This time around, we ran some questions past Ian Lance, co-head of the UK value and income team at Redwheel, and co-fund manager of Temple Bar Investment Trust.
The ground covered included his path through the industry, the importance of recognising cycles and why now is a great time for a value approach.
Here is what he told us:
What has been your path through the asset management industry to your current role?
I started in the fund management industry in 1988 and spent the first half of my career learning the skills of an investment analyst before eventually running a buyside European research team.
In 2007, I joined Schroders which was where I started running money with Nick Purves who is my co-manager on Temple Bar and the two of us joined RWC (now Redwheel) in 2010. We are best known for our distinctive value style of investing.
What is the broad strategy you have in place for the trust?
We have a very clear value philosophy which has been honed through decades of watching market participants overreact to short term news flow and driving share prices well below a realistic intrinsic value of a business.
We therefore tend to look at areas that are out of favour with other investors since that is where we are most likely to find bargains. In addition, we take a longer term view than most and will ask ourselves where we think a company’s profits can get back to on a five year view.
Many investors today seemed obsessed with next quarters earnings. By consistently applying this process, we aim to buy stocks for significantly less than we think they are worth and over time believe that the move in the share price towards intrinsic value will generate a return greater than that of the wider market.
Which industries offer the most compelling opportunities at the moment?
Because the market is fearful that the recent rise in interest rates will produce an economic recession, most cyclical businesses are very lowly valued today. This would include energy, financials and consumer discretionary stocks.
Whilst we don’t know whether there is going to be a recession, most of these businesses are priced as if there definitely will be one and furthermore, that there will not be an economic recovery at some stage i.e. investors are pricing these businesses on low multiples of low earnings.
History tells us that this is overly pessimistic since recessions are usually followed by recoveries and hence we believe there is significant upside in these areas of the market.
What are the most interesting trends or investment themes you have been targeting?
Whilst we are not thematic investors, we do use a capital cycle approach to industries such as energy and mining and think that they share a common theme of reduced investment leading to capacity shortages which is starting to lead to higher commodity prices and elevated levels of profitability.
Historically this would sew the seeds of its own demise as companies would respond to higher prices by increasing capital expenditure and ultimately supply. However, pressure from politicians and environmental interest groups has short circuited this process and the companies have not responded by increasing investment.
This means that supply and demand continues to be very tight across a number of commodities, oil and gas in particular, which suggests prices and company profits are likely to remain elevated for longer than usual. The result is strong free cash flow generation which is being returned to shareholders in the form of dividends and share buybacks.
In your view, why should investors select a value focused trust at the moment, rather than one that leans into growth stocks?
Most academic studies suggest that three factors produce an excess return in the long run; size, momentum and value, and that quality and growth do not.
That on its own should be one reason for investors to consider a value strategy but the second reason is today’s start point in terms of the dispersion between the cheapest and most expensive stocks in the market is almost at the widest point for fifty years.
In other words, value stocks look very cheap relative to growth stocks and there is a strong case to be made that the tailwinds which drove the performance of growth in the last decade; low inflation, near zero percent interest rates and quantitative easing, are in the process of reversing.
Value stocks performed very well as inflation rose in the seventies whilst growth stocks did relatively badly and there must be a chance this happens again.
Can you offer an example of a stock you bought this year and explain the rationale?
One of our most recent purchases for the portfolio is the auto manufacturer, Stellantis, which is valued on a price-to-earnings ratio of 3x, although when one adjusts for the fact that the company has cash on its balance sheet, the enterprise value to operating profit ratio is just 1.5x.
In addition, the company pays a dividend that is 8.5% of the share price at the moment. Contrast this with another auto manufacturer, Tesla, which currently trades at 80x earnings despite the fact that the two companies have similar levels of profitability (c.11% operating profit margin).
