Invest for real returns
“Sir John [Templeton], his first maxim was to invest for real returns after taxes. Really there’s two aims there. The first premise of that is that of capital preservation, to ensure that you do not lose your money while investing. The second main target is to beat not just inflation but also to earn a return over and above that for the risk that you are putting your money at stake with.”
“What that means for us and our strategy is that we can outperform a global benchmark by 2 per cent per annum over a rolling five year period. We think that that sufficiently defines the quote as laid out by Sir John.”
Keep an open mind
“Markets are born of greed and fear and when certain valuation metrics become well-known and well-used then sometimes laziness can creep in by the general market.”
“So in order to keep an open mind you must be prepared to go to those parts of the equity market where you see the biggest valuation discount and to have an independent and open mind as to what the underlying companies are doing and what level of earnings that they could potentially generate in a three to five year period.”
“And then you work out whether that is a discount that it’s currently trading at to the longer term normalised earnings potential of that business.”
“If a company is capable of doubling in that five year period, then we go ahead and invest.”
Never follow the crowd
“Typically people like to buy what’s popular, what goes up. That means that people often buy expensive stocks.”
“If you were to follow the crowd then you would be typically wanting to buy the popular and the fashionable ideas of the moment, being emerging markets for much of the prior decade or technology, media and telco stocks of the late 1990s or indeed Japanese equities of the late 1980s.”
“So to never follow the crowd means to go in the opposite direction to the thundering herd and to seek out your returns from those parts of the market that are not reflecting that popularity.”
Avoid the popular
“That’s the flip side of the same coin really. Avoiding the popular is really the conclusion of not trying to follow the crowd.”
“I think we’re seeing that with certain parts of the emerging markets whereby very popular sectors within very popular regions are trading at a significant premium to their longer term averages and potentially reflecting more than adequate growth that is coming out of the underlying companies.”
Everything changes
“I’d use the example of the European situation back in May 2012. The market was questioning the preservation of the euro currency and indeed the European project as a whole.”
“Roll the clock forward two years, we can see some form of recovery coming out of some of the European countries and indeed the European project has remained together.”
“So if you’re capable of maintaining an independent view on many of these companies and what they could earn, then you could’ve picked up investments at a fraction of their longer run normalised valuations.”
Learn from your mistakes
“I think the four most dangerous words in investment is ‘this time is different’.”
“One of the biggest risks for any equity investor in this time is funding and the level of debt and the level of leverage on the balance sheet.And the risk there is that it’s a binary outcome.”
“If a company cannot roll over its debt or cannot raise sufficient financing, then clearly the equity value is at stake.”
“We’ve got to be very careful when we’re looking at each and every individual idea in the portfolio to ensure that the business can fund itself on a normalised basis and it is not overly reliant on debt.”
“So many of the places where we have tripped up in the recent past is when we’ve not really come to grips with the level of funding and the level of debt in a given idea.”
Buy during times of pessimism
“I think the number of new ideas that we’re finding the market right now has certainly slowed compared to early 2012 or indeed early 2009 where the equity market was littered with discounts in terms of long term valuations.”
“Finding new bargains is difficult, although as volatility has begun to climb again we are starting to see new ideas coming through in the small and mid-cap space in Europe and the US and also opportunistic ideas in the emerging markets.”
Hunt for value and bargains
“What we try and do is look for stocks that can double over a three to five year period and how we do that is by standing back from the short term noise and many of the issues that are driving down an earnings level of a given company, then taking an independent view of that company and what we think that company can earn.”
“In order to do so we’ve got to question those shorter term issues, conclude whether they are resolvable.”
“If they are resolvable, then we conduct further research. If they’re not then potentially the idea may we be a value trap.”
Search worldwide
“Why constrain yourself when to pick stocks and to trade in markets other than the UK is equally as cheap as trading in the UK? We’re really agnostic as to where a given stock is trading.”
“We want to maximise our potential return for our clients and that would mean going where the valuations lead us.”
“If the cheapest stocks that we can find relative to their earnings happen to be outside the UK then we’re not afraid to take advantage of that.”
No one knows everything
“The equity markets can be very humbling. Many investors who have succeeded for a given period of time then do tend to struggle with their returns and their investment styles.”
“And investment styles come in and out of favour, so it’s important to remain grounded, to remain true to your strategy, true to your process and true to your philosophy. And that requires a degree of humility and to really value the companies as you see fit.”
Dylan Ball is manager of the £199m Templeton Growth fund. The views expressed here are his own.
