There are times in every investor’s career when the values that drive their approach are brought into particularly sharp relief. Now, as markets become increasingly distorted, is one of these times. Geoff and I have been managing the Kennox portfolio for coming on 14 years now. We have 100% of our equity investments in our Fund and are pleased to have been joined along the way by co-investors able to identify with our approach – our long-term objectives for both risk and return, where we think we have an advantage over the market and the values we adhere to as we go. (Summed up: think long term; our edge is in the unloved; enact sensible decisions; be a true steward of capital).
A few points on this:
We care about the very long-term result (10 years+) and our very long-term objectives are around the absolute not the relative. We are not distracted by short term benchmarks, i.e. the “neighbours getting rich” risk. We do care very deeply about preserving and growing our clients’ capital, in that order, and the risks we undertake to do so.
It is imperative that any investor knows their advantage over the market. Ours is to look at areas that are behaviourally difficult for a lot of investors. Many are looking for the shiny new thing, but there is great opportunity at the other end of the spectrum, in the areas that are unloved or overlooked because the outlook is obscured, where companies are facing temporary headwinds. We spend our time assessing if these headwinds are temporary or permanent. One is a fat-pitch opportunity, the other a disaster. That this is very different to what a lot of the market does (particularly at present when growth and winners have been so richly rewarded) is especially attractive to us – being fundamentally different means our style can perform even in difficult markets, the timings of which are near impossible to predict.
We spend a lot of time on research but we understand that our competitive edge isn’t going to come from knowing more about a company than anyone else. Rather, it’s how we use the knowledge. It is about being able to differentiate the woods from the trees, the important from the noise; how to balance an understanding of huge numbers of moving parts (inherent in any company in the world), mix that with the uncertainty of change in the future, take an independent view, and distil down into clear-headed decisions.
We are able to look dispassionately at the world and willing to back our convictions when we see a disjoint between the prevailing market narrative and the likely real world outcome. Our opportunities will come in the mismatch between Ben Graham’s weighing machine and voting machine. This is our advantage.
Lastly, as long term investors (our turnover is c.10%) we see ourselves as true stewards of the opportunities we find: we need and want to be responsible owners. We have no interest in micromanaging management but will speak up and challenge on the strategic and material, forcefully if necessary. We are very clear, ownership rights bring responsibilities.
We welcome all investors who share these values to invest alongside us. In the long term we are certain that these behaviours and values will be fruitful in financial terms and, we certainly hope, have a positive impact on society as well.
Charles L. Heenan, Investment Director
Kennox Asset Management