London Value Investor Conference 2015 - Part 1 - Simon Denison-Smith - Metropolis Capital

23rd May '15 by Paul Scott

17 comments 18005 reads

Once again this year I had the privilege of attending the London Value Investor Conference ("LVIC"), for the third consecutive year - thank you to the organisers for laying on such a superb event.

It was held last week (20 May 2015), at the QE Centre, opposite Westminster Cathedral - the same venue as UK Investor Show - but it targets a different audience, of mainly city professionals, family offices, hedge funds, etc.

So as I always say, LVIC is very much the Rolls-Royce of investor conferences - expensive, but top notch speakers. I think all value investors should try to get along to this conference, even if it's just once. After all, most of us wouldn't bat an eyelid at losing £ 800 on a trade, but very few are prepared to pay that amount for a conference which would give a valuable education, and an enjoyable experience.

The event also raised over £30k for a tremendously worthwhile, but small charity, Child Bereavement UK.

Metropolis Capital

LVIC is organised by Metropolis Capital. I first came across Metropolis in 2009, when the CEO of a Brighton-based listed IT training/staffing company called FDM, was trying to bully shareholders into accepting a dismally low takeover bid from himself and a PE backer. Being an FDM shareholder, and realising that the company was woefully undervalued, I wanted to stop the takeover bid, so I ended up speaking to Metropolis who were a major shareholder in FDM.

Confidentiality considerations mean I won't go into any detail on those conversations, but I was struck by how smart the guys at Metropolis are, and they certainly influenced events such that the price of the FDM takeover offer was improved a couple of times, helping all shareholders, including me.

FDM has since returned to the stock market, at a valuation many times that which it was bought out at. So, on principle I will never buy shares in this company again - having seen how management shafted shareholders in the past, grabbing the upside for themselves when things were going well - I see them as unscrupulous, and hence uninvestable.

Cisco Systems Inc (NSQ:CSCO)

Each year, either Simon Denison-Smith, or Jonathan Mills of Metropolis give a talk at LVIC about their in-depth research process, and go into detail about one or two of their favourite shares at…

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cig

23rd May '15

From 9 May 2013 to today, the PHLX US Semiconductor index (SOX) has returned 56%.... So stock picking Cisco was not that good an idea....

Paul Scott

Hi Cig,

Fair point. Although I imagine that with divis, the gap would be smaller. Also there's lower risk intrinsically in a bigger company, with a strong balance sheet, so a lower return would still be acceptable.

Looking on Yahoo, Cisco doesn't seem to be included in the SOX index, which seems strange. Maybe it has a different categorisation?

Regards, Paul.

hayashi22

Its either John Lee or Lord Lee but never Lord John Lee.

Corrected. Thx.

P.

I don't know why though! Enjoy the holiday w/e.

Ah right, I thought Cisco was in SOX but it's a narrower chipmaker index. DJ Telco Equipement (DJUSCT) is perhaps a better index, and they're in. +31% so Cisco is slightly ahead here, but not so impressively as in nominal terms. As a more general point, stock pickers should not look at nominal performance, it's really the wrong metric for the game. It applies to bull and bear markets (eg someone who's doing -20% when everybody is doing -40% should celebrate!).

On Cisco itself I looked at it a while ago and don't like the management and business direction, they're thinking in old ways. It's relatively cheap and there's lot of inertia so fair margin of safety but mixed prospects. The internet of things is a red herring in my view. There's no killer app so far, and putting a few sensors here and there is not going to move the needle on Internet traffic, it's all pretty low bandwidth compared to say video streaming.

Cig,

I agree to a certain extent re relative performance. Although value players accept that they will probably under-perform the market during late-stage bull phases, but will clean up in bear markets & the subsequent early stage bull market.

So a value approach should out-perform in 5-year periods, but may not in say sub-2 year periods. But you're taking a lot less risk.

Woodford was talking about how extraordinarily tough he found it, to cope in 1998-2000, when his value-focussed approach was doing badly, yet TMT shares were going through the roof. He came close to losing his nerve I think, but didn't, and it was reputation-making for him when the TMT shares crashed & his fund then started doing well, as value shares recovered in 2001-2.

But more on that shortly. I might type up my notes from the Woodford Q&A session next, but before that I'm craving a cooked breakfast, so nipping out for that now!!!

Regards, Paul.

Yes, relative performance is problematic during bubbles for value investors. Most of the problem disappears though if you compare to sector benchmarks: bubbles are not (or very rarely) about some other people suddenly becoming better stock pickers than us, but thematic fads. When a sector goes to the sky, value investors can't find anything worth buying there and end up with strong sector biases (underweight on bubbly, overweight on the rest), but the relative performance within the remaining sectors should still be a meaningful measure of stock picking skill.

This suggests there may be an interesting niche in a bubble-value hybrid, perhaps as a long-short strategy, where you try to stock pick based on relative valuation within bubbly sectors, which should pay off when the crash comes and only the better half or so of the sector survives. There should be very little competition in that space as it's not a natural fit for common investor types!

Enjoy your meal! :-)

Kahledfan

24th May '15

Keep writing more articles on the Value Investor conference please Paul

Richard Goodwin

Thanks Paul

jjis

Hi Paul,
Thank you for taking the time to write up your notes from the conference. On Admiral Admiral (LON:ADM) note that Henry Engelhardt has recently announced his decision to step down from his role as CEO in one year's time. However, he will be replaced by co-founder and current Admiral Chief Operating Officer, David Stevens so good continuity there.

The earnings downgrades in recent months reflect primarily the down swing in the motor insurance cycle which has now turned. I also like their dividend policy which Mr. Englehardt summed up in their Report and Accounts as follows: "Our dividend policy has been clear since
flotation – we believe it is for our investors rather than Admiral to determine how they
wish to invest funds surplus to the requirements of our business."

Have a great Bank Holiday.

MichaelFBS

25th May '15

Thanks Paul for the write up and hope you find the energy/time for one or two more.

What I find interesting about these (and stuff one finds on YouTube or the written word - Manual of Ideas for example) is the insight it gives into the thought process/procedures of the investor, rather than trying to back test their stock picks. Then seeing whether I can duplicate some of that behaviour.

That said if I could have earned 39% + 5.8% of divis over two years from a mega cap like Cisco Systems Inc (NSQ:CSCO) I would have been very happy regardless of what other stocks in the sector or the sector as a whole had done.

As I have said before I hope to attend LVIC in the future (maybe next year!) - it must be very inspirational but in the meantime your write ups are really useful and am surprised that with 2000 reads there are only 12 comments!

Have a good rest of the bank holiday.

Jack Hughes

Paul

Good write up - many thanks for your thoughts and thought-provoking comments

grout123

Your comments on Regus are interesting. I generally agree with most comments about firms you write about however this firm is different. Ive rented office space from these cowboys in the past and I can only describe the experience as depressing. Generally speaking I like to invest in firms that I trust and like and where I can buy the product easily. Regus delight in making life difficult for tenants by continually making mistakes on invoices and not refunding for months, extortionate changing on extras that one needs to run an office and very poor customer service. Other friends who have used Regus in the past swear they will never use them again. Me too!!!
I appreciate this isn't the forum to get this off my chest but my point is that this firm will not survive in its present form or when serious competition emerges whilst it treats its clients like idiots. I would rather short this share anyway. Apologies for the rant!

Funderstruck

Paul; I believe Regus fits into the type of share selection that N. Woodford described resulting from Macro economic changes; letting out office space was flat on it's back until the economy started to improve, as always, the time to buy; now I suspect that the growth has slowed. Like NW. I am concerned that the upturn in UK is mostly related to personal expenditure and not enough investment by industry.

VegPatch

26th May '15

thx Paul, v enlightening.
Some really great companies in there . The Owner Occupier analogy is particularly apposite for London housebuilder Berkeley group where Tony Pidgeley has produced brilliant returns for investors. Personally I have always used the term "owner driver" which I thought of after meeting Brian Souter of Stagecoach. (Ok, terrible pun, but true) Meeting him was always chalk and cheese with other professional management teams. Being the founder he knew the business backwards, and was always helpful I pointing out areas where his competition was substandard. The others were not in his knowledge league.

In general these owner occupier companies tend to be v frugal with shareholders capital (Henry at Admiral once told me they used to have a 10.30am team meeting in Cardiff so the guys at the Newport office could catch the cheaper trains after 10am). The founders with large shareholdings tend to keep running the company in the way that they founded it - on a shoestring. The very best never lose that ethos, but recognise the importance of investment back into the business. Run it well invested but with a frugal mind set.

A further extension of the owner occupier model is the franchise model: using other people's hard work, enterprise and importantly capital to further your own business expansion. This has been a hugely successful investment area for many people. The key here is to keep a the franchisees on a tight rein. They tend to be entrepreneurial people and will try things (often prohibited by the franchise agreement). If the franchise can work for both the licence owner and the franchisee in terms of getting the right agreement, a fair distribution of royalties / profits etc then the returns can be fantastic. Prime examples include Dominos Pizza plc (£DOM), Dominos Pizza inc ($DPZ), Buger King ($BKW), Intercontinental Hotels (£IHG) and Costa Coffee for Whitbread (£WTB).

Pls keep them coming Paul

bsharman

Massive thanks Paul - you have brightened up my bank holiday (return to work) blues! Very informative articles and really interesting to compare last year analysis with actual outcomes.
Keep up the great work.
Ben

London Value Investor Conference 2015 - Part 1 - Simon Denison-Smith - Metropolis Capital

Metropolis Capital

Cisco Systems Inc (NSQ:CSCO)

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Paul Scott

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