Manager of the Super 60-rated Premier Miton US Opportunities fund Hugh Grieves sits down with interactive investor’s Sam Benstead to discuss how he invests in the US stock market. He goes into detail about why he loves “dull and boring” businesses that fly under the radar of most investors in America but can consistently keep growing their cash flows – and are not overvalued. He gives a number of stock examples that fit his strict criteria for investment. Grieves also shares his views on the active versus passive debate when investing in America, and speaks about the risks and opportunities in the US banking sector following issues caused by rising interest rates.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Hugh Grieves, manager of the Premier Miton US Opportunities Fund. Hugh, thank you for coming into the studio.
Hugh Grieves, manager of the Premier Miton US Opportunities fund: Pleasure.
Sam Benstead: You've got a 10-year track record now and over this period you've beaten the S&P 500 of the US's largest companies. What have been the secrets to your success?
Hugh Grieves: It's a really interesting question because when we launched the fund we were asked under what circumstances will this fund have a tougher time, [and] be less successful. Look, there are two obvious answers. One, if mid and small-caps do less well, this is a multi-cap fund, we are always going to have more mid and small-caps than the S&P 500 and our peer group. And second, we said if a small group of stocks, large-cap stocks, go nifty50 and valuation doesn't matter anymore. With our valuation-sensitive capital preservation hat on, we won't be chasing those stocks. Well, guess what? We've had both of those. Mid and small-caps have done terribly. And we've also had the FAANGs, which we haven't really participated in. So, when we say why have we done well? It's not we've done well because of things. It's actually we've done well despite of all these things that have happened. And we've had to make up for that with really good stock picking.
Sam Benstead: So excellent stock picking is behind that. Are there any companies you've held since launch that have really helped you get to where you are today?
Hugh Grieves: There's no stocks that we've held continuously since launch, but there are several stocks that we've held for seven, eight years that we'll probably carry on holding. These are great businesses. They're doing exactly the same thing. They usually run by the same management team that we know very well. They're very consistent, predictable businesses. So, unless the valuation goes crazy, why would we want to sell them?
Sam Benstead: And can we have some examples of those companies?
Hugh Grieves: Two obvious examples perhaps would be Pool Corp (NASDAQ:POOL), which is a wonderful, dull and boring business. It supplies swimming pool parts, supplies and accessories to swimming pool contractors. If you own a swimming pool, you've got to spend money on it every year. If you don't spend money on it, it turns to a green, slimy swamp. So you've got to fix it, put chemicals in it. You've got to fix the filters, and all the rest of it. Every year, people build more swimming pools. The installed base of swimming pools grows by about 2% a year. Every year, prices rise. Every year these guys take a little market share. Maybe they make some acquisitions and have plenty of excess cash, which they use to buy back shares. So it's a wonderful, consistent business.
Another example would be Service Corp International (NYSE:SCI), which is the largest funeral homes and cemetery business in the US. Everything's death and taxes, right? Again, they are by far the market leader. Every year the business steadily grows. Every year this business generates significant amounts of cash, which they can use for organic growth and inorganic growth. Or give back to shareholders, again, a wonderfully consistent, predictable business.
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Sam Benstead: One of the biggest debates about investing in the US is active vs passive, with even Warren Buffett saying that most people would benefit from just owning a cheap S&P 500 tracker. And he's been right. Most active funds have underperformed their benchmark. You are the exception so far. So why should investors stick with an active approach and pay fees to a fund manager?
Hugh Grieves: It's a really interesting debate. When you look at it and you look at how the average stock in the S&P performs against the index. If you look at it over 40 or 50 years, the average stock in the index actually outperforms the index significantly over a long period of time. But what you find is it's not every single year. It tends to go in waves and you have the seven, eight, nine, 10-year periods sometimes where the average stock actually underperforms the index. And clearly in times like that, active management becomes much more difficult. And that's why you've seen this period up until maybe a year or two ago where, you know, passive is going to rule the roost. And everyone made this argument that active is never going to outperform ever again. What's fascinating is that's now starting to shift and the average stock in the S&P is starting to outperform the index again. And I think that's going to be a tremendous tailwind for active managers. And hopefully in 10 years' time, we won't be having this debate again.
Sam Benstead: The macroeconomic backdrop has changed a lot in the past couple of years. We now have interest rates around 4%. We have high inflation. Has this changed the way you manage money?
Hugh Grieves: I mean, no environment is ever easy. I mean, people always say, oh, this is the hardest environment I've ever had. But actually, when you look back on it, they've all been hard. I think what's different now is we've got more uncertainty over the economy, over inflation, over where growth is going to be. And I think that has been the big change and the old certainties that led people to buy many of these growth stocks, that obviously did so well pre-pandemic, that's gone, and investors are having to do something different. And that is going to lead investors to invest in different stocks now.
Sam Benstead: But if we see interest rates fall towards the end of the year, if inflation comes down, the economy slows, there could be a resurgence in these growthier names and a return to perhaps outperformance of the index. So, what things are you watching in the economy to make adjustments to your portfolio?
Hugh Grieves: Sure. I mean, there are several things that I pick up on what you said, just that. First, the growth rates for these FAANG shares are slowing dramatically, have already slowed dramatically and probably are not going to pick up. So these aren't going to be the stocks they lead. Second, with inflation, I've stuck my head above the parapet and said I don't think we [will] ever see 2% inflation again in our lifetimes.
We had 2% inflation pre-pandemic for 20 years, mainly because of China during the global economy, manufacturing moving from Europe and North America out to the Far East. So you had negative goods, price inflation for this whole period, which created a very benign inflation environment. That's over. China is no longer a deflationary influence on the world. In fact, it's probably an inflationary influence on the world. So, I think we're stuck with higher inflation for an extended period of time and with that higher interest rates, high nominal growth. And that's not an environment in which some of these large-cap growth stocks are going to do well.
Sam Benstead: You run a concentrated portfolio of between 30 and 40 companies I think, so how do you keep that diversification, and what is the sector breakdown typically in the fund?
Hugh Grieves: First of all, the portfolio doesn't change very much, our turnover is about 20% per year. In the last 12 months, I think we probably bought maybe four stocks for the whole portfolio and we've sold four. So going back to what I talked about earlier, we have these very long holding periods. We're not active. We're actively always looking for new ideas, but the number of new ideas that actually make it over the hurdle into the portfolio is very few.
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Sam Benstead: US banks have been under a lot of pressure recently. We saw Silicon Valley Bank collapse and there's been other issues at smaller US financial companies. Is it an area that you invest in? And what is your take on the issues in the banking sector in the US at the moment?
Hugh Grieves: So this is a big debate at the moment. Perhaps less now than it was just a couple of weeks ago. So we've had three banks in the US be rescued by the authorities. We had Signature Bank and Silvergate, which were both crypto banks, and with the implosion of crypto, they kind of got washed away. And that's fine. Silicon Valley itself, was the other one. Silicon Valley was a very unique business in that it had a very concentrated customer base. You only had 30,000 depositors. For a bank this size, typically you'd have millions of depositors all over the US not 30,000, mostly concentrated in northern California, who all talk to each other, who are all hyperconnected. Once the sniff of bad news came out, they all ran for the doors all at the same time.
No other bank in the US has that typical concentration. In and of itself, that was not a problem for Silicon Valley. Until they had invested a lot of capital in, or their depositors' capital, I should say, in government securities, which as interest rates rose, the prices of these securities fell and they had this big unrealised loss. Once that became obvious to the depositors' base, that created the run. There is no other bank that is close in either of those characteristics. There are some that are vaguely similar who've had problems. But the Fed has been very quick to step in and provide plenty of liquidity to those banks to forestall any potential run or need for the depositors to take money out.
So it feels very much as though the problem has been blocked. We've got a firewall put in place by the Fed. The question now is what happens when new regulations are put in place and how these banks are impacted by high depositors' cost. In terms of the regulation, this wasn't a failure of regulation, this wasn't 2008, this was a failure of the regulators. The regulators had all the powers that they needed. They had only information that they needed. They just didn't act on it. And a big part of the investigation going forward is going to be why they didn't act.
So I don't think we're going to see a significant amount of new regulation being imposed. Then the question becomes, will you start seeing banks tighten lending standards? You certainly saw it during March when a lot of these banks were under a huge amount of pressure. But I think going forward, once customers settle down, depositors settle down, you will see bank lending free up again. And I would hope that in two years’ time we're going to look back on this and it's a speed bump in the road. It's not 2008 all over again.
Sam Benstead: And do you invest in the banking sector?
Hugh Grieves: We do invest in banks. I mean, some of them are great businesses. They generate lots of cash. They have great franchises. They have good growth behind them. Banks, because of what happened in 2008 and maybe what happened in March, people have this idea that all banks are bad businesses, they're not. Some of them are great businesses as long as they are managed well and Silicon Valley was not managed well.
Sam Benstead: Can you give me a reason to be bullish about US shares and a reason to be bearish about US shares?
Hugh Grieves: There are many reasons to be bullish about US shares I mean, the US is just a great place to do business. It's a great place to be a shareholder. It has got a fantastic track record of creating innovative, exciting companies for shareholders to invest in unlike anywhere else in the world. And so for a long-term perspective, I think the US is a great place for people to invest their capital.
Reasons to be bearish? The big worry would be something like inflation going back up and the Fed's going to carry on raising rates and create some horrible recession. At the moment it looks like inflation is coming down and we're entering a more benign environment. But clearly, you know, that could change. We're all aware of, you know, shocks, whether it's Russia/Ukraine or some other geopolitical shocks that might happen in the world that could change everything overnight. And that's always something that we're always going to be worrying about.
Sam Benstead: And finally, the question we ask all our guests, do you personally invest in the fund?
Hugh Grieves: Of course, it's not just the largest holding, it's larger than all the other holdings put together for one, for me.
Sam Benstead: Hugh, thank you for coming into the studio.
Hugh Grieves: Thank you very much.
Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can like comment and subscribe. See you next time.
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