Warren Buffett is probably the world’s most famous investor, and for good reason. A $1,000 lump sum invested in Berkshire Hathaway when he took charge in 1964 would now be worth well over $20m, compared with about $150,000 had you invested the same sum in the S&P 500.
For FE Alpha Manager Keith Ashworth-Lord (pictured), these figures raise an obvious question – why don’t more people invest like Buffett?
The manager of the CFP Sanford Deland UK Buffettology fund quit the City in 1995 after realising he had “learnt nothing” from working in financial markets for more than a decade and began to conduct his own research on the best way to invest. This involved reading every book on the subject that he could get his hands on and, while he said a lot of them weren’t worth reading, he had “something of a Damascene moment” when he read Intelligent Investor by Benjamin Graham, which led him to Buffett and his partner Charlie Munger, as well as similar investors such as Phil Fisher.
“Here was a group of guys who were consistently whacking the S&P 500 with very different portfolios,” he explained.
“What really chimed with me was, when you are buying shares, you are not buying chips on a gaming table. Forget the noise of the stock market, forget what is going on with the economy, because it will all be a blip on a long-term chart. What you have really got to focus on is the businesses.”
Ashworth-Lord began working as a research analyst and flew out to Omaha to meet Buffett and Munger, who he said “mistook him for a journalist, because they didn’t really have analysts back then”. He started making the same trip every year, getting to know the people behind Berkshire Hathaway, and in Christmas 2009 he was approached by Mary Buffett and David Clark about running a fund in Europe under the Buffettology name, which they had trademarked around the world.
Ashworth-Lord hasn’t looked back since then, with his CFP SDL UK Buffettology fund making 214.05 per cent since launch in March 2011 – putting it third out of the 229 funds in its IA UK All Companies sector over this time.
Performance of fund vs sector and index since launch
Source: FE Analytics
“The fund has gone exactly as I thought it would because I was running my money along these lines for 11 years before that – the only difference being that my own portfolio was slightly more concentrated,” he explained.
“I always had supreme confidence in my methodology – it has worked for Buffett for six decades. The only thing I can’t understand is why more people don’t embrace it.”
Ashworth-Lord’s process involves looking for businesses that have what Buffett calls an economic moat – this means a company will have something special that stops competitors “putting their tanks on its lawn”, allowing it to consistently earn excess returns on the cost of capital, which will not be competed away.
“And the beautiful thing is that businesses that have got this moat have certain tell-tale signs that we look for,” he added.
Among these tell-tale signs are strong balance sheets and cash flows, evidence of steady growth, and high margins which must be stable or rising.
“And last but not least, we like businesses that are easy to understand and where we know where they will be in three or five years’ time, they won’t be disrupted,” he added.
Going back to the economic moat, Ashworth-Lord said these fall into one of three categories. He called the first of these ‘human capital’, which refers to the skills of the workforce.
“So, they have got something special that nobody else has,” he explained. “One example would be RWS Holdings – it is doing patent and commercial translations so it is up against patent attorneys who are basically just glorified lawyers.
“The guys at RWS are just people who are dual-qualified, so they will be specialists in something like pharmacy, engineering or software, and they will also be qualified as a linguist. No one else is doing this. Its clients are all big multi-nationals like Siemens, Sony and Microsoft who outsource this activity to RWS, which is number-one in the world.”
Second is patented or non-patented proprietary technology, meaning the company has something that everybody wants but no one else is offering.
An example on the patented side is Rotork, which manufactures and installs valve actuators to control the flow of gases; on the non-patented side is Bioventix, which manufactures sheep monoclonal antibodies (SMAs) for use in diagnostic applications such as clinical blood testing.
The final type of moat is held by businesses that Ashworth-Lord describes as “owning a piece of the customer’s mind” and an example here is one of his pet-favourite stocks, Games Workshop.
“The people who play that would spend their last dime on it,” he continued. “They would find a way to play it if they were 100ft underground.”
Games Workshop was the best performer on the FTSE 350 in 2017, with gains of 311 per cent. Ashworth-Lord has held it since the day he opened his fund and although it moved from 373p in 2011 to 500p towards the end of 2016, there was still a great deal of scepticism towards the stock.
Performance of stock during time in fund
Source: FE Analytics
“People asked me, ‘why are you sticking with that? It is a loser, it is going nowhere’,” he said.
“But everything about the business has been steadily improving over the last six or seven years. The reality was that all the operating ratios, the things that I judge companies by, were going the right way. It was moving from prime sites to secondary and tertiary ones, while staff costs to sales were also going down, with the move to single-manager stores.
“You could see the sales outlook was rising, so cost-cutting wasn’t hurting it there, and more importantly, operating profit per employee was rising. So all of this confirmed to me it was executing on everything it said it was going to do and I thought that at some point or another, the market is going to recognise this.”
While Ashworth-Lord is a keen student of Warren Buffett and Benjamin Graham, he said his experience with Games Workshop reminded him of some words of wisdom given to him by a fund manager much closer to home. This was Nick Train, manager of the LF Lindsell Train UK Equity fund, who told him: “Always invest in great companies, because the surprises tend to be pleasant.”
The £387.1m CFP Sanford Deland UK Buffettology fund has ongoing charges of 1.28 per cent.