We're in­vest­ing in ugly duck­lings...

Shares - - EDITOR’S VIEW -

At the Scottish, we take a con­trar­ian ap­proach to global stock mar­kets. We are high-con­vic­tion in­vestors and fo­cus on stocks that are out of favour with main­stream in­vestors, as we be­lieve th­ese of­fer the great­est po­ten­tial for long-term gains. This is be­cause pop­u­lar stocks tend to be over­val­ued – while out-of-favour stocks are of­ten too cheap. We aim to ex­ploit this in­ef­fi­ciency for our share­hold­ers. The in­vest­ment en­vi­ron­ment is in­her­ently cycli­cal. We see cy­cles in in­dus­try fun­da­men­tals, cor­po­rate be­hav­iour, an­a­lyst views and in­vestor sen­ti­ment. Th­ese cy­cles are closely linked: when an in­dus­try's fun­da­men­tals have been strong for some time, man­age­ment teams, an­a­lysts and in­vestors tend to be overly op­ti­mistic about its fu­ture. This leads to ir­ra­tional in­vest­ment de­ci­sions. Some of our best op­por­tu­ni­ties arise at the op­po­site point in the cy­cle – when a down­turn leads to ex­ces­sive pes­simism about a com­pany's prospects. When this hap­pens, we can buy stocks pre­cisely when the profit op­por­tu­nity is great­est.

An in­no­va­tive in­vest­ment ap­proach

We be­lieve in­vest­ment re­turns are driven by a change in a com­pany's prospects and an ac­com­pa­ny­ing change in mar­ket per­cep­tions. Of­ten good com­pa­nies are overly ad­mired and con­se­quently be­come over­val­ued. A com­pany that has been badly run or is down on its luck may of­fer much more po­ten­tial for im­prove­ment and, even­tu­ally, for out­stand­ing re­turns. As con­trar­ian in­vestors, we see three dis­tinct in­vest­ment cat­e­gories. We cat­e­gorise the first as ugly duck­lings – unloved com­pa­nies that most in­vestors shun. Th­ese firms face fun­da­men­tal chal­lenges, and the mar­ket has be­come ex­tremely pes­simistic about their prospects. But we see their out-of-favour sta­tus as an op­por­tu­nity. The sec­ond cat­e­gory is where change is afoot. Th­ese com­pa­nies have made sig­nif­i­cant changes to their prospects, but the im­prove­ments are not yet recog­nised by the mar­ket. So, while other man­agers con­tinue to steer clear, we see the po­ten­tial for profit. In the third cat­e­gory are com­pa­nies that have more to come. Un­like the first two cat­e­gories, th­ese com­pa­nies are gen­er­ally recog­nised as good busi­nesses but we see an op­por­tu­nity as the mar­ket does not ap­pre­ci­ate the scope for fur­ther im­prove­ment.

A painstak­ing process

To iden­tify the right op­por­tu­ni­ties, we use a qual­i­ta­tive and quan­ti­ta­tive an­a­lytic frame­work to re­search com­pa­nies' fun­da­men­tal prospects. We care­fully as­sess any man­age­ment change and re­struc­tur­ing ac­tions, and con­sider the likely ex­tent of any earn­ings re­cov­ery. Com­pa­nies in our port­fo­lio can move along an axis from “ugly duck­lings” to “change is afoot” and then “more to come”. When ugly duck­lings be­come fully fledged swans, we're look­ing to sell. Un­til then, we keep port­fo­lio turnover to a min­i­mum. For more in­for­ma­tion visit www.thescot­tish.co.uk

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.