Keith Ashworth-Lord’s diligent use of the Sage of Omaha’s famed investment principles has been a successful strategy.
Naming a fund after a famous investor comes with its own unique set of risks. What if that individual finds themselves the subject of a scandal or their investment approach suddenly falls out of favour? The CFP SDL UK Buffettology fund was named after, you guessed it, Warren Buffett and is run according to his investment principles. Yet the ‘Sage of Omaha’ has nothing to do with the fund. Keith Ashworth-Lord launched the product after being approached in 2009 by David Clark, author of the book Buffettology, who had been offered a unique licence to use the Buffettology brand for 10 years.
Ashworth-Lord had already been running his own money according to the investment guru’s philosophy for the previous decade. He says: ‘I haven’t always invested in this way, but I read that book in the 1990s and it made such a lot of sense to me.’ While this is the first time he has ‘stuck his head above the parapet’ by managing a publicly accessible fund, Ashworth-Lord says: ‘I never had any doubt that it would work’.
Buffett’s investment principles are well-known: find a predictable business with strong barriers to competition, growth potential, high free cash flow, a strong balance sheet and ability to deliver superior returns.
However, selecting a business to invest in is not quite as simple as ticking those boxes. That’s evidenced by the fact that the fund invests in just 30 stocks. The first step in finding a potential investment-worthy company is research, and lots of it. Ashworth-Lord pores through at least 10 years of reports and accounts, with companies scored on five factors. Only if they score high enough does he do what he calls ‘the detailed work’.
Ashworth-Lord says: ‘10 or 20 years of financial figures do not lie. They tell you everything about the shape of a company and what is going right or wrong with it.’ After that, complex financial ratios are produced and, finally, there might be a meeting with management. He adds: ‘We like predictable businesses, and by that I don’t mean firms with predictable earnings, I mean businesses where we know what they will be doing in five to 10 years’ time.’
Top 10 holdings
|Source: Trustnet, as at 6 September 2018|
Diageo is a prime example. It has a portfolio of brands ‘to die for’, and exposure to developed and emerging markets across the world. Ashworth-Lord says: ‘I don’t see the world going teetotal any time soon. You won’t wake up one day and find that this company has been disrupted.’
That’s a lesson he learned with an investment in funeral provider Dignity, a business in an industry that had historically benefited from notoriously ‘inelastic pricing’. That changed almost overnight with the advent of comparison websites that meant providers such as Dignity suddenly lost their pricing power. When shares in the business fell in value and Ashworth-Lord sold the stock, he immediately reassessed his entire investment portfolio to ensure no other holdings would be as vulnerable to such drastic change.
Another lesson learned was the importance of patience. Ashworth-Lord’s investment in Games Workshop, which he made after assessing accounts dating back to 1994, took five years to come good, but the company is now the fund’s most successful holding. He invested when shares were 373p. Today they are valued at more than £36.
Of the 30 stocks currently in the portfolio, Games Workshop is one of 12 the fund has held since its launch. Ashworth-Lord says that while some investors may consider such a small portfolio overly concentrated, he thinks it is ‘just right’ and insists it would be impossible to keep track of many more companies. ‘Any more than that and you go from having a portfolio of companies you can keep on top of to a zoo,’ he says. ‘There are so few great businesses out there that when we find one, we don’t want to lose it.’
That is why when new money comes into the fund, he is more likely to top-up existing holdings than introduce new ones. With so much research undertaken before investment, it is not unusual for it to take 18 months for a firm to make it into the portfolio.
One exception, however, is Bioventix, which Ashworth-Lord added to the fund just six weeks after meeting the firm’s chief executive at a trade show. The business manufactures antibodies used in clinical testing. Ashworth-Lord says: ‘I just couldn’t believe what a great company it was. It ticked every single box.’ He bought shares when they were priced at 712p. In just four years, the price has rocketed to almost £32.
While Ashworth-Lord prides himself on being a bottom-up stock-picker and not getting bogged down in macroeconomics, he admits there are reasons to be concerned at the moment, not least regarding trade tariffs and the Brexit negotiations.
The cash pile in the fund has grown to 12.5 per cent in recent months, as a stock market correction seems increasingly likely. He points out that Buffett himself is currently holding record amounts of cash in his Berkshire Hathaway investment holding company.
Ashworth-Lord says: ‘There is plenty to obsess about if you want to, but I just think that if there’s a correction or recession, that means I can buy things at a lower price.’
Investing in this way certainly seems to work. The fund is a top performer in the UK all companies sector over all periods and has delivered a return of 117.4 per cent over five years to 28 August, compared with a sector average of 49.2 per cent. Over one year it is up 23.6 per cent, compared with a sector average of 7.3 per cent. So why isn’t everyone investing according to Buffett’s principles?
Ashworth-Lord says: ‘People aren’t wired to invest this way. You must have discipline and patience, but people want excitement and activity. They think that delivers results, but quite often doing nothing is the best thing.’
Sometimes have to act, though, and he recently sold his stake in Domino’s Pizza, having first invested in the firm in 2001, well before the Buffettology fund was launched. He is concerned that the fast food industry is becoming increasingly competitive with the rise of technology disruptors such as Just Eat and Deliveroo, and he has doubts about the firm’s expansion into Europe. He says: ‘No single red flag made me sell, but there were a lot of amber flags.