After celebrating the 10-year anniversary of CFP SDL UK Buffettology as the second-best performing fund in the IA UK All Companies sector over this time, manager Keith Ashworth-Lord says he is going out of fashion.
However, he is not referring to his popularity with investors: CFP SDL UK Buffettology’s assets under management have grown from about £300m to £1.6bn in three years.
Source: FE Analytics
Instead, he is talking about the evolution of his strategy since the launch of the fund in March 2011 and his move away from more glamorous consumer-facing industries such as retail and leisure towards business-to-business (B2B) companies instead.
The manager’s underlying process hasn’t changed at all over this time and is still based on what he calls ‘business perspective investing’: looking for companies with economic moats, that are generating strong returns on equity and converting a lot of their earnings to free cash. They also need to have strong balance sheets and managers who act like owners, preferably with a big stake in the business, and allocate capital in a rational manner.
But while his strategy remains the same, Ashworth-Lord has become “more discerning” in the businesses he owns.
“I've become less enchanted with direct consumer-facing businesses and have become much more interested in B2B businesses where there's a niche, a specialisation, real barriers to entry,” the manager said.
“Businesses where there's a high proportion of recurring revenue, where the retention rate of customers is high, where it's like a subscription or annuity model, that type of thing.
“That's been a big change in my philosophy.”
Examples of such businesses he has added to CFP SDL UK Buffettology’s portfolio in recent years include IT infrastructure provider Softcat, GPS fleet-tracking firm Quartix and, least fashionable of all, US pest controller Rollins.
These have come at the expense of consumer-focused names such as Revolution Bars, Restaurant Group and Next.
“I had another object lesson [last year] that it's very difficult to make money in anything that's associated with retail or leisure because they are just such bad industries,” he said.
“What is this year's fashion is next year's has-been.
“Revolution Bars was slightly different. It was so small that it was never going to make any difference to the fund.
“But with Restaurant Group, when we went into lockdown this time last year, we looked at the portfolio and asked: ‘Is there anything in here that's not going to make it out the other side?’ We definitely thought that was a candidate, we knew it had to refinance itself.”
Moving on to the sale of Next, he believed he was being consistent at the time given his thoughts on direct consumer-facing businesses, but suspected the trade might come back to haunt him.
This has proved to be the case, with the retailer now recovering to above its pre-crisis peak, which Ashworth-Lord attributed to it being “a first-rate business run by a first-rate manager”.
Performance of stocks since Jan 2020
Source: FE Analytics
However, he said failing to sell would have been a betrayal of one of the core pillars of his philosophy.
“It was when it shut down its online operation within days of the lockdown, while you had people like Clipper Logistics busting a gut to do returns and processing for other retailers,” the manager continued.
“It just spooked me. Because it's a proud boast of mine that in 35 years in this business, I've never ever had a company go bust under me. I didn't want to start last year.”
It is not just in his move away from consumer-focused industries that Ashworth-Lord could be said to be “going out of fashion”, as the value rotation has favoured battered recovery plays rather than the quality-growth names he prefers.
This has seen CFP SDL UK Buffettology drop into the fourth quartile of its sector over three and six months.
However, the manager finds it easy to resist the lure of making a quick buck in this type of market, for two reasons: first because the bounce-back tends to be short-lived, and second because buying in at a great price is just the first of many hurdles you need to overcome when buying “trash”.
“The first out of the traps when the market turns tend to be those businesses that have been left behind, that look cheap on grounds like P/E or whatever,” he added.
“My experience of so-called value rotations is they last for a matter of months and then the quality businesses start to pick up the baton and run with it.
“Because if you think about it, why buy a dirt-cheap business? Purely and simply because you think if it's been left behind, it's going to catch up and you're going to get a short-term kicker out of performance.
“By definition then, you have to know when to sell because these are not businesses that have growth prospects.”
He contrasted that with the businesses in his portfolio, where he can see where they are investing and what bolt-on acquisitions they are making, which means he knows where the growth is going to come from on a three-, five- or 10-year view.
As a result, he doesn’t have to give much thought to selling, unless his original hypothesis proves to be flawed.
“We just stay with them because they are great businesses that have been bought at a reasonable price,” he added.
“But if you're in so-called value, you're in businesses that don't have an awful lot of long-term future ahead of them, they don't have a big hill to roll a snowball down.
“Therefore, you've got to be a good seller as well as a good buyer to make money in that game.
“It's not our bag at all.”
Data from FA Analytics shows CFP SDL UK Buffettology has made 298.12 per cent since launch just over 10 years ago, compared with 102.94 per cent from the IA UK All Companies sector and 87.62 per cent from the FTSE All Share index.
Performance of fund since launch vs sector and index
Source: FE Analytics
The fund has ongoing charges of 0.99 per cent.