Most investments have a history in the market. In the first in a new series of articles, investment expert Julian Hofmann explains what you must do to assess how well a company, fund or trust has done in the past, and how this performance might be relevant to the investment case now.
Due diligence, a fancy way of saying “doing your homework”, is a process and a way of organising information to try and enhance your investment decision-making.
Carefully researching the market history of listed investments is a key part of this process, and will allow you, as an investor, to ask key questions about an investment’s current prospects. The history of a company, trust, or fund is relevant to this, but I see it more as looking at the history of decision-making and whether this translates into a successful investment track record.
Adapt or die
The first point to bear in mind is that longevity does not guarantee long-term success. A royal warrant and a brass name plate on a smart corporate address means very little in the context of the market. It only takes indifferent management, changing markets and technologies, or a full-blown crisis to destroy the most illustrious of companies, or derail an entire investment fund strategy.
Change is inevitable in any context and those that can manage that process will survive and prosper. Those who don’t will fade and disappear.
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Let’s look at some examples and assess how studying the history of an investment can keep you clear of trouble.
GEC: management change goes wrong
GEC for many decades was the leading supplier of electronics, engineering and communications equipment in the UK. It sold big bits of kit to governments, made lifts, electrical switchgear and generally useful stuff. Under its legendary managing director Arnold Weinstock, you could always guarantee that GEC would never have less than £1 billion in ready cash available at any one time, and that was how he liked it. Recessions would come and go, but GEC would always be there. Consequently, it was the “widows & orphans” share, paying out a relatively low but absolutely guaranteed dividend for decades.
Given this history of parsimony and caution, alarm bells should have rung when GEC’s new management under George Simpson, decided to bet big on US defence contractors and electronics firms making equipment for the fledgling internet. The bets failed, spectacularly, and GEC was eventually broken up and sold off piecemeal. Lord Weinstock was said to have died from a broken heart.
DUE DILIGENCE LESSON: if management suddenly goes against the grain then trouble is in store
Some investments are also clearly a product of their time in structure, organisation and long-term goals, and it is worth understanding whether these have influenced the investment case.
Tomkins: when context is everything
A multi-industrial diversified conglomerate is a convoluted way of saying that a company is made up of lots of different bits and pieces. Pearson (LSE:PSON), for example, started out its market life as a building contractor on the way to owning the Financial Times, Madame Tussauds and eventually rationalising into an educational publisher (arguably with mixed results). While Pearson could be said to be moving with the times in a digital age, Tomkins, by contrast, was very much a product of its time – namely when inflation was a real problem for the economy and a tin of tomatoes could double in price overnight.
The most memorable thing about Tomkins, which was sold to the Canadians in 2010, was that, at one time, it owned both gunmaker Smith & Wesson and Hovis bread maker RHM. Financial writers for years called it “The guns to buns-maker Tomkins.” Though easy to dismiss, Tomkins’ business model made sense in inflationary times – controlling lots of different sources of revenue across a wide range of industries is a natural hedge against inflation. That’s where taking the history of an investment into consideration gives you an insight into how it performs. Though largely ignored as unfashionable, Tomkins quietly acquired a lot of value and was sold for a good profit, unfortunately depriving financial journalists everywhere of a decent headline.
DUE DILIGENCE LESSON: understand the context to reveal the investment value
Back from the dead
Some stock market listings have a zombie-like ability to continue living long after their natural lives.
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Investment listings can sit around for years looking for a purpose in life. It is often cheaper for shell entities to keep paying the legal fees and file dummy reports than it is to start a whole new investment vehicle from scratch. When a “new” listing is activated, it often pays to understand what trend has suddenly brought it back to the market. A recent case in point is that of Agronomics (LSE:ANIC), a fund focused on investing in “non-kill” meat product companies. ANIC was a largely dormant shell called Porth Erin Biopharma that was focused mainly on medical devices, over-the-counter medicines and therapeutics before undergoing a change of investment direction.
The history of the fund gives you important clues about both the state of the UK market and the trends that investors are currently chasing. To begin with, you can take it as a sign that the medical market is incredibly difficult to crack without serious money backing the venture. Second, you can start to ask questions over whether there is enough of a track record to ensure success in any new venture.
DUE DILIGENCE LESSON: studying the history reveals the underlying trends
The main due diligence lesson to draw from understanding investment history is that nothing repeats itself exactly – not even as tragedy or farce - and that time and markets simply do not stand still. You can look up the history of retail wide-boy Philip Green’s bid for M&S (LSE:MKS) in 2004 to judge who got off lightly from that failed deal. It is the cumulative impact of missed opportunities, unforeseen events and colourful characters that makes the market interesting.
Predicting the future is not the point of understanding the past - it might not tell you what will happen to an investment, but at least you aren’t uninformed about why things turned out the way they did. And you might still learn the lessons you need to make better decisions in the future if the same scenarios present themselves.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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