Finding a great business is like looking for someone you want to spend the rest of your life with, according to Randall Dishmon of the Invesco Global Focus fund, who says you can’t screen for these companies any more than you would screen women when looking for a wife.
Dishmon (pictured) aims to build a portfolio of 35 to 45 stocks that have an advantage over their peers, are available for a reasonable valuation and are run by management whose interests are aligned with those of shareholders.
But with a starting point of 67,000 global companies to choose from, many people assume Dishmon must use some sort of shortcut to trim his investable universe down to a workable size.
The manager is often asked “how do you screen the universe?”, but he said this suggests a complete misunderstanding of his process, as he pointed out to a client who put this question to him a couple of years ago.
“He was wearing a wedding band,” said Dishmon, “and I got a little cheeky and asked: ‘You’re married, how did you screen that universe? There are 3.5 billion women out there. Let’s assume that about a billion of them are within the age that you might consider without having a real problem.
“And you dated all of them, correct?’
“He laughed and said, ‘well, of course not’. And I said, ‘well, you’re sitting in Georgia, you must have dated every woman in Georgia, correct? I mean, we’re going to narrow the universe until it’s reasonable. Please tell me you dated every woman in Atlanta, at least?’
“And, you know, he gets the point.”
While he admitted he was half-joking, Dishmon said the point is that investing isn’t an “ocean boiling exercise” and that with two decades of experience under his belt, he has learnt how to spot a great business. And the manager said looking for signs of success is much easier than trying to screen 67,000 publicly listed companies, as “success leaves a trail”.
“For instance, show me something where the operating margins went up last year, rather than down,” he continued.
“Show me something in Japan that’s growing north of 10 per cent, because I know Japan very well. Culturally it’s one of my favourite countries in the world but oddly enough, I don’t own anything there. If you’re in Japan and you’re growing more than 10 per cent a year, there’s something special going on at your company. I can go visit, I can figure out what that is and figure out whether or not it is investable.”
Although Dishmon said he doesn’t like to start his process by screening the universe, there are large parts of the market he is happy to disregard straight away. These include micro caps, most commodities, “lousy businesses like heavy metal vendors, countries where I wouldn’t send my worst enemy and companies where the balance sheet is so torched as to not be investable”.
This quickly gets him down to 9,000 companies and from this point, he said he can screen for signs of success.
“Show me operating margins of more than 20 per cent, show me the best balance sheets, show me the best cash generation,” he continued.
“Between those kinds of screens, and travel and reading for six hours a day over 20 years, I can see signs of success.
“I don’t have any problems finding ideas, but it’s absolutely not a top-down screen from 67,000 companies, because there aren’t 67,000 companies. Almost two-thirds of them are somewhat uninvestable.”
But even though the manager likened the search for a great businesses to looking for a wife, he cautioned against getting emotionally attached when investing.
“People fall in love with stocks all the time, they’ll be working the valuation model as hard as they can to make the investment case,” he said. “I don’t do that. I’m in love with my wife and my two daughters. You can’t fall in love with stocks, they’ll never love you back.”
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
Data from FE Analytics shows the Invesco Global Focus fund has made 44.44 per cent since Dishmon took charge on 28 February, compared with gains of 12.51 per cent from the IA Global sector and 11.71 per cent from the MSCI World index.
The £215m fund has ongoing charges of 0.95 per cent.