27th November 2018

Max Ward (former head of UK equities at Baillie Gifford and current manager of the Independent Investment Trust – the best performing Investment Trust in the UK in 2017) joined the Advisory Panel for our November meeting. As a self-confessed perma-bull (“because it’s just more fun”), even Max was interested to explore whether or not there were any “safe havens” remaining after nearly a decade of quantitative easing has inflated global markets to a series of record highs. Rumours of a reversal of this long-standing policy, or “quantitative tightening” have left market participants feeling jittery in the 4th quarter of 2018. Below are a number of areas that the panel felt might offer some safety should jitters turn into anything more serious:

The Kennox house view: companies that have solid balance sheets (i.e. those that have benefitted least from QE and the abundance of cheap credit) for the most part have underperformed recent bull markets, and remain on reasonable earnings multiples. As such, these businesses should be well placed to outperform global markets for two reasons. First, their earnings should be less impacted by rising interest rates (as this benefits cash savings and penalises leverage) and second, they should be less susceptible to a reversal of inflated earnings multiples (as their starting multiples are already more palatable).

UK Businesses: The UK market has its own set of concerns currently. Over the last 5 years, it is flat in USD terms (against global markets that are up over 40%) as the market considers the risks of Brexit. Whether or not it will be a “hard Brexit” remains to be seen, but that it will be poorly managed now seems a racing certainty. These concerns have weighed on company valuations, but for an investor with a long enough timeframe to look through the inevitably volatile transition, this may well be an excellent opportunity to invest in world-class companies that are sure to survive.

Challengers to lazy incumbents: Many markets are dominated by one or two giants. In some cases, size and longevity of success leaves these giants as “lazy incumbents” ripe to be toppled. Max Ward has had notable success in his investment in Fever Tree, that has shaken market leader Schweppes to its core. The panel discussed several areas where there might be other similar opportunities. Small and nimble players in the telecoms markets for example, or within the Kennox portfolio Neopost (competing with Pitney Bowes) or M6 (competing with the TF1 the state-owned French TV broadcaster).

Family owned business: We also revisited the main topic from the last advisory panel. Many family run businesses are conservatively managed, shun leverage and often make sensible decisions on a longer timeframe than those run by management with remuneration that is dominated by short term performance rewards.

Peter Hollis, Russell Napier, Angus Tulloch and the Kennox investment team.

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