Write up of the Simon Young FM interview

A Yellowstone Advisory webinar

A fireside chat with Simon Young, Fund Manager of the UK Equity Income Fund for AXA Framlington

‘Unearthing winners, avoiding losers and making mistakes.’

Stepping well away from the well-trodden path of medicine that is a Young family tradition, Simon has carved his own way in finance and fund management over the last 20+ years starting at Mercury which became Blackrock, a spell in IR then back to doing what he does best, fund management at AXA Framlington. His UK Equity Income Fund is now a top decile performer in its sector.

Piecing together the intricate mosaic around the companies to build the richest picture he can establish is something he thoroughly enjoys. From simple googling of the company, to searching the eye-opening job boards, reading trust pilot reviews of the company’s customer satisfaction ratings and meeting management all combine to develop a broader view. Talking to competitors and combining the insights from social media are all part of the arsenal of techniques to learn more about each company on his radar.

Twitter is a treasure trove of eclectic opinions; some irrational and some rational. There is always the caveat however, to be aware of spurious claims but it can throw up some well-balanced sentiments from the likes of @Rhomboid1, @Boros10 (Leon Boros), @WheelieDealer, @Conkers3 (Peter Higgins), @Reb40 (Aston Girl), @dosh100 (Stock Whittler), @GrahamNeary and @Carmensfella. These FinTwit contributors post intelligent and illuminating pieces. Journalists such as @MorganHousel, @MuddyWatersre, @IanCassel, @HowardMarksBook and @Jeremy_Grantham are all incredibly insightful for Simon. Ditto podcasts such as the #TwinPetesInvesting and @PatrickOShag.

Over Simon’s career he has seen several crises such as the ’97 Asian shock, the Dotcom boom and bust, the 2008 global stock market collapse and the Covid-19 current quagmire. None were predicted. On this basis, the criteria he looks at to choose investments are high barriers to entry and a competitive advantage so the company can endure the hard times and still make money. These principles can be broken down into:

Principle 1: Finding the lowest cost providers where the competition finds it hard to cut their costs to below yours e.g. Ryanair.

Principle 2: A high level of Intellectual Property in the shape of brands and patents preventing competitive entry.

Principle 3: A high level of effective sales networks to optimise all possible sales avenues.

Principle 4: High levels of repeat income such as subscribers or long-standing customers who will continue to buy come what may, such as with Sage plc who produce accounting software.

Steering away from technicals and sticking to his key principles is how he consistently delivers on his portfolio. Meeting management can also often elucidate otherwise dry presentations and accounts. You can really pick up the sense of their drive with personal contact. Quoting Ian Cassel, Simon wants to find the ‘intelligent fanatics’ who are the stars of the show. The late Tony Pidgely of Berkley Group plc was a brilliant example of a best in class FTSE CEO. Polite questioning produces the best results; however he can vouch that if a company feels the pressure it may be the alarm bell needed to reassess the holding.

One of Simon’s largest position is Games Workshop plc which is now c.7% of the fund. Hitting all the principles as to what he seeks when investing his holding has increased from 3% in 2017 to the current level as the shares have more than doubled. Running winners where the criteria hasn’t changed is his philosophy. If the business is still growing, it continues to exhibit the positive principles as detected at the outset with a strong ROC, little competition and still has few barriers to entry then running with the stock despite strong performance is his preference. He does acknowledge though that stubborn pig-headedness is not a friend and selling must be done if necessary.

Integrafin plc is a highly rated holding in his fund which offers Transact, a platform for wealth managers and IFAs. Ticking off his key investment criteria he wishes he had bought more earlier as it has proven a strong performer. As a Director sold stock last week he will ensure he recaps his checklist and acknowledges we don’t always know the reasons for this kind of Director activity. If there is cause for concern then redeployment of capital is always the right answer.

£AstraZeneca plc is a clear favourite for Simon. With a slew of long-term patents and some huge blockbuster oncology meds it ticks boxes left, right and centre. CLS Holdings plc (LON:CLS) has impressed with strong management so is a recent purchase despite its counterintuitive focus on office properties.

Simon’s fund is for income and so he hunts for yields greater than the market and will always consider special dividend situations if it is out of excess cash flow and not capital. Admiral Insurance plc regularly do this, which he finds acceptable. Again, if the rest of the investment proposition is sound then this element also passes the test.

Observing the present Covid-19 turbulence he is looking for opportunities where companies can ride the storm. Exceptional examples are Admiral Insurance plc and Sabre Insurance plc which have both seen supernormal profits as less driving and thus less accidents have meant less payouts. The Biotech space is abundant in opportunity, but he normally veers away from non-profit making companies.

Red flags for Simon are related party transactions, suspicious financing figures, management saying one thing and doing another and overly promotional management where the figures don’t reflect the enthusiasm. Stockopedia has a great Earnings Manipulation Score which is very helpful.

Using a fund manager versus investing for oneself is a debate had by many. Professor Henrik Bessembinder of Arizona State University has studied 60,000 stocks over a 28-year period and found more than 60% underperformed cash in that period. The net growth came from just 1% of all the companies. Using a fund means you have a full time Fund Manager to sift stocks and research, check and assess positions to find the elusive winners. Given that personal investing means the investment of not just your money but also of your own enormous amount of time, then the fees look very worthwhile.

Passive investing, he believes gives opportunities to active FMs who can take much longer-term positions than the AI counterparts can. Machines may miss red flags and cannot meet management leaving the role of fund managers still firmly embedded in the future.

Yellowstone are very grateful to Simon for his time and open answers to multitude of questions. A recording of the presentation can be found on our YouTube channel here.

If you want to hear about future company and investor webinars please subscribe by emailing info@yellowstoneadvisory.com