When Warren Buffett describes his Business Perspective Investing investment philosophy, it all sounds rather simple: “All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever”.
Keith Ashworth-Lord, who runs Sanford DeLand’s UK Buffettology fund, is the biggest advocate of this strategy and has repeated Buffett’s mantra many times, including in a recent interview with Trustnet.
So far, the magic has worked fabulously in the long term: the fund has outperformed its UK All Companies peer group by 230.6 percentage points over 10 years.
Yet more recently, it seems like the spell might be broken, as the fund has consistently been relegated to the bottom quartile over the shorter period (3 years and below), as shown in the performance chart below.
Fund's performance against sector over three years
Source: FE Analytics
Some of the fund’s top holdings, including Games Workshop and Liontrust, have experienced significant share price declines, as illustrated by the chart below.
Share price of fund’s top three holdings over the past year
Source: FE Analytics
This tougher run is down to multiple factors. According to Kamal Warraich, investment analyst at Canaccord Genuity Wealth Management, Buffettology has suffered from investors’ fears about inflation.
Higher prices has led to quantitative tightening by central banks, which in turn has shifted the market’s focus from higher-quality companies, that historically merited a premium valuation and make up most of the fund’s assets, to lower valuations and shorter duration cash flows.
Jason Hollands, corporate affairs managing director at Tilney Smith & Williamson, said the fund has a “very significant bias” towards small and medium-sized companies (SMID), which have fallen out of favour since last year, when very large companies have benefited from their high international earnings due to sterling weakening against the dollar.
Meanwhile, Charles Stanley chief analyst Rob Morgan also drew attention to the lack of ‘value’ companies, which meant that, as concerns about recessionary pressures and higher energy prices started to bite, the fund lagged.
It has no exposure to energy and commodities, including the gas, coal and tobacco sectors, which have recently been driving the market as prices increase due to the pandemic and the war in Ukraine.
Speaking to Trustnet at the end of April, manager Ashworth-Lord admitted that it has been a “very painful” few months for the fund. Nevertheless, “we sleep well at night knowing the sort of businesses we invest in are very well equipped to cope with the more difficult backdrop that we're now seeing”, he said.
A month after these comments, the fund suffered from further net outflows of £44m, according to the latest monthly factsheet.
In the document, the manager explained the outflow with the classic market maker response: “we had more sellers than buyers”.
He also didn’t identify any “apparent justification” for the performance of the fund’s biggest detractors Craneware and AB Dynamics, which were down 19.1% and 18% respectively.
On the back of these observations, while the fund’s core approach is to ‘hold forever’, should investors hold too, buy more in the weakness, or sell out? Hollands, Morgan and Warraich shared their views with Trustnet.
Hollands buys into the Business Perspective Investing formula as a clear and distinctive investment strategy that excludes trading shares on shorter term factors such as swings in energy prices.
He also credits FE alpha manager Ashworth-Lord, concluding: “Long-term investors should not be concerned and stay the course”.
Warraich agrees and, on a more than five-year view, sees this as a good entry point for adding quality and SMID-cap exposure within portfolios, where appropriate.
Alternatively, for a similar approach based on quality, growth and SMID bias, he recommended Slater Growth, which has also outperformed over the long-term (as shown below), whereas for a more valuation-conscious strategy operating down the market-cap spectrum, he said the CRUX UK Special Situations fund looks interesting.
Buffettology’s and Slater Growth’s performance against sector
Source: FE Analytics
If we are talking new investment, Morgan favours more diversified UK exposure and funds that try to balance growth and value over Buffettology. He finds funds that are sufficiently small and nimble to invest across the full spectrum of UK small caps “relatively attractive”.
Indeed the size of Buffettology, which has reached £1.8bn, has been a matter of concern when investing in companies with market capitalisation under £100m, which Ashworth-Lord decided to forfeit altogether.
He said: “The bigger the fund gets, the harder it is to find some of these smaller investments where we can actually get a meaningful stake and ride with them.”
Smaller funds such as FTF Franklin UK Smaller Companies and, for broader UK exposure, Man GLG Undervalued Assets, could be a good alternatives, said Morgan, as Buffettology is likely to continue to experience headwinds until there is more certainty around when and how inflationary pressures will recede.