Latitude Horizon fund manager Freddie Lait tells us what he’s doing with three of the most popular stocks around. He also has some advice that will re-anchor your perception on everything you do.
Is this equities bull market over?
Well, that’s really the, sort of, trillion-dollar question. It has been a fantastic bull market and equities are a little bit expensive compared to history, but I think there are a number of different ways you need to frame the question.
The first thing I’d say is, we really don’t take macro positions within our portfolio, so our equity allocation won’t swing around depending on our view of the bull market’s timing. But the things I’d say are this, on the plus side, for equities, there are individual stocks within the market that are still cheap compared to history, growing faster than history and have fantastic secular growth trends and one always needs to separate the market from individual investments.
The second thing to say is that stocks, relative to bonds or any other asset class, are still quite cheap and are, probably, the best inflation hedge you can have in a portfolio.
So, I think there are a couple of great things to point towards markets and, in particular, the subset of markets in which we invest, having another great few years in the future. On the flip side, on the more bearish side, it’s very plain to see that there has been a build-up of debt around the world and that there’s a potential, through the rate rises that are coming through in America and now, in the UK, as well, that we may be closer to triggering that more garden-variety economic recession over the next, sort of, 18 to 24 months.
And it’s something we watch for very closely, we’re relatively underweight in cyclicals as a result of not finding as much opportunity there, but I think it, personally, is very much too early to call the end of the bull market.
Will you continue to run successful calls on Tesco and Royal Mail? Is Imperial Brands a viable recovery play?
So, just to stand back a tiny bit on our portfolio construction within our equities, we really do always allocate some portion of the portfolio to value turnaround stories, which are undergoing corporate restructuring. Some in high-growth areas, some in secular change, some in cyclical and some in very defensive areas, and we like having that diversification so that we don’t suffer from large momentum drawdowns.
The three stocks you’ve just mentioned all happen to be in the UK, but they’re also all in that, sort of, corporate restructuring/turnaround phase. Now Tesco and Royal Mail have both done fantastically since launch over the last 18 months. Royal Mail, if I’m honest, has re-rated so aggressively that it’s, possibly, becoming less interesting as an investment to hold for the medium-term.
Tesco, however, I look at and think has a fantastic few years ahead of it, the consolidation in the space that we’ve seen in the last couple of days has been really positive for the market. Tesco’s margins are improving, despite their pricing falling for consumers and I think that’s a fantastic position to be in, so those two stocks are doing very, very well.
Imperial, as you mentioned, is a turnaround story, it’s got a phenomenal cash flow yield, its cash conversion is increasing, and I see this as a blip in the road for the management, not the end of the road.
What stocks have you been buying in the past few months?
That’s a relatively easy one to answer for us. Our portfolio turnover has been very low and we expect it to tend to be very low. We’ve sold three stocks and we haven’t bought any stocks in the past few months, really because we’ve been looking for larger corrections in the positions we’re interested in.
There is some value and moves, like we saw in February, create a little bit more opportunity, but really, we only went back to levels which we saw in last November or last, sort of, September, on the ideas that we’ve been looking at. And when you’re a patient investor and you’re thinking five to 10 years out, the only thing you can really control is your entry price, so we’re being very patient and we will need a larger correction in the markets before we really start buying.
Why did you become a fund manager? What lessons have you learned managing money? What do you like to do in your spare time?
In reverse order, I tend to read a lot about investing in my spare time, because in terms of learning, I think there’s still a huge amount one needs to do. Why one comes into fund management, it’s for a range of ideas, but for me, it’s been this fascination with human behaviour, you know, businesses are collections of individuals who create or destroy value.
I think, when you look at our industry and you immerse yourself into it for a few years, you realise there’s a massive over-supply of people who think the same way and achieve the same results, which tend to be mediocre, and you have to think differently. I think that challenge to continuously think differently to the market is very, very important and probably what drives me to continue being a better fund manager each year.
If you could give investors one piece of advice, what would it be?
In order to think differently, which I think is the key thing, you have to find your own way of thinking about the market. The one best piece of advice I’d give you, to guide you if you’re a fundamental investor, towards thinking differently, is to think longer-term. It involves thinking through far more uncertainty, not trying to monitor day-to-day performance and it will make you stand out from the crowd who are, generally, all focused on three, six or twelve-month numbers. So, think long-term and it will re-anchor your perception on everything you do.
This is the transcript of a video filmed on 1 May 2018. To watch the original video, please click here.
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