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“Buffettology Ultra” fund hits top decile after first three years – can it keep it up?

03 February 2020

Andrew Vaughan said the use of “Business Perspective Investing” has given CFP SDL Free Spirit an edge over its small- and mid-cap peers.

By Anthony Luzio,

Editor, Trustnet Magazine

CFP SDL Free Spirit has reached its three-year anniversary and now has reason to celebrate – its gains of 47.37 per cent put it in the top decile of funds in the IA UK All Companies sector over this time.

The unconstrained fund is headed up by Andrew Vaughan, alongside deputy Keith Ashworth-Lord who also runs the £1.5bn CFP SDL UK Buffettology product. CFP SDL Free Spirit uses the same “Business Perspective Investing” approach used by Ashworth-Lord in Buffettology – which is based on the strategy of Berkshire Hathaway chairman Warren Buffett – although he describes Vaughan’s interpretation of this methodology as “Business Perspective Ultra”, with just 25 holdings in the smaller fund compared with 34 holdings in the flagship product.

Source: FE Analytics

“‘Business Perspective Investing’ is the differentiator – I’m not aware of any other small cap fund using this this approach,” said Vaughan, who took over the fund last year following the departure of Rosemary Banyard.

“We are basically looking to take a slightly different view of investing. We don’t think of shares as something that you can trade, we really think in terms of ownership of businesses.

“We try to filter out the City’s short-term focus. If you look at typical sell-side research, you probably get a paragraph on the company itself, and it’s a dive straight into ‘we think this year’s earnings are going to be ahead of expectations’ or whatever. We are very much the opposite.”

Instead Vaughan (pictured) and Ashworth-Lord attempt to find businesses with “economic moats” – meaning they have good competitive positions, are resistant to new entrants into the market and offer a product or service that is unlikely to become obsolete.

To find clues as to which companies possess these characteristics, the managers will trawl through company reports going back at least 10 years to try to understand the drivers of the business.

However, while they are very much growth investors, they are not particularly interested in companies that are seeing a spectacular expansion in their top line.

“It’s very easy to start looking at companies which are growing at breakneck speed in terms of their revenues, but that is also where problems lie – that kind of growth is always quite hard to manage and it’s just very easy to make mistakes,” Vaughan explained.

“We’re trying to find predictability and high degrees of certainty. That tends to go out of the window when something’s growing at 30 to 40 per cent per annum, adding on factories or making a lot of quite big acquisitions.

“For our method, we find that even with really nice high single-digit growth, that can turn into really quite decent growth in shareholders’ funds if the operating margin is expanding.”

The managers also look for strong free cash flow as this can allow a dull business to deliver powerful returns. Vaughan said this is a sign that a company doesn’t need capital in a way that less profitable businesses do and allows them to either pay down debt or buy back shares for cancellation.

“That way they are shrinking the share base,” he continued. “If you’re the owner who is sticking in there throughout this, you’re proportionally becoming a bigger and bigger owner of the business.

“Those things together are a way of getting really good growth, often in easily overlooked situations.”

The manager said the size of the fund – it is currently just £7.2m – should give it an edge over many other small cap funds which now have assets of more than £1bn, as these cannot take meaningful positions in companies at the lower end of the market cap spectrum.

Another way Vaughan is seeking to take advantage of liquidity issues in the small-cap space is by holding a high cash exposure – this is currently at 15 to 16 per cent, a figure he said is unlikely to fall below 10 per cent.

While he is sometimes criticised for this position, with detractors saying it hinders performance, Vaughan disagrees.

“We have a willingness to say ‘we like everything about this company except the price’,” he added.

“So at any time, we have a list of companies we want to buy and there’s no point in doing that unless you have cash to take advantage of it.

“The cash sits there and it tends to play out very well on the day that the market is having a wobble. If anything, that is the day you get redemptions coming in as well.”

CFP SDL Free Spirit is permitted to hold large-cap equities as well as small- and mid-caps, which explains why it is in the IA UK All Companies rather than the IA UK Smaller Companies sector. It currently has 16 per cent in FTSE 100 names.

However, it has also outperformed the IA UK Smaller Companies sector since launch.

Performance of funds vs sectors over 3yrs

Source: FE Analytics

CFP SDL Free Spirit has ongoing charges of 1.46 per cent, although these will fall if it becomes larger in size.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.