Emma Wall: Hello and welcome to Morningstar Series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by James Henderson, manager of the Lowland Investment Trust.
Hi James.
James Henderson: Hello Emma.
Wall: So it's been a tricky start for the year, for markets, for all professional investors and indeed for your trust. However seeing a drop in value in the trust is no unusual thing for you and it’s normally followed by, or indeed the precursor is, great gains. If you look at the five year annualised view of the trust it's returned 10% steadily for investors. But if you look at the price it's much, more like this [volatile]. I was just wondering why that was, what in the nature of your investing makes it so volatile?
Henderson: It is contrarian investing. So when things are weak, that's when I get excited and when things are strong that’s when usually I'm selling. And I am often buying too early, a value contrarian person is buying too early. So I have been buying things like Rolls Royce, during the autumn I have been buying the miners, for instance for the last few months. A lot of those prices looked wrong, just recently – the most recent prices look much better, because there is a bit of recovery going on.
But a contrarian, it is lonely sometimes and you have got to have a fairly thick skin to take a bit of pain. Markets usually overreact, they usually make things out to be worse than they are. They usually make them out to be better than they are when things are good. At the moment I think the problems are being over exaggerated. I believe the global economy is growing.
I think when that growth is seen we'll think that some of the prices, like industrials and the mining stocks have been sold down to bargain basement levels. That’s why I'm adding at the moment, but you are right it's painful but that’s always been the approach to buy into these downturns.
Wall: I mean some people would call you brave, some people would call you crazy to be adding miners at this time, when the outlook for oil is uncertain and when the feeling around oil stocks is so negative. I suppose that, as you say, is indicative of contrarian. What was the trigger for you to make you think actually now is the time?
Henderson: When there is trading substantial below that book value. Very easy metric that, you start to look and what people say is ‘James wait for a catalyst’, they say. Wait for that catalyst, but you only learn about the catalyst after the event. So you have to be buying on the way down, then we might have had the catalyst.
What happens in these companies when things are really difficult; they look at themselves, they look at their costs. They think what are we really good at and let's get out to what we are bad at. These are moments in company's life and I think… I was at the Anglo meeting yesterday. That's what they were facing up to. They were getting out of quite a lot of business and they have been saying what are we good at, DeBeers, diamonds we are good at that, we are good at platinum. We are good at, so we are going to do that and we'll get rid of the iron ore. And it's those kind of big moments that are often we look back the catalyst, but at the time ‘can you get out of the iron ore’ and all these things are uppermost.
So to me it is, you've got to be buying into the pain and you ought to do it slowly, but keep going and on the really red days when you rather you were out of the office, you need to be in the office buying a few. And then when it does bounce just be careful don’t get sucked in on the good days, because another bad day will come along, buy a bit more on the bad days. So that’s how a contrarian value guy operates.
Wall: Of course Anglo is a very large stock. It's a stock in the FTSE 100. But you have a remit to go across all market cap, indeed the right the way down to AIM. And AIM has been quite a profitable investment for you in the past, hasn’t it. So where are you positioned at the moment in terms of the market cap?
Henderson: Well I have run Lowland 25 years and I am always more or less around the same. I'm with a-third large, a-third medium and a-third small and the small includes the AIM investments. I think AIM is a great place for stock picking because it's fairly ignored by many analysts, that gives the opportunity to find value.
At the moment it's slightly a sideline for the market and everyone's thinking what's happening in the big stocks and that's an opportunity. If people aren’t paying attention you've got more chance to be able to add little bit of value if you pay a bit of attention to it, nothing clever just pay attention. I don’t know for instance when the oil price will recover, I haven’t a clue. So I don’t worry about that. I try and spend my time thinking about few things where I might be able to see what's happening and AIM would be one of them.
Wall: You mentioned oil, that you are adding and you also mentioned that you added Rolls Royce, recently. Where else are you seeing the best opportunities?
Henderson: Well across industrials I have been adding. I think what's happened it's been that big oil companies have cut back their capital spends, the mining companies cut back their capital spend. And that’s hurt quite a lot of industrial companies in related areas. But actually elsewhere in industrials the world is growing quite well. We're seeing more spend on construction, more spend on road build programs for instance.
Automotive is going well, the amount of air miles flown is growing at 6% or 7%. These are all, there is a lot to do out there. But everyone is so fixated about the problems. They are not noticing because there's quite a lot of growth going on. So I think for a lot of these industrials they are all going to be surprised to the medium term outlook. And also remember there is a replacement cycle. So yes oil companies can stop their capital spend today, but those pumps they use, they will wear out and they will be back buying pumps in a few months' time I believe.
Wall: James, thank you very much.
Henderson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
