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 Brendan Gulston, co-manager of the Morningstar Silver-rated LF Gresham House UK Micro Cap fund.
Which Sector Shows the Biggest Promise in 2023?
Healthcare, where we see the services and technology areas of life sciences as critical hotspots undergoing transformational change. This change is underpinned by multi-year structural drivers that are step-changing the pharmaceutical value chain and consequently the ecosystem of companies feeding into this space. Pharmaceutical outsourcing is one such long-term trend where we see the earlier stages of drug discovery and development, as well as use of data, as being particularly exciting in terms of investment opportunities.
What's the Biggest Economic Risk Today?
We are experiencing a shifting economic paradigm, particularly in terms of inflation and interest rates. An overarching economic risk is how this shift combined with other headwinds such as energy prices and supply chain disruption accumulate to influence the behaviour of corporates and resulting changes in decision-making at an executive level. This could lead to discretionary cost cutting, paused capital investment, strategic reviews of businesses and so on, all of which impact growth. However, it is precisely these fundamental shifts that create investment opportunities across public markets that allow us to exploit disparity between underlying operating conditions and share prices.
Describe Your Investment Strategy
We take a private equity approach to public markets by focussing on long-term fundamentals, and by conducting thorough and thoughtful due diligence. We are selective, long-term stock pickers seeking resilient, high quality companies underpinned by structural drivers with strong valuation discipline. We continually look to deliver an “investment edge” through the consistent application of our robust process, downside risk mitigation, active engagement with company management teams and leveraging our proprietary network of independent specialists to drive high conviction investments.
Which Investor Do You Admire?
Ray Dalio but not for his investment returns, which are clearly impressive, but for his clarity of thought and mental discipline. What particularly resonates is his relentless pursuit for objectivity and truth, and the rewards for navigating adversity (“struggling well”). He methodically and obsessively lays out the critical building blocks to successful investing, developing resilience and business building.
Name Your Favourite "Forever Stock"
It’s harder to call “forever stocks” given the current and expected elevated levels of corporate activity within UK equities. However, B&M, the discount retailer, is a good example. The company has a long-term sustainable competitive advantage around supply chain management and flexibility, product focus, use of data and scale. Combined with their positioning as a very low ticket, value-oriented consumer retailer and ongoing store rollout strategy sets the scene for consistent compounding of earnings over a long period.
What Would You Never Invest In?
Anything where the outcome (success or failure) is too heavily correlated with factors outside of the management team’s control, or where the spread of outcomes is too large. Examples would include mining, oil & gas and biotech businesses. This is a key part of our investment process, which has consistently mitigated downside risk and helped drive strong risk adjusted returns over the long term. For the big winners we may have missed in these categories there are always many more “zeros” to be found, which we will also have missed.
Growth or Value?
We are more growth investors than we are value investors, although the reality is much more nuanced, in my view. Our focus is principally on quality and resilience deeply rooted in fundamentals and we have a strong valuation discipline, which includes proprietary diligence and views around strategic value and corporate activity, where relevant. Therefore, value is an integral component of our process across all investment situations. We also have a range of funds, most of which are growth focused but one which combines capital growth and income, where defensibility and sustainability of income is critical.
House or Pension?
I would steer towards a pension as there is more flexibility in terms of portfolio construction (if you have a SIPP) as well as overall diversification of assets. I think the tax treatment is also more favourable, although one might be able to put property into more complex SIPPs which could negate that point (I’m not an expert in the area!)
Crypto: Brilliant or Bad?
I think the concept outlined in the original paper around a peer-to-peer electronic cash system is really interesting. The idea of incentivising participants (by creating mineable bitcoins) to cooperate rather than attack the network, thereby ensuring computing power is directed at validating transactions and forming an “unbreakable digital record” is elegant. However, I subscribe to Warren Buffett’s view on crypto and its lack of fundamental asset backing making it impossible to value (and possibly worthless). When you layer on the fact that crypto is largely used to fund illicit transactions or for nefarious activities and that considerable and increasing amounts of energy are required for mining, I think it’s generally pretty negative for society.
What Can be Done to Improve Diversity in Fund Management?
Although the industry has made positive strides over the past number of years there is more that can be done. I think building awareness around the positive benefit of variant perspectives within fund management is important and that doing so earlier on in people’s decision-making is key, whether that’s through school and university career fares, internship programmes or otherwise.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
I’ve engaged quite heavily over the past year with the management team at Argentex, a listed corporate currency services provider. The team have implemented significant changes across their organisation from technology infrastructure to incentivisation structures and it’s pleasing to see these initiatives bearing fruit in the underlying business performance as well as the share price.
What’s the Best Advice You’ve Ever Been Given?
Being sceptical and dispassionate are traits that come fairly naturally to me, however, this was reinforced throughout the start of my investment career. In particular, being militant on independently validating your investment case or “how can you prove you’re right?”. This continues to be a critical part of how we invest and we are always thinking of where our “edge” is.
What Would You be if You Weren’t a Fund Manager?
Perhaps a chef. It brings together many areas of interest for me - creativity, the pursuit of perfection, working intensity, pressure and attention to detail.
