In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is James Harries, manager of the Morningstar 4-star rated Securities Trust of Scotland (STS) run by Troy Asset Management.
Which Sector Shows the Biggest Promise in 2022?
We are long term investors in consumer staples companies and believe they may be very well placed in the coming months. At Troy, we seek to invest in companies that have sustainably high returns on capital supported by durable competitive advantages. Consumer staples companies are good examples of this. Established, well-loved but hard to replicate brands engender great loyalty in customers and allow companies to charge a premium.
This allied to strong market positions and depth and breadth of distribution allows these companies to generate strong free cash flow. This can then be used to reinvest in the business ensuring that the brands remain relevant and reward shareholders. This is a valuable combination for funds seeking to balance a return between income and growth.
The reason we think they are well placed today is because the companies have been suffering a margin squeeze as inflation has raised input costs. As we move from this inflationary shock to a likely slowdown it may be these input costs stop going up at the same rate – after all it would seem commodity prices may well have already peaked.
That being the case, today’s margin squeeze will become tomorrow’s margin expansion. This combined with inherent predictability and durability of these businesses makes them well place for what may be a more difficult period in the economy and markets.
What's the Biggest Economic Risk Today?
A recession.
Describe Your Investment Strategy
We manage a global equity income strategy. We are seeking to produce above average returns with below average volatility from a concentrated portfolio of high quality businesses. Both parts to this matter. As an income fund we are very aware that our core client base very often has irreplaceable capital and is in need of income. These tend to co-incide in retirement. When you are young, volatility is your friend as it allows you to buy assets cheaply and you have plenty of time for prices to recover.
When you're older this changes, so avoiding steep losses becomes important. If we can provide an income of 2.5-3% for people to pay day-to-day bills without having to dip into capital (which can be costly if done at times of market stress) and compound capital at a decent rate this should be a very sensible place for people to allocate their capital.
Which Famous Investor Do You Admire?
Phil Fisher. Warren Buffett famously described himself as 85% Ben Graham and 15% Phil Fisher. I would put my personal weighting as much more in favour of Fisher. In his famous book Common Stocks and Uncommon Profits, Fisher lays out an investment approach that is very similar to ours. Quality focused and advocating long-term holding periods Phil would fit right in at Troy. Although written in 1958 the book is amazingly resonant today reminding one that sound investment principles often don’t change much.
Name Your Favourite "Forever Stock"
Pepsi. Really a snacking business rather than a drinks business as the name would suggest, Pepsi is dominant in its core US market as well as having plenty of scope to grow overseas. Snacks are a quintessential affordable treat as well as generally an impulse purchase. As such consumers are brand loyal and relatively price insensitive. This gives this company an ability to raise prices without denting demand – the hallmark of a wonderful business.
What Would You Never Invest In?
We would never invest in what we consider to be highly speculative areas of the market where it is impossible to have any clarity on the long-term development of cash flows. Examples would include exploratory mining companies or biotechnology.
Growth or Value?
As income investors we are value buyers and long-term holders. We firmly believe that a undisturbed, high quality portfolio that is allowed to compound over the long term is the way to make real money.
House or Pension?
Pensions are far more advantaged from a tax perspective, allowing more efficient compounding of capital.
Crypto: Brilliant or Bad?
A brilliant technology that would be a bad investment in an income fund.
How Can we Increase Diversity in Fund Management?
The most important thing is to increase the diversity of recruitment to provide role models. "If you can see it, you be it" is a powerful idea.
Have You Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
We engaged with Hershey on their use of water. We were the first and water stewardship became a specific part of their sustainability report thereafter.
What's The Best Bit of Advice You’ve Ever Been Given?
Make an active effort to have a positive mental attitude. You can go through life happy or miserable. The only person for whom it really matters is you (and possibly your partner or immediate family!) so you might as well try to be happy.
What Would You be if You Weren’t a Fund Manager?
As a keen scuba diver and fisherman, I would like to have been a marine biologist.
