In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they’d never buy.
Which Sector Shows the Biggest Promise in 2023?
The wider healthcare sector is looking attractive, especially smaller companies. It’s been a relatively unloved part of the market in 2022 and investor sentiment has been low. However, many companies have managed to build strong balance sheets during the pandemic. This can be invested in the pipeline either organically or inorganically through acquisitions. In the world of drug development, we are expecting a multitude of pivotal data points throughout 2023 which can potentially shift sentiment. Another notable dynamic is that both the US and UK healthcare systems are still working through a large backlog of elective procedures which can provide a tailwind for service providers.
What’s the Biggest Economic Risk Today?
I see the biggest risk as global central banks reducing liquidity from the system and the impact of this shift on markets. In addition, the persistence of tighter monetary conditions for longer than anticipated can have a negative impact on consumers, businesses and risk assets overall. That being said, we are fundamental investors and focus on finding companies which can be substantially larger over the coming five years, irrespective of the wider economic landscape
Describe Your Investment Strategy
Across the Octopus Investments Quoted team, we are focused on bottom-up, fundamental investment in UK equities with a bias towards smaller and medium sized businesses. Within the fund I manage, the FP Octopus UK Future Generations Fund, we’re targeting long-term capital growth by focusing on investing in companies, aligned with our sustainable investment themes, which are solving problems for the planet and people.
The portfolio consists of core holdings and satellite holdings. Core holdings are businesses with dominant positions in attractive growth markets, they tend to have strong margins and the ability to grow organically without being impacted by externalities. They can reinvest capital at attractive returns and have a strong capital structure.
Which Investor Do You Admire?
I love reading investor letters and look to approach any investor that has a perspective that I can learn something new from. When it comes to overall equity investment approach, I have learned a lot from Francois Rochon, breaking down investing as part science and part art has helped my mental model. In terms of macroeconomic thinking, I enjoy reading Howard Marks. Both his books and memos have helped me significantly in terms of thinking about the system and first principles of investing. Lastly, I must mention Paul Graham. What I admire about him is that he redefined what it means to be an investor and took an active role in supporting businesses, built strong relationships with management teams and actively created value for the companies he is an owner of.
Name Your Favourite ‘Forever Stock’
A tricky question as a stock can be a dream at one price and a nightmare at another. So, I will answer this question as what my forever business is. The company is GB Group, a software provider helping businesses identify their customers, protect their business and reduce fraud. Our team first invested into GB Group in September 2010 at a market cap of £20 million. The company benefits from the ever-increasing move towards online transactions and increased regulatory burden through KYC (know your customer). There are high barriers to enter this market as it requires proprietary datasets, algorithms and know-how to provide the service. GB Group has shown strong organic, global growth over the last decade and has a large opportunity set ahead of it. It has got strong margins, a solid capital structure and a large, diversified global customer base.
What Would You Never Invest In?
Given the nature of the mandates we manage we must remain radically open-minded. However, I would not invest in business models where I can’t see a path for the business to become sustainably value creating. I do not like to invest in companies which only exist because of short term inefficiencies, regulatory loopholes or arbitrage. I dislike investing in companies within shrinking markets or businesses overly exposed to externalities the management team can’t control.
There is a great quote: “If I see management teams who believe the world is happening to them, I am out. I want management teams who do things to the world.” Unfortunately, I can’t remember who said that so apologies to whoever I am not giving proper credit to!
Growth or Value?
Growth is a crucial variable in the equation to determine the value of an asset. Although growth can be worth a lot, worth nothing or destroy value, it is very difficult for a company, which is predominantly valued on present value of future cashflows, to be worth an awful lot without growth in its cashflows. I also believe that growth is the variable where the most inefficiency occurs and hence a key factor to outperformance. I believe in investing in growth businesses which are solving an important problem in the world, have the ability to reinvest their capital at attractive rates and trade at a discount to fair value.
House or Pension?
This is such a difficult question as there are so many variables based on individual circumstances. If I look at it from the highest level, in an inflationary world where money is devalued over time, one wants to take debt in that money. A house is one of the best vehicles to take leverage and can provide many softer benefits. On the flipside, long term equity market returns, which can be accessed in one’s pension, have been significantly higher than real estate returns.
Crypto: Brilliant or Bad?
I approach crypto like I approach most new things: curiosity, a hunger to learn, an open mind and a healthy dose of scepticism. I can say that I have learned so much when researching Bitcoin, blockchains, cryptography and consensus mechanisms. The idea to create an asset that can freely hold and transfer value across space and time, is truly decentralised, is completely inclusive, secure, non-discriminating, is transparent and can’t be changed by any central entity, is deeply fascinating. That said, cryptocurrencies as an asset class have been a vehicle for rampant speculation far away from the original vision of bitcoin and have not fulfilled their promises.
What Can be Done to Improve Diversity in Fund Management?
I believe that it requires active outreach from companies to educate and recruit diverse talent from an early age. This includes diversity in all meanings of the word. At Octopus we run an apprentice programme which has been a fantastic addition and helped us tap into great talent. Additionally, I believe that building a meritocratic culture can help encourage diversity of thought, ensure all voices are heard and gives everyone a chance to strive.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
I feel extremely privileged to be able to meet talented entrepreneurs and provide capital to help them solve important problems and to grow their businesses. Looking at how far some businesses have come since we first invested in them, the jobs that have been created, the value created, it’s deeply rewarding. One engagement I am proud of was with a company developing a sustainable drivetrain solution for heavy duty vehicles. In its initial public offering process, we worked with the business to structure the transaction and to become the cornerstone investor. This was during a difficult market environment and the investment banker told us that this transaction would not have happened if it weren’t for us. Since investing the company has gone from strength to strength, winning contracts, moving into other verticals, creating new jobs and doing its part in attempting to decarbonise a heavily polluting industry.
What’s the Best Advice You’ve Ever Been Given?
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” In order to generate market-beating returns an investor needs to have non-consensus convictions and be right over time, however, maintain flexibility when the fundamentals change. Great investors can have strong convictions while being open-minded. As James Grant says: “Brilliant investing is when everyone agrees with you. Later.”
What Would You be if You Weren’t a Fund Manager?
I am deeply passionate about writing, coding, Southeast Asian cooking and (Chinese tea ceremony) gong fu cha. If I was not a fund manager, I would like to believe that I would find a way to combine these passions into something to brighten up people’s days and to make a difference.
