Mello London 2018 Notes Day 2: Keith Ashworth-Lord's Buffetology Fund and Judith McKenzie

Friday, Nov 30 2018 by

I didn't attend Day 2 of this year's Mello London event, but luckily for me, Ben Hobson did. I've got a hold of some of his recordings - two good speeches here:

Keith Ashworth-Lord

Switch On Companies; Switch Off markets

  • Keith Ashworth-Lord ('KAL') manages the UK Buffetology fund
  • The fund tries to find really great companies at a price that makes sense, invests meaningful quantities in them, and intends to hold them forever
  • They use 'Business Perspective Investing' - this expression came from Benjamin Graham but is more closely associated with Warren Buffett
  • The key requirement is economic moat
    • They look for companies defying the first law of capitalism (excess returns over the cost of capital, year-in, year-out)
    • Pricing power is the crux
    • Growth potential - both for the company and the market
    • Companies that are predictable in terms of where they will be in 3, 5, 10 years' time
  • First thing KAL looks for is rising margins on sales at gross margin and operating margin levels - this indicates economies of scale
    • static or declining margins —> franchise could be coming off the boil
  • Even more important is ROE
    • They look at marginal ROE - what's happened in the past 1-5 years
    • This is delta (change in) earnings over delta equity
    • Must be a cash return on equity; high conversion of earnings into free cash flow
  • Look at cash flow over a five year basis to account for volatility
  • 'Cash flow is absolutely king'
  • Return on equity minimum of teens
  • Cash flow has to be minimum of 80% of earnings
  • Most of their businesses tend to have a very strong balance sheet & net cash
  • They allocate capital rationally
    • They look for situations where money can be invested to generate high marginal returns, which leads to future organic growth
    • Reinvest meaningful quantities of cash for future profitable growth
  • Growing by acquisition can make sense - moving into complimentary industries, synergies
    • But they don't like the 'transformational' acquisition
    • Something like 9 out of 10 of these make no new wealth for the company
    • Croda (LON:CRDA), which they own, was an exception
  • Management that are owners, that return cash to owners rather than hoard it
  • Investment holy trinity: enduring franchise w/ growth prospects and pricing power; high marginal ROE; good cash conversion (management is glue that holds all this together)
  • They pay attention to Porter's Five Forces Analysis and think it is the best framework. It's always in their minds
    • Bargaining power of customers
    • Bargaining power of suppliers
    • Industry rivalry
    • New competition
    • Substitute products
  • Where does the economic moat come from? People who have unique skillsets. Human capital. Brand power, 'gets a piece of customer's minds'
    • Eg. Games Workshop (LON:GAW). Customers are obsessed
    • They protect their IP
  • Proprietary tech. Might be patented or it might not. BVXP has regulatory barriers (process takes 3-5 years & once you're on, you're in. From there, a 2% royalty from one of big 5 machine manufacturers. Switching is expensive & a risk so you tend to be on a lifecycle.) Non-patented.
  • Rotork (LON:ROR) is patented valves in pipeline
  • How to decided whether to buy? Estimate of what FCFs from now until forever will be & discount back by high hurdle rate of 10%. 'Far better to be approximately right than precisely wrong'
  • If the price indicates good value they will invest there & then
  • If price is not good, they put it on a watchlist and they wait & wait until there's an opportunity
  • Margin of safety comes from the 10% hurdle. GDP rate of global economy over time is typically 2.5%
  • They demand to buy at prices cheaper than the economic value of what they think the value is
  • Focused investing, concentrated portfolio (max 35 holdings)
  • Their circle of competence is an inch wide and a mile deep
  • Over-diversification increases business risk as you are bringing in companies that are less good or that you know less well
  • Long-term investing benefits - compounding, lower frictional costs, more of your money working for you
  • When would you sell?
  • If something's gone bad with the company (management, regulation, politics, or something else) & it is unlikely to get better anytime soon
  • If they've miscalculated. You learn more from your mistakes than you do from your successes
  • Switch - alternative superior investment has come up
  • Bad reason to sell: when you're twitching to bank a profit
  • Far better to cut your losses and run your profits
  • Most people are wired the other way


Q: Quality is quite expensive now after flight to quality. Interest rates are rising, which is not good for share valuations. Where do we go from here?

A: KAL doesn't distinguish between quality investing and (good) value investing

  • Cigar-butt investing in bad companies isn't what he thinks of as value
  • He always looks to buy more of what he already owns rather than adding something new
  • Caution has served him very well in the past, when he has let cash build up as he searches for good value
    • 2014 was a good example. He had 14% in cash. That year there were 3 flash crashes late in the year
  • Just be careful and stick to your knitting. Less opportunities that there were 10 years ago
  • Don't be afraid of bear markets as they provide opportunities

Q: Portfolio turnover, rate of churn

A: currently around 8% indicating holding period of 12.5 years but he wants to hold for longer

  • He has been quite active this year in dumping Dignity, Domino's Pizza, and Mattioli Woods
  • Typically over the lifetime of the fund it's been more like 5-6% (18-20 years)

Q: When you identify a quality business that has struggled recently, the return on equity will be down. How do you see past this? 

A: The incremental return on equity would be down but the average would still be going up. The marginal acts like a magnet on the average

  • Is the company's problem soluble or more deep-seated?
  • Re. the numbers after the dip, you should see ROE stabilising if the company is high quality

Q: How do you know when to sell?

A: Based on the operations of the business. This is all KAL really focuses on. If the operations have deteriorated he will sell

  • Dignity (LON:DTY) is the biggest disaster the fund has had to date. He knew the industry very well. The most price-inelastic industry he'd seen in his life. Hadn't noticed the price comparison websites had sprung up. DTY cut prices to be in line w/biggest competitor, halving operating profit

Q: Method

A: They plug in data going back 20 years. Three different parts: BS, IS, cash flow. Stats going back 20 years don't lie

  • The model comes out with 150 key ratios based on what Buffett looks for

Q: Do you ever sell on valuation grounds?

A: No. Read Nick Train's half-year letter to shareholders. He talks about that.

Judith McKenzie

The Capacity To Suffer

  • This title is from well-known value investor Thomas Russo
  • The last few years have seen a momentum-led market but this might be a changing of the guard
  • Games Workshop (LON:GAWmanagement takes a 20-year view on their investment decisions
    • Long-term success, not short-term gain
  • They are working with some very good, well-aligned management teams
  • Portfolio characteristics:
    • PE of 8 times
    • Margin of safety is 30% (difference between intrinsic value and the value of businesses. The upside from growth potential is 70%)
    • Up to the board and us to drive that value long-term
  • Eg.s of some that are midway through the journey
    • Volex (LON:VLX); supplier of power chords for everything from iPhones to MRI machines
    • Five different management teams over 9 years
    • Chasing volume not margin, made a mess
    • New management team came in; share price had taken a pounding but decisions were more long-term and cash generation was improving
    • Still 5x EV/EBITDA
  • Synectics (LON:SNX) Smart CCTV for heavily regulated industries (transport, infrastructure, OIG) making investments into R&D
    • Big deal w. Serco
    • Investment has depressed earnings so share price has gone down
  • Takeaways:
    • They invest for the long-term because companies that invest for the long-term are more successful than companies that don't
    • Thomas Russo would much rather be a farmer investor than a hunter - plant the business and watch it grow


Q: Why would you invest in companies at seed rather than when they are bearing fruit

A: They take strategic stakes between 3 and 25% - they get more attention than other fund managers might get at their investments

  • Timing investments is very difficult
  • She would rather get in at the start and take the time required to grow the business. She would love to be able to time it perfectly but it's hard to do

Q: What makes a good board - culture & long-term decision-making. Where does it come from?

A: Can't put it down to one thing

Q: Investor relations - should AIM companies have board members more cognisant of investor relations?

A: MiFID II has really changed things. There has been a big impact in terms of disseminating information to investors. Arrogant attitude that institutional investors are different to retail investors. Companies should not be disclosing information to one set of shareholders but not to another. The AGM is the best forum to get access to management but there should be more contact.

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8 Posts on this Thread show/hide all

matylda 30th Nov '18 1 of 8

Thanks for the write up Jack, much appreciated.

Blog: Briefed Up
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rwnicolson 30th Nov '18 2 of 8

Thank you too. Just a small correction. The value investor referred to is Thomas Russo. His investment talks are available online and are worth watching.

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Jack Brumby 30th Nov '18 3 of 8

In reply to post #423358

Cheers rwnicolson, I hadn't actually heard of him before. I'll edit that now.

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Jack Brumby 30th Nov '18 4 of 8

In reply to post #423348

No worries - it was great to meet you, hope you enjoyed the rest of the event!

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jonthetourist 30th Nov '18 5 of 8

Yes, very nice notes thank you. I was there for Judith but not Keith (although I have his book). Both talk a lot of sense, although Judith's comments about comparatives and being judged sounded particularly heartfelt as she is on a bad run.


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shipoffrogs 30th Nov '18 6 of 8

Great write up for those not there, KAL is a class act. Thanks

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Gromley 30th Nov '18 7 of 8

Hi Jack,

I think you phrased my question (the first one to Judith McKenzie) much more elegantly than I did! ;-)

Had I not already handed the mic back I would probably gone for a cheeky follow up question / clarification in that I wasn't so much thinking about timing the market and getting in "at the bottom" but rather looking for a time when the execution risk of whatever transformation is being undertaken has been reduced.

Judith with here fund cannot really do that, firstly because of scale but secondly because she probably wouldn't get a seat at the table to work with the management before taking a stake.

However, we don't have those limitations. I was very impressed with Judith's presentation and her views on the companies. So I for one will be watching carefully for situations where I may be able to buy once Judith has done all the hard work for me (and taken the suffering)

I would not recommend blindly following anyone, but I certainly think there is a case to look at others for initial ideas.

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Jack Brumby 6th Dec '18 8 of 8

In reply to post #423438

Hi Gromley,

Judith seems to really appreciate the importance of viewing her investments as growing businesses rather than numbers on a spreadsheet or a series of financial ratios. I've got a lot of time for that approach, so I'll be keeping an eye out too!

There's nothing wrong with being purely quantitative, of course, but it's nice to hear the way she talks about companies. It echoes what Keith Ashworth-Lord was saying about business perspective investing, I think. I listened to her interview with the Adept Technology CEO yesterday on piworld, don't know if you've seen it:

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