In this series of profiles, we ask leading fund managers to reveal everything from their investment strategy, to their views on cryptocurrencies, famous business leaders they look up to, and what they’d never invest in.
Our latest interviewee is Simon Gergel, fund manager of The Merchants Trust (MRCH).
1. Which sector provides the biggest investment opportunity as we approach the end of 2021, and why?
The oil and gas sector is attractive at the moment. New supply is increasingly constrained and commodity prices have rallied, meaning that the major energy companies are generating very healthy cash flows and starting to buy back shares. They are increasingly addressing the energy transition, and in fact their skills and capabilities are necessary to address the climate challenge. Activities such as producing and distributing hydrogen, or capturing and storing large amounts of carbon dioxide will require the skill sets of the major energy companies.
2. What's the biggest economic risk right now?
In the short term, new variants of the Covid-19 virus are a risk to activity and economic growth. In the medium term, inflation is something to watch out for, given supply chain bottlenecks and recovering demand.
3. Describe your investment strategy
We aim to deliver an above average level of income and income growth together with long term capital growth. We focus on high yielding, predominantly large UK companies which meet three criteria. The companies should have sound fundamentals, including a strong competitive position, robust financials, and cash flows, and acceptable environmental, social or governance risks. Then, we look for companies that are attractively valued, at a discount to our assessment of their intrinsic worth. Finally, we look for companies with supportive short or longer term themes, such as demographic or technology trends, or improving end markets.
4. Which famous investor or business professional do you look up to, and why?
Clayton Christensen, author of “The Innovator’s Dilemma”, has had a major influence on how I think about technological disruption. His writings not only explain how disruptive technology emerges to challenge incumbents, but also explains why it can be so hard for large companies to respond to these threats. One of the biggest risks for a value investment strategy, such as ours, is owning a “value trap” or a share that looks cheap but faces a structural challenge. Understanding the institutional barriers that can prevent large companies from responding effectively to technological changes is critical in identifying and avoiding “value traps”.
5. Name your favourite forever stock(s)
I do not have any “forever” stocks. It is very dangerous to fall in love with a company or to believe you will own it forever. An investor should regularly reassess their investments with a completely open mind. In practice this is extremely difficult, for all sort of behavioural reasons. But one thing to avoid is thinking that a stock should always be owned, no matter how expensive it may be, or how circumstances might change.
6. What would you never invest in?
I prefer not to rule anything out completely, for similar behavioural reasons mentioned previously. Companies in difficult industries rarely stand still and circumstances can change materially over time. Having said that, I try to avoid businesses in industries that are under long term structural pressure.
7. Growth or value?
I would categorise myself as a value investor, meaning that the price I pay for an asset is a critical part of my investment process. However, value is not the opposite of growth. Ideally, I like to own companies that can grow fast, provided I can buy them at a sensible price.
8. House or pension?
Diversification is a good thing in personal finances as well as in an investment portfolio. I would not want all of my personal wealth to be tied up in property, and a pension is a really important asset, that is often not as well understood as it should be.
9. What are your thoughts on crypto?
The technology behind cryptocurrencies is very interesting and will have many applications. However, I have no idea what the “currencies” themselves are worth, if anything. If I cannot value an asset, I would not invest in it. Whilst there may be a limited amount of any one cryptocurrency, there seems to be no limit to how many cryptocurrencies there can be. Crypto “mining” also seems to be extremely harmful for the environment with little obvious benefit to society.
10. What can be done to increase diversity in the fund management industry?
This is an important topic that does not have a simple fix. Attention needs to be given to promoting gender, ethnic and other diversity at every stage of the career path. Companies can start, by for example, taking on interns from diverse ethnic backgrounds, and ensuring a diverse graduate intake. But it is also important to build in flexible working arrangements or other benefits structures that encourage female participation at senior management levels.
11. Please give an example of how you’ve engaged with a company you invested in where you were particularly proud of the outcome? (Or disappointed!)
We engaged with a building products company which had made several acquisitions, as we wanted to ensure that there was a strong, consistent health and safety culture, among its different subsidiaries. We were encouraged when one of the first actions of the new Chief Executive was to appoint a group health and safety specialists to focus on this issue. We have been encouraged that the company have continued to engage with us as part of a process of continuous improvement.
12. Best bit of advice you’ve ever been given?
“Always keep an open mind, but not so open that your brain falls out.”
13. What would you do if you weren’t a fund a manager?
I would be a maths teacher.
