Latest / Merryn Talks Money / This Hated Corner of the Stock Market Is Yielding Big Returns

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This Hated Corner of the Stock Market Is Yielding Big Returns · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to marrin Jock's Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I am Meren'
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Speaker 2: Sunset Web and with me today is Lawrence Hult's, founder
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Speaker 2: of the investment company Onward Opportunities.
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Speaker 3: This is a rare beast in this relatively recent launch
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Speaker 3: of a long only trust which specializes in UK small caps,
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Speaker 3: one of the most unpopular parts of the global stock market.
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Speaker 3: So we talk about why he launched into this sex so,
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Speaker 3: how he's done it and how he makes his returns.
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Speaker 2: Laurence, thanks for joining us today. It's very nice to
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Speaker 2: have you with us.
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Speaker 4: Good afternoon, and thank you for having me here at
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Speaker 4: the European headquarters of Bloomberg, where everyone wants to be,
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Speaker 4: where everyone wants to be.
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Speaker 2: Listen. We've got on today because you've done something really interesting.
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Speaker 2: You have actually, in really an appalling environment for the
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Speaker 2: investment trust industry, managed to launch a new one a
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Speaker 2: lot only did you do it, but it's actually gone
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Speaker 2: quite well. So tell us about why you did that
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Speaker 2: and how you did it.
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Speaker 4: I had spent eight or nine years at a business
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Speaker 4: called Gresham Ascesset Management, I was on the UK Critest
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Speaker 4: team there investing in UK swatter companies. We had a
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Speaker 4: good performance track record as a team, and it came
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Speaker 4: to sort of late twenty twenty one twenty twenty two,
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Speaker 4: and I really observed that the world, the financial world
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Speaker 4: as well as the wider world, was changing quite fundamentally,
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Speaker 4: and that really hung around interest rates. You'd had for
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Speaker 4: the first period of my career when I was there,
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Speaker 4: cheap money, lots of it, and it was really a
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Speaker 4: multiple expansion market, Whereas I had been taught to investor
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Speaker 4: in my time at Gresham House around catalysts and engagement
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Speaker 4: and being a truly active manager, and in you know,
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Speaker 4: in a world of rising interest interest rates, as was
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Speaker 4: about to happen and went on to happen, those elements
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Speaker 4: of investment thesis become much more important because you can't
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Speaker 4: and as many high profile managers are finding out at
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Speaker 4: the moment, you can no longer rely on multiple expansion
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Speaker 4: and liquidity to drive a thesis. And I spotted really
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Speaker 4: a good old fashioned gap in the market to do
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Speaker 4: this for investors for clients, using my experience at Gresham
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Speaker 4: House the time I spent there, they had a fantastic
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Speaker 4: journey of growing products of clients. I got to witness
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Speaker 4: that take part of it. I was one of the
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Speaker 4: original employees, and I combined that with the sort of
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Speaker 4: stock picking techniques i'd learned there to launch a fund.
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Speaker 4: And here we are.
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Speaker 2: So you thought you would launch into one of the
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Speaker 2: most unpopular parts of part of global markets, UK's mall caps,
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Speaker 2: the one place that has been so cheap for so long.
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Speaker 2: We've talked about mos podcasts for so long. We're constantly
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Speaker 2: saying UK's monument caps are ridiculously cheap, need buy them
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Speaker 2: before somebody else does. But it never really happens. The
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Speaker 2: stuff just days cheap. And it's also a relatively crowded
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Speaker 2: market getting smaller. But when you launched, there were still
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Speaker 2: quite a few funds and silarizedly trying to operate in
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Speaker 2: this small than MidCap area in the main kind of failing.
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Speaker 4: You're right, there are quite a few, but we've been
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Speaker 4: outperforming the majority of them, and at points in the
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Speaker 4: first three years of our fund's life, outperforming them materially.
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Speaker 4: And that really loops back to what I was describing before.
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Speaker 4: We have got a slightly different or more specific specialist
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Speaker 4: way of investing in these companies. And yes, many of
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Speaker 4: them remain difficult and cheap, but some clearly aren't given
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Speaker 4: our investment returns since we launched. And it comes back
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Speaker 4: to this idea of I call them the gems amongst
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Speaker 4: the rubble. It is undoubtedly difficult market that's slightly appealed
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Speaker 4: to the contrarian and me to have a go and
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Speaker 4: resign and try and launch this at twenty nine years
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Speaker 4: of age. We just about did and it's gone on
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Speaker 4: to good thing since. But and I know you talked
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Speaker 4: about this on the podcast before, therein lies the opportunity.
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Speaker 4: I think the thing I'd love to add today for
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Speaker 4: the listeners beyond what's been talked about in previous podcasts,
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Speaker 4: which is around how cheap it is, I think that's
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Speaker 4: just the start of any investment thesis. I think what
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Speaker 4: we've been showing and demonstrating along Sudce some other fund
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Speaker 4: managers is actually what can you buy within that value
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Speaker 4: and if you have a strategy like ours that is
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Speaker 4: pretty concentrated, pretty hands on. My sister who's an artist,
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Speaker 4: calls it brutalist investing. It's pretty pointy, it's pretty active,
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Speaker 4: it's pretty energetic, but it delivers out performance by foraging,
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Speaker 4: rummaging and finding those gems, and we have a really
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Speaker 4: eclectic portfolio today. Of some of these companies have capitalized
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Speaker 4: at less than fifty million, but their clients are some
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Speaker 4: of the biggest companies in the world.
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Speaker 2: Well, let's come back to that in a minute. I
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Speaker 2: want to come back to exactly how you invest your
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Speaker 2: family companies, and then want to talk about a couple specifically,
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Speaker 2: but before I want to stick with the with the
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Speaker 2: structure of the fund. I mean, the first thing to
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Speaker 2: ask being who are your investors? Because one of the
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Speaker 2: things that you hear constantly and investment trust business is
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Speaker 2: that you've got to have four hundred million, five hundred million,
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Speaker 2: maybe at this point even six hundred million to get
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Speaker 2: any wealth managers in for example. So to get those flows,
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Speaker 2: you need to be pretty big. So if you're down
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Speaker 2: at the much smaller end of that, you're really only
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Speaker 2: looking at retail investors.
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Speaker 4: That is the law, and I think I was told
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Speaker 4: it so many times I would sort of wake up
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Speaker 4: in the night seeing those words on my bedroom wall.
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Speaker 4: But what we've shown is that there are there is
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Speaker 4: a different way, and if you listen to someone like
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Speaker 4: Andrew Mhattie, who's quite a spokesperson in the industry, or
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Speaker 4: Jonathan Davis through on his podcast recently, we've actually done
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Speaker 4: something quite revolutionary in building a trustmost from the ground up,
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Speaker 4: brick by brick, as you point out, and we actually
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Speaker 4: have managed to convince some wealth managers with our pitch
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Speaker 4: and our approach and our background and our performance that
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Speaker 4: it's okay to just dip the toe. And I think
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Speaker 4: just this week you had a podcast out What's the
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Speaker 4: Future Like for Wealth Managers and there was a lot
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Speaker 4: of talk about being engaged with your clients and taking
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Speaker 4: them on a journey to demonstrate the value adding for
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Speaker 4: them beyond a kind of robotic solution. I would take
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Speaker 4: that step further. We've you know, many many industries, and
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Speaker 4: as a relatively younger fan manager, I witness and experience
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Speaker 4: this things are becoming experiential and even restaurants now there
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Speaker 4: are an experience to be successful. There's a little bit
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Speaker 4: of that about this investment product, this fund. If listeners
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Speaker 4: go on the website, they'll hopefully pick up on some
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Speaker 4: quite fresh branding. It's designed to be very accessible, relatable.
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Speaker 4: We have a dynamic, energetic board, you know who work
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Speaker 4: for some pretty big hitters, Bill Lackman, Guy Hands. And
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Speaker 4: because that's what's great about investment trust, they can and
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Speaker 4: are accessible. There's no minium investment, there's no sort of
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Speaker 4: hurd or the minium investment is the share price in
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Speaker 4: having a retail investment platform. You know, Rath Bones, Kallenish Capital,
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Speaker 4: gpi AM. There are all wealth managers that have now
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Speaker 4: disclosed a greater than five percent stake. We had some
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Speaker 4: seed money from my mothership, their clients Downgate Wealth, who
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Speaker 4: were a specialist boutique private client business. And then the
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Speaker 4: rest really was high net worth sophisticated investors that I
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Speaker 4: had met along the way in my career and really
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Speaker 4: convinced to back something slightly entrepreneurial, slightly different, and then
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Speaker 4: promised to thank them without performance, which we so far.
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Speaker 2: Just good okay, And they'll do that. Those wealth managers,
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Speaker 2: even though it's expensive, it has to be expensive because
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Speaker 2: it's small, right. But if you look at the investment
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Speaker 2: trust environment now most people are kind of trending down
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Speaker 2: to zero point seven percent, zero point six percent, But
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Speaker 2: at your side is you're still one point five percent.
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Speaker 4: They are trending down on costs and costs are and
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Speaker 4: input and the output is best performance. I think it's
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Speaker 4: well documented on this show, amongst many others, some other
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Speaker 4: struggles of act management, and one of them has been performance,
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Speaker 4: and one of I talked about interest rates and spotting
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Speaker 4: a gap in the market to quit my job and
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Speaker 4: do this another thing I became aware of. And this
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Speaker 4: isn't a criticism, it was an observation. As Gresham House grew,
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Speaker 4: it became a big business itself, and we were starting
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Speaker 4: to look after various funds across a team, and it
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Speaker 4: was becoming a bit thinly spread. I want to be
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Speaker 4: solely focused on this and make it a life's work,
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Speaker 4: and to do that requires full time and overtime of myself,
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Speaker 4: the manager, lead manager, and the founder, but also the
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Speaker 4: investment committee, which we'll hope you talk about later. We
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Speaker 4: need to build out the team over time to dilute
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Speaker 4: key man risk and add resource. And this is a
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Speaker 4: sort of specialist hig end product and his priced accordingly.
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Speaker 4: That will rule out a large swathe of investor. But
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Speaker 4: the reality is this strategy can never be big enough
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Speaker 4: to attract large spaces of all list.
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Speaker 2: Yeah, okay, well, on that same subject, tell me about
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Speaker 2: the performance few because I have said everyone listeners this podcast,
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Speaker 2: I really really disapproved performance fees on the basis that
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Speaker 2: outperformance should be its own reward. Because you joined General
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Speaker 2: laurm And as the fund gets bigger and bigger and bigger,
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Speaker 2: so does the income of fund manager. So a performance
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Speaker 2: fee shouldn't, I think, really be necessary. But what you've
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Speaker 2: got is twelve and a half percent over six percent hurdle.
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Speaker 2: And is that six percent nomenal or real?
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Speaker 4: So a couple of points that this fund can't get
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Speaker 4: bigger and bigger realistically, it will never be bigger than
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Speaker 4: two hundred maybe in the fullness of time two hunred
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Speaker 4: and fifty million, adjusting for inflation and asset price growth.
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Speaker 4: So again to that point around keeping the team aligned,
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Speaker 4: fully resourced, fully costed, it forms what effectively becomes a
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Speaker 4: bonus pot for the team and the investment committee on
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Speaker 4: our performance. The hurdle is six subject to a high
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Speaker 4: water mark. It also resets every year. If you think
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Speaker 4: some performance fees are what called a compounding hurdle. At
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Speaker 4: this case six Most of our peers are six or
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Speaker 4: seven percent in what we do in the small cap market,
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Speaker 4: but our target returns are fifteen and they've they've been
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Speaker 4: pretty much that until recently around the earl. More so,
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Speaker 4: you can quite quickly open up a very large spread
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Speaker 4: to this compounding hurdle that there means nothing. So ours
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Speaker 4: resets every year as well, on top of the high watermark.
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Speaker 2: On top of the high watermark.
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Speaker 4: Yes, correct, We get asked, how have you done this?
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Speaker 4: Have your gown a fund? How's it performed well? And
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Speaker 4: I think you leaded to that at the starting the
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Speaker 4: market we live and breathe this. I do nothing else.
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Speaker 4: I'm pretty selfish with my time. If it's not something
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Speaker 4: to do with stock picking, looking after the stocks that
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Speaker 4: we've got, or or talking to relating to finding clients,
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Speaker 4: I just don't do it. And again that was one
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Speaker 4: of the reasons to spin out and do something entrepreneur.
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Speaker 4: There'sn't time for kind of wider top co office agendas.
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Speaker 2: Okay, fair enough, we didn't actually mention the performance numbers
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Speaker 2: at the beginning, So tell us the performance numbers now.
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Speaker 4: So as we sit today to the last FAG sheet
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Speaker 4: at the end of May, that the nevs plus thirty
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Speaker 4: five percent that is running costs. That's a net number
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Speaker 4: of all these costs we talk about. It peaked at
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Speaker 4: an even more attractive number of about plus fifty towards
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Speaker 4: the end of last year before Hummers and Iran and
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Speaker 4: the straight or Schroding as straight as I call it
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Speaker 4: with a friend opened up or not or closed, and
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Speaker 4: that's materially outperforming our two peer groups, which we define
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Speaker 4: as the Investment Association UK Smaller Company's funds, that's the
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Speaker 4: open ended vehicles, is about sixty of them, and it's
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Speaker 4: outperforming the AIC UK Smaller Companies in peer group, which
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Speaker 4: is the trust that invest in small caps. And we're
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Speaker 4: outperforming both by circle double through the life of the fund,
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Speaker 4: and listeners can see that on our fact sheets and
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Speaker 4: investment decks.
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Speaker 2: Okay, great, let's move on to more interesting stuff then,
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Speaker 2: and how you do this? How you it's a big
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Speaker 2: universe UK smaller and medium cap getting getting a smaller university.
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Speaker 2: Actually there's more and more companies are taking out of it.
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Speaker 2: How do you find these gems among them?
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Speaker 4: RUB two? What makes a gem a special company with
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Speaker 4: an attractive price doing something different? I think what I've
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Speaker 4: definitely refined since we started the fund, and this is
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Speaker 4: my past life running other funds in this world of
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Speaker 4: higher interest rates, scarce capital outflows, it's pretty barren companies
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Speaker 4: their shares that really had to command capital. And when
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Speaker 4: I did a sort of three year review of our
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Speaker 4: first three years at the start of this year, the
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Speaker 4: stocks that had won were sort of what I call
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Speaker 4: world beaters on a London rating. And we've had some
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Speaker 4: particular case studies with some great returns, and it's because
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Speaker 4: they've really been global businesses with ip with great products,
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Speaker 4: with great strategies that happened to be listed in London
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Speaker 4: and at that London discount.
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Speaker 2: Can we stop there actually and just talk about this
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Speaker 2: London discount that we talk about on podcasts quite quite
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Speaker 2: a lot, and it just doesn't go away. Why do
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Speaker 2: you think that is?
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Speaker 4: I think it won't go away until flows return. I
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Speaker 4: think it's a multiple question. There's plenty of great businesses
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Speaker 4: in our portfolio and other funds portfolios that are doing
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Speaker 4: great things and their earnings are going up. In fact,
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Speaker 4: I've got some friends at Shore Capital and Canicord who
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Speaker 4: deserve a shout out for helping me do the work
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Speaker 4: before I came on. UK retailers, the small Cap index
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Speaker 4: of UK retailers, their margins are much higher than the
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Speaker 4: US peers and they trade on half the valuation. Same
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Speaker 4: with the industrials and the construction stocks. But the problem,
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Speaker 4: actually it all sounds a bit too good to be true,
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Speaker 4: has been growth. The US indices, the US stocks all
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Speaker 4: have much better growth prospects. And hopefully we've got a
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Speaker 4: chance today talk about the current administration and environment in
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Speaker 4: which the stock market sits. But in terms of the discount,
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Speaker 4: I think it stays until there's fundamental policy change to
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Speaker 4: make flows or encourage flow incentivized flows to return. And
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Speaker 4: that's one of the reasons why I concentrated approach like
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Speaker 4: US has been able to outperform. I'm not going to
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Speaker 4: be sadly today one of the fund managers that comes
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Speaker 4: on and says small caps are ready to rock and roll.
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Speaker 4: That will come one day and I can't wait for it,
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Speaker 4: and I hope they'll still be around. But at the
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Speaker 4: moment it's very stock specific commanding. You've got a command capital.
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Speaker 2: Well, let's you said that. We hopefully will talk about
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Speaker 2: the lady, but let's talk about it now. The policy
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Speaker 2: changes that probably not this administration, but maybe a future
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Speaker 2: administration could bring in that might change the direction of
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Speaker 2: flows needs.
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Speaker 4: Before getting political, which I probably will.
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Speaker 2: It doesn't have to people, let go, we're just discussing, well,
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Speaker 2: this is the point that's discussing policies that my door
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Speaker 2: might not help the London stock market, which is hugely
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Speaker 2: important to our economic.
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Speaker 4: Growth totally, and that's the point. You don't have to
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Speaker 4: get political. Where a fund manager that myself and frankly
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Speaker 4: a citizen of the country gets cross is object of
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Speaker 4: matters get really poorly executed, like when to have a
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Speaker 4: budget in twice in succession. Now they've the government have
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Speaker 4: effectively waited till the last possible moment to announce what
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Speaker 4: they're going to do. Now, anyone with any grasp from
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Speaker 4: a kind of GCC level of business studies or economics
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Speaker 4: will know that businesses love certainty and predictability. Well, delaying
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Speaker 4: your budget for as long as possible is the opposite
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Speaker 4: of that. But it's particularly painful when there's leaks and
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Speaker 4: speculation and there's an ability to front run based on
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Speaker 4: said leaks and signation and do real economic damage. I
15:36
Speaker 4: don't think it's a coincidence that since the build up
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Speaker 4: to last year's as late as possible budget that the
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Speaker 4: construction sector has really been struggling ever since. Some of
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Speaker 4: the peer numbers are at pandemic levels. You listen to
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Speaker 4: the house builders, the brick layers, these are all real
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Speaker 4: companies that we talk to on the stock market. They're
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Speaker 4: tearing their hair out with frustration. It's just so incredibly helpful.
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Speaker 4: And that's before you can get to some of the
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Speaker 4: policy decisions that then get made s late.
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Speaker 2: What about things like signal policy is like changing stamp
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Speaker 2: duty a polishing stamp duty or the brit I ser
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Speaker 2: that kind of thing. Do you feel they make a
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Speaker 2: substanceial difference even if they were just there as signals
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Speaker 2: that the administration cared.
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Speaker 4: I think the brit icer genuinely would. But again there's
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Speaker 4: the frustration. It was kind of semiing out as it
16:26
Speaker 4: was going to happen, and then it wasn't. So if
16:29
Speaker 4: you're a wealth management business or wealth manager or it
16:32
Speaker 4: adds to this image of confusion and flip flopping and unpredictability, uncertainty.
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Speaker 4: And I think if there's one word you could use
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Speaker 4: to define the UK over the past ten years, it
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Speaker 4: would be uncertainty. Yeah, whatever, the Prime Minister, we've had loads, whatever,
16:46
Speaker 4: the Housing Minister or whichever department it's been uncertain, hasn't it,
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Speaker 4: And you know businesses crave certainty even if it's a
16:53
Speaker 4: bad number. At least then they can adjust the model
16:56
Speaker 4: accordingly and make a decision, even if it's to build
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Speaker 4: slightly less homes or in a different cost base. So
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Speaker 4: I think the British I had structured the right way
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Speaker 4: is a good idea. I know some listeners some commentators
17:08
Speaker 4: will say your commanding capital, you're not, because I don't
17:11
Speaker 4: think anyone's saying you can't invest in other stocks. I
17:14
Speaker 4: think what people are saying is an increasingly polarized splintered
17:20
Speaker 4: to the world and world economy. A big tax incentive
17:25
Speaker 4: should be domiciled, especially the time when our economy, on
17:29
Speaker 4: our market and the stock market. By the way, isn't
17:31
Speaker 4: this sort of casino that some politicians would have voters
17:36
Speaker 4: listeners believe it's a capital location mechanism. We myself, my team,
17:42
Speaker 4: we decide which companies to put money in so they
17:45
Speaker 4: can go and do things in the economy, and we
17:49
Speaker 4: need to be encouraging that, incentivizing that a British iSER
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Speaker 4: something around pensions. Those can only be good things and
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Speaker 4: signals as you say, because of course, what I think
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Speaker 4: most likely happen is fast dynamic in forum. Capital would
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Speaker 4: follow that because it was one of the big challenges
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Speaker 4: of the UK dot rocket would being fixed.
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Speaker 2: Let's go back to where we were on the positive
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Speaker 2: stuff choosing with gems.
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Speaker 3: What's the process.
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Speaker 4: So there's two sort of crosshairs or identifiers. One is
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Speaker 4: a set of quantitative mechanisms. We use a tool called quest,
18:42
Speaker 4: which is a cash flow modeling tool, but we use
18:44
Speaker 4: it in the opposite way of how it's designed to
18:46
Speaker 4: be used. So an investor like Terry Smith or Lion Trust,
18:50
Speaker 4: they will look for quality compounders through the cycle, generating
18:54
Speaker 4: cash flow returns from their assets above the cost of capital,
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Speaker 4: reinvesting them well, creating more cash flows. The simple kind
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Speaker 4: of summary. We actually look for situations in businesses where
19:04
Speaker 4: that isn't happening anymore, could happen it stopped happening, and
19:08
Speaker 4: go and ask ourselves why. And there's six different scenarios.
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Speaker 4: We traw the market for once a month. You get
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Speaker 4: six sort of shortlists, and then we spend the rest
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Speaker 4: of the month shortlisting them into things that we should
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Speaker 4: spend proper time on or not so that's that's been
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Speaker 4: historically the core of idea generation. We do operate like
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Speaker 4: private investors, so we try and find our own ideas,
19:31
Speaker 4: our own pipeline, rather than take the traditional inbound broker calls,
19:34
Speaker 4: which makes it quite unpopular, but it kind of works.
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Speaker 4: And then the other which is a little bit more recent,
19:40
Speaker 4: past year or so, and this is a genuine benefit
19:44
Speaker 4: of artists and intelligence that everyone sort of wants to
19:46
Speaker 4: talk about at the moment. For years, I desperately try
19:50
Speaker 4: to read every RNs and for listeners aren't familiar, RNs
19:53
Speaker 4: stands for Regulatory News Service. So every day a company
19:57
Speaker 4: that has is on the stock market has some important
20:00
Speaker 4: news to share, they have to announce it at seven
20:02
Speaker 4: am via our NS. And I used to try and
20:06
Speaker 4: read them every morning.
20:07
Speaker 2: Your whole day gone, Yeah, because a lot of things
20:10
Speaker 2: people have pretend in RNs are not exactly.
20:12
Speaker 4: Important correct interesting, And even with filtering out some of
20:16
Speaker 4: the sort of fairly vanilla or technical ones, it was
20:20
Speaker 4: just unsurmountable when trying to launch a fund and grow it.
20:24
Speaker 4: But the business I work at dowgate board into sort
20:28
Speaker 4: of PhD types about a year ago to help our
20:31
Speaker 4: business take up costs through AI and that was working fantastically.
20:35
Speaker 4: And they sit on the desk a couple from me,
20:37
Speaker 4: and I overheard them talking about something and I kind
20:40
Speaker 4: of twigged that they could automate what Lawrence is doing
20:43
Speaker 4: every morning at seven oh one, but in thirty seconds.
20:47
Speaker 4: So every day I get any of the rns's that
20:49
Speaker 4: have some phraseology or words and other things I don't
20:53
Speaker 4: really want to share on here because it's genuine IP,
20:56
Speaker 4: and I get them a moment box. I usually get
20:58
Speaker 4: between one and five a day. I can read those
21:00
Speaker 4: over the course of.
21:01
Speaker 2: A couple of How much time has that saved you?
21:04
Speaker 4: A couple of hours a day?
21:05
Speaker 2: Has it interesting?
21:06
Speaker 4: All?
21:07
Speaker 3: The reality is how are you using AI in your business?
21:09
Speaker 2: That's fascinating.
21:10
Speaker 4: It's more than saving a couple of day. It's actually
21:12
Speaker 4: prevented me missing out by not doing the second hour
21:15
Speaker 4: because it's the world.
21:18
Speaker 2: Okay, interesting. So we've got those things on the go,
21:21
Speaker 2: could you maybe talk us through an example of a
21:25
Speaker 2: company that you've picked up, looked at it and gone, well,
21:27
Speaker 2: that's a gem, and then what's happened?
21:31
Speaker 4: There's one that comes to mind because we're sat in
21:34
Speaker 4: a broadcast studio and that's what they do. In fact,
21:36
Speaker 4: I suspect some of your colleagues probably use their products.
21:39
Speaker 4: So there is a stock called Pebble Beach Systems. It
21:43
Speaker 4: flagged up on our screening system as a business that
21:46
Speaker 4: had some capitalication questions very quickly. Just to give some context,
21:51
Speaker 4: the business has a piece of globally eading software that
21:55
Speaker 4: allows broadcasters to, in what I call layperson speak, put
21:59
Speaker 4: content in a line. So when any of us watch
22:02
Speaker 4: a show or stream a live event, we get a
22:05
Speaker 4: continuous thread of basically various video streams behind that on
22:10
Speaker 4: the other side of the screen, there are anything from
22:13
Speaker 4: twelve to fifty different cameras. Think of a football match
22:16
Speaker 4: or the tennis or producing a broadcast show, and all
22:21
Speaker 4: those feeds plus the adverts to be sliced and spliced
22:24
Speaker 4: and moved around and put into a almost in situ,
22:27
Speaker 4: into a thread fee years. Pebble Beach had been doing
22:31
Speaker 4: that for traditional broadcasters. That's the market that's deemed in
22:34
Speaker 4: structural decline. So they started trying to invest in new products.
22:37
Speaker 4: And I'm going to condense this for effect, because I
22:40
Speaker 4: don't want to go on for hours and hours, and
22:41
Speaker 4: we do a lot of work to qualify these ideas,
22:44
Speaker 4: but there's long short There were generally some great cash
22:47
Speaker 4: flows but burning them all. And because of that and
22:50
Speaker 4: the fact it was deemed a kind of legacy industry,
22:53
Speaker 4: broadcast media is treated like tobacco today in terms of
22:56
Speaker 4: structural decline. It was a stop with a thirty five
22:59
Speaker 4: percent margin trading on a p of five when we
23:02
Speaker 4: found it, So we asked themselves, why, what's the catch?
23:05
Speaker 4: What's going on? The catch was the stock market didn't
23:09
Speaker 4: believe in the strategy. They thought the new product wasn't
23:12
Speaker 4: going to work and costing lots of money, and they
23:14
Speaker 4: thought what they did already was great but die. And
23:18
Speaker 4: one of the things we do, and with diligence and ideas,
23:20
Speaker 4: we talk to people that basically know a lot more
23:22
Speaker 4: than I about what we're looking at. So in this case,
23:25
Speaker 4: we spoke to people in the broadcast world and someone
23:28
Speaker 4: quite a stupidly pointed out to us that, yeah, look,
23:32
Speaker 4: the streamer is our cannibalizing traditional television, but they're now
23:37
Speaker 4: going through an absolute arms race for live content for sports.
23:42
Speaker 4: And that's because there's loads of reasons start, which you
23:43
Speaker 4: can go on to another time. But the interesting thing
23:46
Speaker 4: about sports is even though you stream it, you watch
23:49
Speaker 4: it in a line. It's live, you don't just download
23:52
Speaker 4: and watch it. It's continuous like a traditional broadcast, fast forward,
23:57
Speaker 4: lots of engagement, lots of diligence, mothboarding the previous product,
24:01
Speaker 4: which meant the margins and the cash flows got even better.
24:05
Speaker 4: The company announced in February this year it won an
24:08
Speaker 4: initial contract with a global streaming giant. I think what
24:11
Speaker 4: the words use. So it's probably one of five companies
24:15
Speaker 4: that they didn't disclose, but it was for sport. They'd
24:17
Speaker 4: just won. Anyone that is keen sports and streaming will
24:20
Speaker 4: be able to work it out. We did. But what
24:22
Speaker 4: they do disclosed is they also do the Six Nations,
24:24
Speaker 4: familys and Prime now the football. So all of a sudden,
24:28
Speaker 4: you've had a business with cracking margins become a world
24:33
Speaker 4: beater and it was on five times p The shares
24:35
Speaker 4: have done well is eighteen months now but still today
24:40
Speaker 4: only trades on a P ten and we think that
24:42
Speaker 4: can get better and better because one thing we have
24:44
Speaker 4: learned at the moment it's winning sort of marquee sports
24:47
Speaker 4: like the rugby or the one they won in Februar,
24:49
Speaker 4: which people have to go and work out, so I'm
24:51
Speaker 4: not allowed to share it. But what's interesting and we
24:55
Speaker 4: learned this on one of our regular sort of site
24:57
Speaker 4: visits we do with the investment as a whole cohort
25:01
Speaker 4: of what did you call sort of tier two tier
25:03
Speaker 4: three sports that are an economical to produce as a
25:06
Speaker 4: as a media format on a national basis, but actually
25:10
Speaker 4: if you're producing it by a streaming platform to global audience,
25:13
Speaker 4: the economics work too. Broadcast the volleyball season or.
25:19
Speaker 2: What is a tier three sport.
25:23
Speaker 4: But niche sports can now be televised and monetized and
25:27
Speaker 4: that's all going to be worked for Pebble. So just
25:30
Speaker 4: a classic case of gem amongst the rebel, really cheap
25:33
Speaker 4: wild beating product listed in London global earnings and that's
25:38
Speaker 4: what this fund has all been about, and that's where
25:40
Speaker 4: the success has come from. And we have we have
25:43
Speaker 4: a really eclectic cast from one of the largest podcast
25:46
Speaker 4: publishers in the world. Topic is what we're doing today
25:49
Speaker 4: to the UK's leading retailer fishing tackle to the market leader.
25:54
Speaker 2: Is fishing in tier three sport.
25:56
Speaker 4: I bet it gets televised now, but it wasn't before,
26:00
Speaker 4: So yeah, that would be something that wasn't traditionally broadcast
26:03
Speaker 4: on the Channel four aiming direct.
26:05
Speaker 2: Your is your second biggest holding, correct, and that is
26:10
Speaker 2: I mean, it's a huge hobby in the UK, getting
26:12
Speaker 2: a bigger hobby in the UK fishing outside my comfort
26:16
Speaker 2: zone here, but my husband and my son are both
26:17
Speaker 2: great fishermen.
26:18
Speaker 4: And they spend probably quite a big time doing it.
26:20
Speaker 4: When they do, they.
26:21
Speaker 2: Spend a lot of time doing it, and I spend
26:22
Speaker 2: a lot of time buying them.
26:24
Speaker 4: Yeah, I'm signed to find my sort of co manager
26:28
Speaker 4: for the fun because you're picking up our investments here,
26:31
Speaker 4: which was really very rarely have we invested in retail.
26:34
Speaker 4: But if you're going to do it retailing, fishing tackle
26:38
Speaker 4: is a down good place to start because it's a
26:41
Speaker 4: large hobbyist community. What's really interesting is you tend to
26:45
Speaker 4: have to go to the store to buy the bait
26:48
Speaker 4: because it's live and therefore it's a genuine omni channel proposition,
26:52
Speaker 4: and that ring fences it from some of the online
26:55
Speaker 4: I mean, I don't think many people do buy fishing
26:57
Speaker 4: reels from Tama. They're quite complicated and expense but it
27:00
Speaker 4: sort of ring fences you from the Amazon effect. And
27:03
Speaker 4: you've seen that come through in There aren't many retailers
27:06
Speaker 4: that upgraded profit forecast twice last year, but Angling Direct
27:09
Speaker 4: did even after absorbing an unexpected employers National Insurance contribution
27:14
Speaker 4: of three quarters of a million pounds and their profit
27:17
Speaker 4: target was five. So that's quite a meaty okay.
27:20
Speaker 2: And when you found the Angling Direct, we've just talked
27:22
Speaker 2: about why you hold it. When you found it, how
27:24
Speaker 2: cheap was that.
27:25
Speaker 4: The market cap was roughly twenty They had net cash
27:29
Speaker 4: as sixteen, ditcasha fourteen and inventories of sixteen, so it
27:33
Speaker 4: was trading at a negative tangible and that I said
27:35
Speaker 4: value that one we invested in the depths of twenty
27:38
Speaker 4: twenty three, and I think that was the real bleakest
27:43
Speaker 4: in the deer of yuk smatter companies. But interestingly, you
27:48
Speaker 4: know that's the whole reason why we launched the fund.
27:50
Speaker 4: To one of your comments at the very start of
27:52
Speaker 4: the podcast on earth have you done that? Did done this?
27:55
Speaker 4: I'm a bit of a contrarian by nature, but of
27:59
Speaker 4: course the same reasons that made it really hard to
28:01
Speaker 4: launch a fund were the same reasons why we can
28:04
Speaker 4: buy Angling Direct at a crazy evaluation like that and
28:07
Speaker 4: generate those returns of thanks to our early investors.
28:11
Speaker 2: Yeah, and a lot of these companies that kind of
28:13
Speaker 2: company are too small to be bought by some of
28:15
Speaker 2: the larger funds and the larger trusts.
28:17
Speaker 4: But yes by the larger funds, yes, but interestingly not
28:21
Speaker 4: buy larger strategic acquires acquirers. We've had three acquisitions now
28:26
Speaker 4: in our first three years. We had nearly our fourth
28:30
Speaker 4: just this week with audio Beam, which is the podcast publisher.
28:33
Speaker 4: I mentioned that Bily your top holding, Yeah, that had
28:36
Speaker 4: three confirmed now publicly three cash bids, but the board,
28:40
Speaker 4: who owned six percent of the company themselves deemed them
28:43
Speaker 4: not representative of the accelerating growth and margins in the business.
28:48
Speaker 4: That refesshingly actually rejected the offers and are going to
28:50
Speaker 4: go it alone and I think to acquire other podcast
28:53
Speaker 4: businesses themselves. But again when we invested in that, it
28:57
Speaker 4: was on zero point seven sales group profits of fifty
29:01
Speaker 4: percent last year. We think will grow them both more
29:04
Speaker 4: this year. And Netflix Spotify Fox have been acquiring podcast
29:11
Speaker 4: businesses on multiples of sales. So there was a you know,
29:14
Speaker 4: it was really a US business but listed in London,
29:17
Speaker 4: so therefore traded at a material discount to where it's
29:20
Speaker 4: a Peers trade, so just another gem amongst the ruble.
29:25
Speaker 2: Interesting Now it's a very constrated portfolio. Twenty twenty two
29:29
Speaker 2: twenty two stocks. Tell us about something that you've bought
29:32
Speaker 2: more recently, something interesting. We haven't heard about it and
29:36
Speaker 2: isn't isn't here on the top ten list.
29:38
Speaker 4: Ah, now you've got me. I don't think min CON's
29:43
Speaker 4: quite on the top ten. For memory.
29:44
Speaker 3: It might be number eleven, but it is only five
29:48
Speaker 3: percent of that.
29:49
Speaker 4: Is very recent. So this again is in the camp
29:52
Speaker 4: of what's particularly interesting about this one. Usually when we
29:57
Speaker 4: think we found a gem amongst the rubble, people have
30:00
Speaker 4: heard about it but missed something. This stock I mentioned
30:03
Speaker 4: to people and they look at me like I've got
30:04
Speaker 4: two heads. Tell me what about this Mincoon thing. It's
30:08
Speaker 4: one hundred million pound capitalized business dual listed in London
30:12
Speaker 4: and the Urinext and it has some of the best
30:16
Speaker 4: copper and deep bore construction drilling drill bits in the world.
30:21
Speaker 4: In fact, they're so good that this year they've announced
30:24
Speaker 4: that Epi Rock, which is a larger pier ten times
30:27
Speaker 4: the size of Mincom, is having to use Mincon's green
30:34
Speaker 4: hammer technology to do it's deeper drilling. Having tried to
30:37
Speaker 4: crack the technology itself for ten years, they're now on
30:40
Speaker 4: trial with twelve rep Rock customers. We obviously hope and
30:43
Speaker 4: believe that will go well, hence making the investment. But
30:46
Speaker 4: when we first identified the shares and put it in
30:49
Speaker 4: what we call the nursery, which is the investments that
30:52
Speaker 4: aren't in the top ten that we disclose, we bought
30:55
Speaker 4: them about thirty five pence per share. They've been one
30:58
Speaker 4: pound fifty four years ago. At thirty pence per share,
31:01
Speaker 4: they're at a deep discount to tangible value. And then
31:04
Speaker 4: we made it a core holding and hence it appearing
31:06
Speaker 4: in the top ten now in February this year. Is
31:09
Speaker 4: our conviction grew on really a recoverying copper mining, a
31:13
Speaker 4: recovery in margins, and growing evidence that their ip was real.
31:17
Speaker 4: There's not no bigger compliment than a peer having to
31:20
Speaker 4: begrudgingly buy your products off you.
31:23
Speaker 3: What about mistakes.
31:25
Speaker 2: We've talked about three really great buyers already, and I
31:30
Speaker 2: mean kind was already out twenty seven percent since you
31:32
Speaker 2: brought it right, So that's marvelous, But it can't always
31:35
Speaker 2: go well.
31:35
Speaker 4: Sadly not We've definitely made mistakes, and it's going to
31:41
Speaker 4: sound like a cliche, but that's been one of alongside.
31:44
Speaker 2: In a learning experience.
31:45
Speaker 4: No, it's more than that. It's been a joy alongside
31:50
Speaker 4: some of the support and the counterparties and basically people
31:53
Speaker 4: I've got to work with and launching this and sort
31:55
Speaker 4: of break out from a desk job at my old chop.
32:00
Speaker 4: I've developed more as a fund manager in the past
32:02
Speaker 4: twenty four thirty six months than ten years before, and
32:05
Speaker 4: that's because I've directly made mistakes. And yes, it's a
32:08
Speaker 4: cliche that you learn from them, but you really learn
32:11
Speaker 4: from them when they're yours and they're very public. And
32:14
Speaker 4: I described to friends and family who aren't in the
32:16
Speaker 4: finance world that the job is akin to running a
32:21
Speaker 4: high street store and in a big glass window. Every
32:24
Speaker 4: day you have to put your p and l what
32:26
Speaker 4: you're selling, what you're not, what you're losing money on,
32:28
Speaker 4: and you have to walk past it five times a day.
32:31
Speaker 4: Your friends, your family, in fact, they can look on
32:33
Speaker 4: their phone seit, your rivals, your peers, your advisors, your customers,
32:39
Speaker 4: and that takes a certain fiber to assault. Actually, I
32:44
Speaker 4: think we have got you know, we've made mistakes. Particularly
32:49
Speaker 4: bad ones are where we've almost tried too hard. So
32:53
Speaker 4: there was a business called RBG Holdings. They had a
32:56
Speaker 4: distress balance sheet. It was a legal services business. It
32:58
Speaker 4: used to have cracking margin. The founder returned the namesake
33:03
Speaker 4: of the business chat called Ian Rosen Black, and re
33:05
Speaker 4: really backed him to strip out the cost, went back
33:09
Speaker 4: to the key clients, paid down the debt organically and if
33:12
Speaker 4: you did that, it was from memory. Yeah, a business
33:15
Speaker 4: that lot long ago did a forty percent margin training
33:17
Speaker 4: on point one of sales, so it'd of been a
33:19
Speaker 4: cracking return if you go anywhere near one time sales
33:21
Speaker 4: or two. But in hindsight it was a bit of
33:24
Speaker 4: an attempt at a hero trade and we were trying too hard,
33:27
Speaker 4: I think. So that was one another very recently. It's
33:31
Speaker 4: one we partly got wrong because actually we took profits
33:34
Speaker 4: along the way, fortunately, and that's one of the great
33:36
Speaker 4: things about having colleagues they encourage you to do that
33:39
Speaker 4: sort of thing. But there's a business called Scenectics and
33:44
Speaker 4: the portfolio is still there today. It is still there still,
33:48
Speaker 4: and we're down I think.
33:51
Speaker 2: On this. Latest facts twenty.
33:55
Speaker 4: Was point nine out twenty we'll call it around twenty
33:59
Speaker 4: and when we invest in the company, we'd identified it
34:02
Speaker 4: had again Jim amongst the rubble, some well leading software
34:06
Speaker 4: and cameras for security, mainly around casinos, but that in
34:10
Speaker 4: the modern world we live in, those techniques and products
34:14
Speaker 4: could be applied to other sites like metro stations, hospitals,
34:17
Speaker 4: data centers, in structure sites. The stock was going through
34:22
Speaker 4: a purple patch earnings upgrades. Here we go. We called
34:26
Speaker 4: this one right fantastic, and then the chief executive very
34:29
Speaker 4: tragically sort of died overnight and the business that purple
34:37
Speaker 4: patches within twelve months come to an end and it's
34:40
Speaker 4: now throughout. You know, so the business is now sat
34:42
Speaker 4: in a loss rather than a profit in terms of
34:44
Speaker 4: our investment, and we are now back to the brutalist
34:48
Speaker 4: investing comment earlier on. We were at a bit of
34:50
Speaker 4: an apex in our journey with Scenectics and sourcing that
34:54
Speaker 4: out and reformulating the strategy, getting back to basics. You know,
34:59
Speaker 4: the business isn't distressed. It's got fourteen million of cash
35:02
Speaker 4: and the bandsheet the market caps about thirty today and
35:05
Speaker 4: the management and happy to speak to you. They're speaking
35:07
Speaker 4: to us, Yeah, and the board in particular. We like
35:11
Speaker 4: to deal with non executives. That's their role and we
35:14
Speaker 4: encourage them to take that up. And because the business
35:19
Speaker 4: does have that IP and a margin of safety, we've
35:22
Speaker 4: got options to review the best way to maximize value
35:27
Speaker 4: in the investment. But in hindsight should have taken more
35:30
Speaker 4: profits on the way up than we did. But now
35:32
Speaker 4: stepping into and I'm pretty confident with exit the investment
35:36
Speaker 4: with a profit. But it's requiring a lot more time
35:39
Speaker 4: than buy and hold to do.
35:40
Speaker 2: So you said earlier before we started recording. Actually we
35:43
Speaker 2: were talking about podcasts and listening to podcasts and how
35:45
Speaker 2: much you drive, suggesting you spend a lot of time
35:48
Speaker 2: on the road visiting prospects.
35:52
Speaker 4: We do, and funny enough, just yesterday I was about
35:55
Speaker 4: half past three to drive to the airport to fly
35:57
Speaker 4: to see some Perspective clients in Edinburgh. Funny enough, and
36:00
Speaker 4: then I got back about eleven o'clock last night, and
36:02
Speaker 4: here we are today. But the fun, the more fun
36:05
Speaker 4: traveling is is the site visits. And you do get
36:09
Speaker 4: some almost sort of caricature type moments where the penny drops.
36:13
Speaker 2: So when you go on these site visits, one of
36:15
Speaker 2: one of the things. I was at a conference justin
36:16
Speaker 2: and we were talking about how AI is the new
36:19
Speaker 2: ESG that in intol rered de rousion, every time you
36:22
Speaker 2: went to visit a company, you'd also about their ESG policies,
36:25
Speaker 2: and they musfer away for a while about all that.
36:27
Speaker 2: And now every time anyone goes to a company they said, well,
36:29
Speaker 2: how are you using AI and presumaly, you're asking that
36:32
Speaker 2: question every time you go to see anybody.
36:35
Speaker 3: Nope, you're not.
36:35
Speaker 4: If anything, I get slightly cheapish when someone brings it up,
36:39
Speaker 4: because it's become a bit of a buzzword like CRYPTO
36:42
Speaker 4: was a few years ago, an EESG before that. I
36:47
Speaker 4: think what most people call AI is just good automation,
36:50
Speaker 4: and really honest and good automation. I'm all for. We're
36:53
Speaker 4: just a bit wary and when we start seeing words
36:56
Speaker 4: like AI and big budgets for it crop up kind
36:58
Speaker 4: of from nowhere. They were talking about it three years ago.
37:01
Speaker 4: Fantastic cutting edge. You cleanly need it. But back to
37:05
Speaker 4: one of the ways we find ideas, there's things we
37:08
Speaker 4: used to weed things out as well, and AI isn't
37:11
Speaker 4: one of them. But that is really haven't done it
37:14
Speaker 4: twelve years now. It's fascinating some of the little habits
37:17
Speaker 4: and tricks you can spot in the way a company
37:20
Speaker 4: communicates that can let you sort of look around corners.
37:22
Speaker 4: I mean the classic is broadly in line or however
37:26
Speaker 4: more over in the outlook and you just go, oh god,
37:28
Speaker 4: six months task can be a disaster.
37:30
Speaker 2: Yeah, okay, interesting. I think that's a good tip to
37:33
Speaker 2: end on. That's good tip for negative stuff. You've got
37:35
Speaker 2: a good tip for something positive to look through for
37:37
Speaker 2: the ordinary invers day going out attempting to do a
37:40
Speaker 2: little bit of what you do, filtering through one hundreds
37:42
Speaker 2: and hundred companies. What's the top number one thing to
37:45
Speaker 2: look at from management?
37:46
Speaker 4: Follow the money, go and look at the l tips,
37:49
Speaker 4: which is for code for how the management team get paid.
37:53
Speaker 4: If there's triggers or thresholds or share prices that they
37:56
Speaker 4: have to hit, and they look interesting versus where the
37:58
Speaker 4: shares are today? Always worth investigating.
38:01
Speaker 2: Okay, interesting, Lawrence, Thanks very much, Thank you very much.
38:11
Speaker 2: Thanks for listening to those week's Merrin Talks Money. If
38:13
Speaker 2: you like our show, rate review and subscribe wherever you
38:16
Speaker 2: listen to your podcasts and keep sending your questions or
38:18
Speaker 2: comments to Merrin Money at Bloomberg dot net.
38:21
Speaker 3: You can also follow.
38:22
Speaker 2: Me and John on Twitter or x I Am Meren
38:25
Speaker 2: s W and John is John Underscore step Back. This
38:29
Speaker 2: episode was hosted by Me Maren's ms at Web. It
38:31
Speaker 2: was produced by Someersadi and Moses, and sound designed by
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Speaker 2: Blake Maples and special thanks to Lawrence Hultz