Fresh from asking why is there no UK Warren Buffett we spoke to Keith Ashworth-Lord, fund manager of the Buffettology fund and author of Invest in the Best. We had a chat about his investment philosophy, how he invests, what its like to be a fund manager and how he grew the Buffettology fund from £1 million in 2011 to around £1.35 billion of asset under management today. An abridged version of the interview is below, for the full conversation, watch the video.
Why is now the time to start looking at the smaller caps within the UK market?
There’s a number of things going on here, firstly the Buffettology fund has grown to such a size that realistically we can’t access microcaps in it anymore, microcaps I define as under 100 million market cap, you know, we’d be ending up with about 20% of the company and still it’d be a fraction of the net asset value, so even if one of those doubled it wouldn’t really move the dial for Buffettology.
But at the same time we have been coming across quite a number of really good businesses at the smaller end, using the same methodologies as we use for Buffettology, but we’ve not been able to really contemplate buying those for the main fund, so the idea here with the investment trusts is that we start with a small vehicle and we keep it small, we’re not going to let it grow to more than 500 million in size, we’re going to access those smaller businesses, anywhere from 20 million to 500 million market cap, and even better still it’s a closed-ended structure so in other words, we don’t have to worry about redemptions and meeting those redemptions with cash or liquidations, it’s permanent capital structure, ideally suited to the longer-term.
Now the next thing I would say is the timing of it, at the moment the UK market is really on a downer relative to valuations on Wall Street and the continental European forces, it’s as low as I can remember it for a long, long time. And the reason for that is all this negativity about COVID, about Brexit, about WTO terms and all this sort of periphery.
The UK market is on a downer, in addition, smaller companies within the UK market are like double whammies because everybody’s saying, oh you know, smaller businesses, domestically orientated. I tell you this it’s an absolute load of tosh, we’ve got three little businesses in Buffettology, we’ve got Bioventix, we’ve got Focusrite and we’ve got AB Dynamics, none of them are about 500 million market cap and everyone of them has got single digit exposure to the UK market, something like 90% odd of the revenues are derived from abroad and that’s equally spread between Asia Pacific, Europe and North America. So if you’re accessing the right sort of smaller companies you are not being domestically oriented at all, you’re buying global businesses that just happen to be small.
So we’ve got a double whammy, but at the same time the UK is a great place to do business, we’ve got the entrepreneurial skills, we’ve got the time zone, we’ve got the international language of business, we’ve got the accounting standards, we’ve got the legal standards, I mean there’s so much going for this country to make it a great place to invest, but if you read the papers you would never think that, it’s just doom, gloom and despondency, what a wonderful time to be starting a small companies investment trust.
What does a typical day look like for you as a fund manager?
I’ve got to say most days are different, at the moment the days are taken up with quite a lot of marketing because of the fact we’re launching the new investment trust, but a normal day, a normal day I’ll rake myself out of bed at about seven o’clock in the morning and just catch up on RNSs, the news channel and company announcements, probably have a cup of tea and maybe some breakfast and then start to do some work.
Work depends on the day, it could be some research that I’m trying to get done, it could be some report writing, it could even be something like at the moment I’ve got the board papers, I’ve got some of the board papers to put together for our board meeting next week, so it’s a total variety of things. An awful lot of Zoom at the moment used to be the case that I’d get down to London maybe once or twice a month, well maybe even two or three times a month actually and I’d get around a bit, but everything now is being done on Zoom, so I’m getting a bit of Zoom fatigue.
Do you find it harder meeting companies that you are hoping to invest in over video conferencing?
One of the things I do like to do is go and kick the tyres, I like to see businesses and see what the operation feels like and you can’t do that at the moment. And the other little thing on Zoom, you miss some of the little nuances as well that go on between people when they’re talking, but other than that it’s great. The really good thing is I’m not sat on a train between Manchester and London for four hours or whatever there and back, that’s a definite plus.
I don’t think we’re going to go back to the old normal when all this nonsense is over, Zoom and Teams will now be a permanent part in our lives.
What’s the best part of your job?
There’s one thing and one thing in particular, when you get an investment that really pays off for you, you’ve done all your work, you’ve maybe had to ride it through rough times or not such great times, then the whole thing pays off at the end.
The one that really sticks in my mind is back in the early days, and I mean the first week of the fund’s launch I put a business called Games Workshop into the portfolio, I paid 373p per share for our opening holding, it was a business I’d known for donkey’s years, I’d got all the data going back to the early ‘90s and it was a business that I could see was actually executing on what it said it was about to do which was move from prime sites to secondary or tertiary and move from multimanager sites to single person operated sites, and you could see from the whole swathe of ratios that it was executing on its strategy.
What happened was five years down the line in 2016 the shares were still only about £5, and they were under a lot of pressure from investors at meetings saying, “Will you get out of Games Workshop, it’s going nowhere, what can you see in it?” and all this sort of thing, and I tried to explain but it was always the same, “Get out of it, it’s going nowhere, get into something that’s moving.”
Subsequently what has happened with that business is it’s had a change of leadership, the new leadership are very, very social media savvy, they’ve introduced new products that are firing, they’re getting back onto great terms with their gamers, it’s tabletop war gaming, and even better they’ve had the benefit of devaluation of sterling post the referendum, they make everything at Leamington near Nottingham, 75% of their sales are abroad, the net result is that the share price has taken off like a Falcon 9 rocket. So remember 373p was the in price, the price today is £106 per share, that’s a 28 bagger.
Now that is the sort of thing that makes your job great.
The only reason you get multi-baggers like that, and it’s not the only one, we’ve got quite a number of them, is because you hold onto it, you don’t get tempted to trade, to try and get out at the top, in at the bottom, because it just doesn’t work that way, just stay with it and great businesses compound up and that’s the best part of a fund manager’s life when you get something as right as that.
What’s the absolute worst thing about your job?
It’s when I get something wrong, and that something wrong is my fault, and there’s been several instances of that in the first nine and a bit years.
If I told you I’d make six mistakes I’d be being economical with the truth. I make mistakes all the time, some of them are costly, some of them aren’t, what you’ve got to do is try and learn from your mistakes and not make the same mistake a second time, but if anyone sits in front of you and tells you that they’ve never made a mistake I’m sorry they’re just telling porkies.
The worst one, probably the worst one we did was a business called Dignity, in funeral services, it was an industry I thought I knew an awful lot about, pricing elastic, relatively capital-light, not capital intensive, really a great area to be in, and we bought the shares and within six months we’d lost half our money.
The reason we’d lost half our money was because we hadn’t seen that price comparison websites were springing up for funerals, at a stroke it removed the interaction between the customer and the funeral director, because you think about it, if a customer is burying their loved ones they’re not going to haggle the bill with the funeral director.
I’d seen this at first hand, what this price comparison website did is they took away that human interaction and I’m afraid to say Dignity’s outlet were up at the top end of the price scale and they had to cut their prices quite severely, and it drove a steak through the then existing business model. As I say we lost half our money, terrible indictment of my failure to spot that coming up, and you know, one of the worst days you could have as a fund manager.
What’s your favourite investment book, do you have a go-to investing bible?
Yes, it’s called Invest in the Best and it was written by Keith Ashworth-Ward in 2016. Setting that aside, the one I would say everyone should read is they should read The Intelligent Investor by Benjamin Graham, and in particular appendix 1 to the 1951 edition which was called The Superinvestors of Graham and Dodsville written by Warren Buffett, that is a superb book to really get you on the right tracks.
What would be your one bit of advice to someone starting off as an investor?
I would say just remember when you are buying a share in a business you are buying an economic interest in a real company.
You’re not buying a gaming chip on a casino table, therefore spend all your time drilling down into the business, the market that business is involved in and the competition. Do a thorough economic analysis and make sure that you really want to own this business. If you don’t want to own the business in its entirety then what are you doing messing about in a share of the company.
In other words, switch on companies, switch off markets.
Keith Ashworth-Lord manages The Buffettology Fund at Sanford DeLand