As the world has adapted to “the new normal” instead of meeting managers for lunch in the West End we had to settle for a chat on Zoom. In this interview with Jamie Ross, fund manager of the £320m Henderson EuroTrust plc, we discuss poker, the “swings, and roundabout” nature of virtual meetings, why active fund management is here to stay, and the best and worst parts of being a fund manager in the 21st century.
Did you always want to be a fund manager?
No, I definitely didn’t. When I was four or five you’d find me in full camo with a pretend gun cruising around the garden trying to scare my sister.
I wanted to join the army and actually ended up passing regular commissions boards (RCB) just before university and I was an army bursar at university. I was actually always going to join the army. But there was a side of me that just creepingly usurped that desire. That seed of interest in business or in fund management was started when I was in the sixth form at school. Simple stuff, right? I chose economics. Looking back, why did I choose economics? I have no real idea. I had no experience of it. At GCSE we didn’t have economics as an option and suddenly I chose that. There was some desire to learn something about business.
When I studied economics, I actually really enjoyed it. Not so much the macro stuff like what creates inflation, that wasn’t that interesting to me. What I found interesting was more the idea of what makes a good business. That started to appeal to me more and more.
I’m one of those people that if I walk down the street and there’s a shop that’s got loads of people outside and there’s one that’s got no one outside, I wonder why.
I’ve always been that way. So for me, it was the seeds that were planted when I was 16, 17, 18. Eventually it was a powerful enough impetus that stopped me wanting to join the army and made me change my mind. I think that anyone that claims they wanted to be a fund manager since the age of one is not being entirely true or they’re a bit crazy.
If you wanted to be a fireman or to drive fast cars when you were five or six, I can understand why, but to want to be a fund manager and sit behind a desk and look at accounts? It’s definitely an interest that’s developed over time.
How often do you invest in new things?
I’d say we’re very active. We’re not the type of fund that buys companies with the intention to own them for 10 years. We are the type of fund with the type of strategy that sees opportunity and adding to the value we add over time.
If something we own looks expensive versus other things, we’ll sell it and we’ll buy something else. We won’t sit with it and think, “oh, it looks a bit expensive, but I’ve got a long-term approach”.
We will sell something where we see better opportunity elsewhere. Our turnover historically has been in the region of 40, 50 percent. It’s actually been higher this year because the market oscillations have created some really good opportunities for us, which we’ve taken advantage of.
As the crisis was starting we found some really good sell opportunities and when the crisis knocked equity markets 30 – 35 percent, we added quite a lot. So in general, very active.
What’s your view on how much passive investing will affect you as an active investor industry?
It really depends on what people want. If you want to have exposure to the index at very low fees, whether you do that by ETF or something else that gives you good exposure for that purpose, then passive is clearly appropriate. But we strongly believe the talented fund managers, talented as the big caveat, will outperform over time.
Everyone points to statistics when they look at active versus passive and says active’s underperformed over X, Y and Z years. In general, they underperform, that’s true. If you select your fund managers at random I think you get average results, but talented fund managers I think can outperform over time. We’re strong believers that there is a role for both passive and active.
I wouldn’t be doing this if I didn’t think I could outperform, and my history of roughly six years of investments [taken together] suggests that’s the case.
I used to run a UK fund and ran that for over three years and outperformed by about 20 percentage points over that time. Now, I run a pan-European strategy which I’ve been doing for over two years and have outperformed by 10 percent plus over those periods. I firmly believe active has a place in the market and I firmly believe I can outperform over time.
Active brings with it volatility. That’s something we welcome, but it’s something that clients have got to be aware of. There are periods when we underperform. For example, in the two days before the presidential election, the market got very carried away with the blue wave theory and that it’s going to lead to a big infrastructure program.
Suddenly all the cyclical, lower-quality companies rallied very hard in those two days. We lost two percent, performance relative, to the market in two days. There is some volatility. We’ve gained back almost half of that as we’re speaking today [Wednesday 4 November] as the poll results come in. So volatility is something that active fund management brings.
There’s a place for both in the market and in terms of what it does to the industry longer term; when I joined the industry 13 years ago, I remember making career choices and thinking, am I doing the right thing by joining an industry that’s going to be under perennial fee pressure for my career? And I think it probably will. We’ve seen fee pressure and that will continue. But if you can add value, if you can perform and if you can outperform the market, then there is a pricing power to that.
The active fund management industry is here to stay but it will probably be a smaller industry relative to
total assets than it was 10, 15, 20 years ago.
What’s the best thing about being a fund manager?
If you think about what the day job is, where I would normally come into the office and sit with a load of like-minded colleagues or even better, colleagues who have completely different opinions, but sit with people who are doing the same thing, and we analyse companies.
We just think about what is a good company and what’s a bad company. Then we have the privilege of being able to meet the CEOs, the CFOs, the high-level management of all of these companies and fire questions at them and ask them why they’re not doing things differently. It’s that that gives me huge pleasure. It’s the analysis. It’s sitting there and feeling that you understand the company better than you did two months ago when you started a piece of work.
It really is that original obsession of mine with what makes a good company.
I feel like my job is a hobby, genuinely. If I was out of work tomorrow because passive investing took over the world and there was no space for any active fund managers, I’d still be doing what I do, just probably on my own upstairs in my house permanently. I love the analysis. I love understanding business. That’s always given me great pleasure.
Have you found it harder with Covid-19 restrictions not being able to meet people face to face?
If you think about anything in life, almost every discussion is easier face to face, almost every, single thing. Imagine if your communication with your partner was purely by Zoom? You wouldn’t get that behavioural, emotional connection that you do. It’s the same with fund management. We do miss that contact with managers, with the CEOs of companies. That definitely is a negative.
But for me, it’s almost outweighed by the positive implications for efficiency of time.
For example; I will do this call with you, hang up and then I’ll do a call with a company two minutes later and I haven’t moved one foot. That’s not very good for my physical fitness levels but, if I think about prior to lockdown and when the peak of the pandemic hit in March, the last trip I did was to Milan to see Luigi Gubitosi, the CEO of Telecom Italia. Me and my analyst flew to Milan, did a one-hour meeting, had lunch and flew back. If you think about that as a full day for a forty-five minute meeting, it’s a crazy use of time.
Yes, maybe we got a bit more out of the meeting because we saw them in person, but there is an efficiency in Zoom based business life.
One of the themes that I’m following at the moment in the portfolio is the virtualization of business life, which brings great efficiencies. You do lose some things but overall it’s very easy for me to do my job. Waking up in the morning, having a shower, getting dressed and then getting upstairs to my desk in five minutes, that’s pretty good, rather than an hour and a half in to Cannon Street and walking to London. That’s good for me. It’s working.
What’s the worst thing about being a fund manager?
I think the worst thing is also the thing that almost drives me the most.
I’m a very competitive guy. Always have been, even with things I’m not very good at I’ll still be hugely competitive. I started running with one of my friends recently and whilst I’m OK at running, he’s a good runner and took me to a track for the first time and I’m already trying to buy some running spikes.
So I’m a very competitive guy. When that comes to fund management, one of the brilliant things is that if you’re good, or at least if your numbers suggest you’re good, people can see it straight away and there’s no hiding from it. Even if people aren’t coming around and physically patting you on the back, they know you’re good and they know you’re doing well.
But the same applies to when you’re doing badly. I think one of the real challenges of fund management is the visibility of performance and learning to deal with the behavioural issues that occur when you’re performing badly. If you perform badly for a week, what do you want to do? You want to change something. You have these urges to transact just because you can see your performance.
If we go back 30 years, fund managers were lucky if they could see that performance once a month. They might have it published in the newspaper and say, “I’m doing rather well. That’s good”. They didn’t have that pressure which can be a very big negative. The biggest challenge is performance visibility and the short-term visibility of performance and learning to deal with that. With one click of a button, I can find out my intraday performance and see if I’m doing better or worse than I was ten minutes ago and that’s not healthy.
So I try to avoid those short-term impulses that that creates. But that’s the biggest challenge; learning to deal with the peaks and troughs.
What do you think that is the most common mistake investors make?
When I look at my group of friends and think about what they do when they look at an investment, I think the biggest mistake people make is that quite often a temptation seems to be to buy a bad company. I think very simply put, buying bad companies is the biggest mistake people make. It’s all well and good buying a company that is cheap if you think that something is changing in that business.
For example, if you think that an industrial company is transitioning to being a more software or aftermarket related business and will go from being cheap to expensive, fine buy it. But buying a company just because it’s cheap and therefore just buying a bad company, that is the biggest mistake I think people make.
What’s your favourite book on investing?
I’ve gone through stages with investment books. When you first start, you’re super keen reading everything by Warren Buffet that you can. I think over time I’ve got a bit more selective and a bit
more widespread in my reading.
For example, I wouldn’t say this was my favourite book as I’ll come onto that in a second., but I read a book recently by a poker player, Annie Duke, and it’s called Thinking in Bets, which I think is very interesting.
For less obvious investment books, anything by Daniel Kahneman learning about behavioural and emotional things and how that can impact. If I was going to choose a pure investment book, my favourite would be Capital Returns, which is edited by Edward Chancellor. It’s by the guys at Marathon who are very long-term investors and they think about the world in quite a clever way. They talk about the capital cycle and investing at different points in that. The thing I really like about the book is it’s actually a collection of their meeting notes.
It goes back to pre-crisis and shows the notes they took when they met a company and then the notes they took when they met that company again. It really gives you an insight into the kind of things that a fund manager is thinking when they have a meeting with a company.
I found that very instructive. It’s very useful as well because it shows the ability to think differently to the crowd and stick with your conviction, even when it’s tough to do so.
One of the good examples is they were meeting an Irish bank in the run-up to the financial crisis. When they first met, they said, ‘they’re lending looks really inappropriate and they’re lending to someone that they’ve never met who was building a golf course. This looks a bit strange, we’re going to steer clear’. Next time they meet them it’s, ‘wow, the shares have doubled in six months. I don’t really understand what we’re missing here. Aren’t they being really inappropriate with their lending?’ This carried on of course until they eventually pretty much went bust in the financial crisis.
It shows the kind of thinking and the ability to have an opinion and stick with it even when the share price is going dramatically against you. It’s a really good book for a fund manager or prospective manager to read.
What’s the one bit of advice you can give to someone first starting out as an investor?
There’s a poker expression that goes along the lines of, “if you look around the table and you don’t know who the patsy is, you’re the patsy” and in a similar vein to that, people sometimes look around the room and assume, especially when they start out, that everyone is brighter than you.
You kind of assume that you’re the least clever in the room just because you’re young and inexperienced and all these older guys in their suits must know a lot. When you first start out, don’t make the mistake of thinking that. Have a bit of self-confidence. If you look at things in a simple and logical way, you’re just as bright as anyone around you. You’re just as bright as the analyst that has covered this for twenty-five years and happens to know more about that company.
So believe in yourself, believe that your opinion is as valuable as anyone else’s and have the courage to follow your convictions. That’s one of the things I think is most important, because when I look back and think about myself as a young analyst, I was definitely skewed by other people. I might have an opinion on a stock and then I’d speak to some experienced fund manager who would say, “oh, no, I think that’s totally wrong”, and I’d come out of the meeting thinking of course he’s right and I’m wrong. It’s a big mistake.
Back yourself and think about things in a simple analytical way.
How do you pick the companies that you invest in?
This comes back to what I said earlier on and my obsession with analysis.
I enjoy analysis and I enjoy understanding companies better. What I try to do when I pick a company is try to understand that business better than anyone else. That’s always my intention. It’s probably something I never achieve, of course, but it’s always my intention.
When I invest in a business, I’ll always have looked at it for a substantial period of time. I will never buy a company that I’ve looked at for two days. I will always build a complete financial model for a company myself. I think that’s really important groundwork to understand the business. I would also always write an investment thesis, a long document, 20, 30, 40 pages explaining to myself why I’m buying things. My process is one that follows a set process for every stock I look at.
I will always produce a model, always produce a thesis and I rank every investment as well. There are five areas of analysis I look out for in each business. I score each of those five areas for each company out of ten and I produce a weighted average score. For each business I look at, I could summarize two months of work in one score out of ten. I try to be very objective, try to be very thorough in my analysis.
Hard work and heavy due diligence is the simple answer.
But what am I actually looking for? I’m looking for two types of investment opportunities. The first is good companies, solid, high return on invested capital businesses where I think that the return on invested capital can stay high for a number of years. Your solid compounders. That’s the first thing I look for. The second is businesses that have at present a low return on invested capital, so they look like a bad business. But something is happening in my analysis, something is changing with that business that will make it a good business over time, so returns will improve.
Those are the two things I focus on and return on invested capital covers both of those areas. I want high and stable or low but improving. I haven’t got any time for buying a company just because it’s cheap. That’s not my style at all.
What puts you off investing in a company?
This will sound geeky but some companies are a beautiful thing to model because the numbers are all really clean.
An example I’ll use is one of my biggest investments, which is Novo Nordisk, a Danish pharmaceutical business. Super high quality, super high return on capital. When I analyse it, the number for earnings that I come out with matches the company’s adjusted earnings almost exactly.
So in other words, they are adjusting their earnings in what I think is a very fair, very balanced, very appropriate way. There are other companies, that when I try to analyse them, there is a gulf of difference between what I think the real earnings number is and what they’re telling you it is. When I’m modelling a company and it’s hard to model and there’s lots of adjustments, that’s when that red flag starts to rise.
If I speak to the company and try and get clarification on various bits of accounting and I don’t get satisfactory answers, then I’m just not interested at all. I’m not an accountant, but if I don’t find a business simple to model and if I’m struggling to model it and if I don’t get simple answers from the company, then that’s a red flag straight away.
That’s the biggest one; can you understand the numbers in front of you? Is it simple to understand? Is it simple to model? If not, forget it. There are another eight hundred companies you can look at in Europe. The second thing I’d say is all to do with management themselves. These are not controversial points, but the second one is, do you like management? When you have a conversation with them are they the kind of people that you’d like to have a beer with? Do you get them or is there something about them that you don’t quite trust on a human level?
That for me is important. I suppose it goes back to your question of Zoom based meetings rather than shaking someone’s hand and meeting them in person. Maybe an aspect of this is lost, but it’s still important.
You need to like the people involved because if you don’t, then firstly, it’s going to be a tough few years investing in these businesses if you don’t like speaking to the management team and secondly, just trust your instinct with people.
If you don’t get on and you think there’s something not quite right, then I think you can probably find another investment.
Jamie Ross is the Fund Manager of Henderson EuroTrust