filmed on 27 April 2020]
Lee Wild, head of equity strategy at interactive investor:
Now, it’s been one of the most eventful periods in stock market history, and that’s to put it lightly. And you’ve been taking advantage of low share prices. There are some new names in the fund’s top 10 holdings that stick out – RELX (LSE:REL), Softcat (LSE:SCT) and Rollins (NYSE:ROL). If you could just give us an idea of the thinking behind your recent share purchases.
Keith Ashworth-Lord, manager of the Sanford DeLand UK Buffettology Fund:
Well, actually RELX has been in the fund for some time. It’s just that it’s never made an appearance in the top 10. It’s the old Reed Elsevier business and it’s a business that’s absolutely essential for lawyers, doctors.
In other words, it’s the provision of information and it’s mainly digital, but there is still some physical books. It’s a nice little business. It consistently buys back its own share capital, gears up the balance sheet to do it and it gears up the return to equity as a result.
Classic sort of Buffettology business – high return on equity, very strong cash generation. The only thing that’s slightly unusual, from our perspective, is it’s really rather highly geared, but the reason it’s geared is what I’ve just said.
It’s borrowing at the bank to retire equity, and we’re pretty satisfied that, were it to switch that process off, it wouldn’t take an awful lot of time to actually get the gearing down to what we would normally consider to be manageable levels.
So that’s RELX. As I said, been around a long time. Rollins has been in the fund for a little bit over a year. Rollins is the number two pest control business in North America. It operates under the brand name Orkin and it’s number two to ServiceMaster over there.
It’s an interesting business because pest control in the United States is not a discretionary spend. We’re not talking about the odd rat in the kitchen or wasps’ nest or anything like that. We’re talking about seriously managing critters.
So I live part of my life in the States. I live in the state of Florida, and I can tell you now that if I didn’t pay Rob to come round every month and do a proper job, I’d be over-run with spiders and with roaches and Lord knows what else.
So it’s not just residential, it’s commercial. It’s a business that has sailed through recessions like they didn’t exist. 2008, 2009 on its radar did not exist. It came right through them. It’s a consistent what I call mid-single-digit compounder, but in addition because it’s in a fragmented market, it’s been making use of its cashflow to actually make acquisitions to bolster the growth up.
It’s typically about a 10% compounder and it’s consistent year in, year out. A family-controlled business, over half of the equity is held by extended family, and a really nice little addition to the fund, I think.
Softcat is quite interesting. I mean, it basically helps people with digital presence, online presence, cloud, that sort of thing, in both the public and private sectors, and this whole trouble that we’ve been going through leads me to believe that remote working, home working, online is going to be much more important in the future than it has been in the past, and this is a business that’s sat right there in the middle of all that, helping people to actually improve their virtual presence.
So a great business. Softcat, incidentally, is a shortened version of Software Catalogue, so that gives you an idea of what it’s about. And again, a great business – consistent growth, high returns on equity, generates cash like you wouldn’t believe. All the growth is organic and a strong, cash-rich balance sheet.
OK. Well, there’s a few big names have disappeared from your top 10 as well as entering it. The one that really sticks out for me, I think, is Dart Group (LSE:DTG), and then there’s Next (LSE:NXT) and AB Dynamics (LSE:ABDP). Could you explain what’s happened to these three and whether you still like the businesses?
Let’s take Dart Group first of all. Dart Group’s fallen out simply because of the share price, which has come back from almost £20 to £5 at one point. Quite understandable.
The Jet2 fleet is grounded at the moment. It’s in a hunker-down situation. Very strong balance sheet, probably the strongest balance sheet in the airline industry.
No doubt in my mind it will be a survivor. It’s got issues. It’s a business that hedges heavily in derivatives for both fuel and Forex exposure, and of course they’re write-offs now. It reminds me of Victrex (LSE:VCT)back in 2008, 2009.
They were extensive hedgers and they had to write a whole loads of hedges off that year when volumes plummeted, and Dart will be in the same position. No doubt whatsoever in my mind that if they did have to come through an equity tap in order to just see this period through, it would get the backing. I don’t even think they will have to do that.
I think people will return to wanting holidays. They probably want them even more after this, what we’ve gone through, and Dart if anything will be stronger coming to of it because think some of the competitors may fall by the wayside, which would increasing its pricing power.
So Dart Group is a business we’ve actually added to on this fall. I should just point out, we first bought Dart back in 2011 at 80p a share, so we’re still sitting very pretty at whatever we are, £6 per share at the moment, but nowhere near as pretty as we were three months ago at £20 a share. So that’s Dart.
Next Group has gone. Next Group is sold. The reason is, I’ve taken a view that consumer-facing business in this environment have been really shown up for what they are – that the consumer is, for want of a better word, a tart. The consumer shops around, fashions come, fashions go.
I’d always liked Next because of Simon Wolfson. I think he’s one of our best managers. Their corporate governance is first-rate, but what really forced me to take the decision was the decision when they closed the online business temporarily, because I’d always seen that as the future for the business and here we were sort of a few weeks into lockdown and the business was being sort of shuttered for a while, and that gave me a little bit of a start. Just a bit of a reality check. So that one’s gone.
I might just add, actually, I mean, our other consumer-facing ones have also gone. We’ve sold Restaurant Group (LSE:RTN). We were coming out of Revolution Bars (LSE:RBG) anyway. Well, we’ve just got out of the last bit of that. So there’s been a wholesale orientation away from what I would call directly consumer-facing businesses, where they don’t have that much of an edge.
The other one you mentioned, AB Dynamics, again that is just a case of the share price has halved from its recent highs. It had done more than that – it actually got down from mid-£20 down to £7 at one point, and that’s another business that we’ve added to in the turmoil where we’ve taken advantage of falling prices.
I would just add that one of the really interesting things is in a bear market, this is like the fifth I’ve been through in my life, and my survivor’s kit says you buy down but you don’t go hell for leather all at once.
You buy down, you pound cost average down and you always feel, the week after you do the purchase, you always feel stupid because you could have got them cheaper.
So you resolve that if they go cheaper again, you buy some more and then the week after you look stupid again.
I mean, it’s just part and parcel. And eventually the thing turns and if you try to catch the bottom like that, you’ll never be there. It’ll turn and it’ll go up like a Saturn 5 rocket and you’ll be left on the ground.
So that’s kind of what we’ve been doing. A lot, as I say, of the movement in the top 10 is really the fact that things have fallen back and other things have held up well. Bioventix (LSE:BVXP) has held up remarkably well, as an example of a small company that we have, that’s back up in the top 10 now. So it’s just natural attrition and natural movement, really, rather than hyperactive portfolio management.
Watch our other videos with Keith Ashworth-Lord here:
- Buffettology fund interview: why I love a market crash
- Warren Buffett’s survival kit for stock market investors
You ended March with around 33 holdings. I think that’s fewer than you’ve owned for quite some months. Like you say, some stocks in and out of the top 10 and that’s down to share price movements and what have you, but have you been active, have you been buying and selling anything else? You’ve talked about Next and some of the others, but any other stocks that viewers might be interested in?
Well, the only other sales we’ve made – and again this was started last summer, this started in June – we finished selling down our stake in Air Partner (LSE:AIR).
The reason for that was quite simple. It was that it had become so small as a part of the fund that it was never going to move the dial, and yet we were owning 15%, 20%. There were three companies – there was Driver Group (LSE:DRV), there was Rev Bars and there was AirPartner.
All three we held very big stakes and even if they’d doubled, they wouldn’t have moved the dial on the fund because they were such a small part. So the decision was taken that we would come out of those micro caps. Driver we exited almost in one fell swoop in December.
AirPartner we’ve been progressively selling down since last summer and the last of that went about two weeks, a month ago or something like that.
And the same’s true of Rev Bars, so it was a conscious portfolio management decision that the fund at over a billion, these companies were just never going to move the dial any more.
So that was the reason for those going. And in terms of purchases, well – when we got the really big lurch down, the 25%, 30% lurch down, there was one week when I actually topped up 25 companies in the portfolio, which is absolutely unheard of because usually you’re looking at it and you’re thinking “that one’s still a bit pricey, that one is as well” and you wouldn’t allocate capital to that.
But on one particular occasion, one week as I say, 25 companies saw a top-up.
And what were the biggest? I don’t want you to go through all 25 but were there any that you thought to yourself “got to have that”?
Well, really quite a lot of them. I mean, it was a case of we were running with quite a high level of cash and, as you know, cash and now US holdings together mustn’t make up more than 20% of the fund.
So we had bags of firepower to use and it was really a case, I cannot say to you that there was one particular one that we hit harder than the rest. We pretty well allocated equally across them. There was the odd one where perhaps we’d not been able to get stock in the past.
I’m thinking of a business called Focusrite (LSE:TUNE) that we own. It had been difficult to get stock and suddenly we were offered a fairly chunky line of stock so I think I put about a million quid in that in one week alone. But that’s the only one that really sticks in my mind as being slightly out of the ordinary that week.
OK. You mentioned your cash holdings and according to your last month end report for the month ending March, you had cash of I think it was £143 million, about 12.7% of the asset value.
So, as you just said, you have a lot of powder dry. How has that changed during April and how low would you be comfortable letting that cash level go?
Because you do still have firepower. Are you thinking “well, I’m going to sit tight for now” or are you still very keen to pick up – you’ve got your eye on a few stocks?
Right, OK. The cash level has actually been bolstered by the fact that Next went out right at the start of April, so that’s increased the cash even further.
I’m still of the view that we may see a spate of redemptions. We’ve been remarkably immune from redemptions.
I mean, we had a net 90-odd million in in the first quarter and we were positive in March, but I still wouldn’t be surprised if one or two cold feet appeared and redemptions picked up, but we’re well placed to service that.
The other thing I would just say is with the sale of Next we’re down to 32 holdings in the fund. I have my eyes on three particular businesses.
They’ve been on the watch list since day one. In all three cases, they’re there but not quite on price.
Every time I just think “yeah, one more little lurch down and I’ll strike” and then you get a day when the market turns blue and back up they go. It’s so frustrating, but that’s life. So there are things on the watch list. I mean, in all three cases we’re talking there about FTSE 250 companies, just for the record.
OK. And viewers will all want to know which three they are. I mean, clearly you’re not going to tell us that now but just for the viewers, I have asked!
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