interactive investor’s collectives editor Kyle Caldwell speaks to the UK’s very own Warren Buffett, Keith Ashworth-Lord, manager of the CFP SDL UK Buffettology and CFP SDL Free Spirit funds. In the interview, Ashworth-Lord names two shares that are relatively immune to a recession, runs through a favourite holding he could never envisage selling, and explains why two shares have recently exited the portfolio. He also gives his views on Buffett’s take on the active versus passive fund debate.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Keith Ashworth-Lord, fund manager of the CFP SDL UK Buffettology fund. Keith, thanks for coming in today.
Keith Ashworth-Lord, fund manager of the CFP SDL UK Buffettology fund: Thanks for inviting me, Kyle.
Kyle Caldwell: In your latest update to investors, you mentioned that you are redoubling your efforts to wargame how robust the companies you hold in the fund are in the face of the changing macroeconomic environment. Could you talk us through that? And has that led to some companies exiting the fund?
Keith Ashworth-Lord: Yes, is the answer to both. It's not the first time we've done this. We did it when lockdown was striking and we looked at the portfolio to see if there was anything that we felt wouldn't come out the other side. So, we did actually, we've done this before. But specifically what we were interested in is, we think we are going into a recession, well we think we're in a recession, and we think it could be prolonged. It could last through 2023, maybe even into early 2024. So, we looked at all our companies. Which are going to be prone to recession? Where is demand likely to falter? What's the financial situation of those companies currently? And we did, we've actually looked at three.
I can only mention two because one, we're still working on, but two of the businesses that we've let go, one is Trifast (LSE:TRI), which has literally been in the portfolio since day one. The reason we did that was this was a business that historically has been founded on modest organic growth. It's supplemented that with quite decent acquisitions. And the classic two and two equals more than four, and they've had a very successful track record of doing that under the previous management. That all seems to have ground to a halt. What really concerned us was the measures that we dearly love. Growth was faltering, margins were faltering, return on equity slipped into single figures. The business had a very high stock level and really escalated debt levels, not where you want to be going into a recession. So that was one business that reluctantly we decided to part company with.
Another one, where perhaps it's not quite such a shock, was Victrex (LSE:VCT). Victrex, again, has been in since very early doors, from the early months. It's a business again that has been struggling to make meaningful growth. It's exposed to automotive, it's exposed to aerospace. It's got some mega-projects, which were supposed to be the great hope for the future, which it all seems to be jam tomorrow. So, it is a cyclical business and we decided that that was one where perhaps we could get better returns elsewhere. So, those are a couple of examples of where our wargaming has led to action.
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Kyle Caldwell: The UK is in a recession and it's expected to be in a recession for potentially two years. Does this make you wary of investing in consumer-facing companies?
Keith Ashworth-Lord: Very much so. I mean, we don't have that much consumer-facing because one of the consequences of the lockdown review that I mentioned was that we deliberately cut our exposure to directly facing consumer businesses. And it really left us with just Jet2 Ordinary Shares (LSE:JET2). And I suppose you could say Diageo (LSE:DGE), but we're very wary about the outlook for consumer spending because of the squeeze on the cost of living and inflation. But as I say, we went into it really with not that exposed a position to the consumer, at least directly.
Kyle Caldwell: As well as Diageo, are there any other stocks you [wanted to] highlight that you think could potentially weather the recession?
Keith Ashworth-Lord: Yeah. I mean the two I would mention, one is one of our two American companies, a business called Rollins Inc (NYSE:ROL). It's a pest control business; rat catcher, bug catcher and everything. And, as you probably know, I spend some of my time in Florida. And if we didn't have our house regularly debugged, like every month, I mean we'd be overrun. But it's not just residential, it's commercial. You can get shut down if you have rats in the kitchen. So, Rollins has sailed through recession after recession. Growth maybe slows a little during the recession, but nonetheless, it continues to grow through recessions. And I believe it will do the same this time.
The second business that I think is pretty immune to recession is a business called Bioventix (LSE:BVXP) that we own. It's probably the smallest company in the fund. Bioventix makes high-affinity monoclonal antibodies. In a nutshell, they're used in blood tests. So, you will go to your GP, you'll have a blood test, it'll be run on a machine and it'll see whether you've got something like Vitamin D deficiency, or you could even have had a heart attack and didn't know it, but it's in your blood, there's a marker there, and their products actually bond with the antigens. It's antibody-antigen, they bond together, and the machinery, it can detect whether you've got an ailment. And the reason I think that it's going to be relatively immune to recession is that these blood tests will carry on all the time during a recession. The interesting thing is that those two companies I've given you there, I mean, Rollins, is a huge company. It's US and it's very large. And Bioventix is UK and it's very small, as I say, the smallest in our portfolio.
Kyle Caldwell: Games Workshop (LSE:GAW) is your top holding and it's a position you've held in the fund since launch 12 years ago. Is this a company that you could never envisage selling?
Keith Ashworth-Lord: Absolutely. And it's also a company that we've probably had more questions about because it's so poorly understood in general. It's a business that has a very loyal customer base who spend on the hobby through thick and thin, the wargaming hobby. And the recent big news is the potential tie up with Amazon (NASDAQ:AMZN).
They've been exploiting their IPO in a number of ways over several years. But I mean, this potentially is very big, leading to movies and Amazon getting behind it. Without wishing to use a pun, but I will, it could be a game changer for Games Workshop, it really could if it comes off. So that is a business that I think is exceedingly well run. It has a very loyal customer base. It's incredibly profitable. My great fear is that we lose it to a takeover at some point, but I don't think that's likely in the short term.
Kyle Caldwell: And of the 27 holdings in the fund, how many have you held since launch?
Keith Ashworth-Lord: If we say by launch the first month, or first couple of months, we've got seven in the portfolio. And those seven, are Games Workshop, James Halstead (LSE:JHD), RWS Holdings (LSE:RWS), NCC Group (LSE:NCC), Diageo, Croda International (LSE:CRDA) and Liontrust Asset Management (LSE:LIO). And then there's another three, Barr (A G) (LSE:BAG), Dechra Pharmaceuticals (LSE:DPH), and Jet2, which have been in the portfolio for over 10 years, but weren't bought in the very first year.
Kyle Caldwell: And there's been some takeovers over the 12-year period, so I think if there weren't those takeovers, that number might have actually been higher?
Keith Ashworth-Lord: For example, we lost Homeserve this year to private equity and that was a business I was desperate not to see that one go. But that was one we bought very early doors. So that one has certainly gone. We've lost Motivcom, Latchways, Lavendon, and what's the other one? There's another one. I think we've lost five in total, and all early doors. We've not had any sort of, let's get in and let's get out quick, none of that.
Kyle Caldwell: Given the investment approach, you're clearly a Warren Buffett fan. But as an active fund manager, I'm interested to hear your thoughts on Warren Buffett's views on active funds versus passive funds. He's said in the past that he thinks that the majority of investors should just simply buy an S&P 500 index fund. What are your thoughts on that?
Keith Ashworth-Lord: I think for a know-little investor, I think that is very good advice indeed, because they might not have the expertise and the wherewithal to pick out individual companies, individual stocks or indeed funds to invest in. And they might get tempted to churn, which, you're at risk of being whipsawed if you do that, if you're trying to sell at the top and buy at the bottom and all this sort of nonsense.
So, I think for the ordinary Joe Public who wants equity exposure, I think it's very good advice. But I think for anyone who has got, or believes they've got, some expertise in analysing companies and valuing shares, I think it's not good advice at all. And it's quite noticeable, isn't it? I mean, Berkshire Hathaway has got a portfolio of marketable securities. It doesn't have a portfolio of index funds.
Kyle Caldwell: And finally, a question we ask all four managers we interview. Do you have skin in the game?
Keith Ashworth-Lord: I do indeed. I mean, every single bit of my family's net worth, in terms of equity investments is in the shares of the fund. So, skin in the game, I mean, I eat my own cooking. I've suffered very painfully this last year or 15 months. I've felt it the same way as investors in the fund have felt it because I'm one of them. And as I say, everything, all our equity exposure, my family and I, is in the fund.
Kyle Caldwell: Keith, thanks for your time today.
Keith Ashworth-Lord: Thank you.
Kyle Caldwell: That's all we have time for. You can check out the rest of our Insider Interviews on our YouTube channel where you can like and subscribe. Hopefully, see you next time.
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