Emma Wall: Hello and welcome to the Morningstar series, Why Should I Invest With You? I'm Emma Wall and here with me today is George Godber, manager of the Miton UK Value Opportunities Fund.
Hello, George.
George Godber: Good morning.
Wall: So I thought we’d start by looking at exactly what you mean by value opportunities?
Godber: It's very good point. Because value it's not a very popular or well-known strategy in the UK, it's extremely prevalent in the United States, but we think it will become far more mainstream in the UK. What we mean by value? How do we define it?
There are two types of companies that we try to target for our investment. The first and foremost is where we can find a pound coin for sale for 50p in the stock market. We ripped through the balance sheets of every company that we look at and try and see what it's real true asset value is, what's its replacement cost, what's the property worth, what's the inventory worth.
What are all the claims on the business, what all pension is owed, how much do they owe the bank, how much do you owe your landlords? Once you get that true view of intrinsic value of the business you can work out what you are willing to pay for it.
Second type of company that we try and target are consistent cash generators and consistent is the key point, they must have great visibility. And we must be able to understand whereabouts they sit at the moment in terms of visibility of earnings. So those two tenants form the basis of our investment approach and research.
In terms of what do we mean by an opportunities fund? We are very unconstrained, we really go and seek exactly where the value is. We are not constrained by looking at a benchmark it is a reference point and not the reference point. We simply invest our investors’ money where we see the best bargains, the best opportunities in the market.
Wall: It sounds there like it's very much a bottom up approach. But, the fund has been running for a year: how have stock market conditions supported or gone against that sort of style in that time?
Godber: You are right, it very much is a bottom up approach. We don’t really pay much credence to macro commentary where there is lots of noise and information flying around some of it helpful and often distracting. What really matters to us is simply trying to find the best 55 stocks that we can put our investor's money to work.
However during the last 12 months what we have seen is it has been a very good time for our strategy, its stock pickers market at the moment as correlations fall it is just as important to avoid the losers, avoid those that are seeing significant downside as it is picking the winners. And we feel our process which is rigorous and gives us a good margin of safety in our investment approach, should stand us in good stead and in fact the fund has done very well in the trickier months in the market. We hope that, that’s a good indicator for future.
Wall: I mean one of the risks for the value investment or value style investment is that you simply get it wrong that, that 50p in the pound is actually worth 50p, other than that what do you see as the risks?
Godber: Well, to your first point you are exactly right, how do you avoid value traps it’s the biggest pitfall of a value fund. And for us the cash generation of any asset is very, very important. Because if the asset is positive cash flow generation we know it has a real value not just a sort of made up value on paper. And importantly for us we need duration, we sometimes have to be very, very patient with our investments it can take a long time to come to fruition and ultimately become a profitable position for the fund. But to give yourself that duration you have to have solid funding structure. You have to have a robust balance sheet.
So we are very happy to take cyclical risk in an investment where we are seeing sizable improvement in trading in a company. But we will not take financial risk. So often what you will see is that whilst we probably don’t participate in many IPOs, rights issues are very important part of driver of performance for the fund, new ideas for the fund because there you see a business that’s probably got too much debt coming on and recapitalising and become stronger through the process.
I think from a top down point of view what can disrupt value conceptual bull markets are very difficult and they often happen at all times. Although I am a UK investor I look with astonishment to the price that Facebook has paid for the WhatsApp transaction. But if proved to be correct is low rates to spread into sort of stock market bubbles and our strategy will be out of favour but I think if that was to become prevalent we would certainly be able to find some fantastic bargains.
Wall: George, thank you very much.
Godber: No problem.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
