Mark Leach studied history at Edinburgh before moving into the asset management industry. He joined James Hambro & Partners (JH&P) in 2014 and is Head of International Equities. Here he tells us why history helps in managing client money and how JH&P decides what goes into client portfolios.
Is history a common degree for a career in asset management?
I didn’t have a clear career plan when I went to university. I’d loved history A level and so I carried on studying it. It’s probably not an obvious degree choice for an investment manager, but with hindsight it has proven to be extremely helpful, especially from an analytical point of view. I also believe that to have a strong understanding of the world today and its likely future, having knowledge and perspective of the past and how we got here is useful.
And how did you get to where you are today?
My first job after university was at what was then a burgeoning, small private client firm called Ruffer. I quickly became an assistant portfolio manager there, but I was just executing on other people’s ideas and wanted to research and understand those ideas. So I started my Chartered Financial Analyst qualification and after three years moved to work alongside hedge fund manager Marc Chapman at Powe Capital, investing in European companies. He was a great mentor. He was very focused on high-quality growth businesses and not interested in necessarily making fast money.
Unfortunately, the parent company got swept up in the crash in 2007 and I was last in, first out. I was made redundant the same weekend that Lehman Brothers went bust. Given that a few thousand Lehman employees had just hit the streets, I got a ticket to Paris and moved there for a few months to learn French, until an opportunity with J O Hambro Capital Management came up. I was with them for six years. We were running money through the European crisis so dealing with the fallout of the Greek debt issue and problems in Portugal, Spain and Italy. It was a particularly stressful time, with markets very volatile until August 2012 when the president of the European Central Bank, Mario Draghi, stepped in and said he wouldn’t let the euro fail.
Since then the market has been more benign, but those experiences do live with you and they ensure you never become complacent.
What brought you to James Hambro & Partners?
I was intrigued by JH&P because they were interested in equities at the core. There are not that many wealth managers who buy equities directly – most portfolios are constructed purely with funds. But JH&P believe that building portfolios around a central body of direct equities brings focus, reduces costs and can therefore enhance returns. They wanted to buy good companies that they really understood and to own them for a long time. They also wanted all their investment managers to be involved in the selection of assets, which I thought was interesting and different to how private client wealth management had been done in the past.
What does your title, Head of International Equities, mean?
I’m in charge of maintaining the quality of the non-UK part of equity portfolios – ensuring that there are new ideas coming in and that the existing ideas are being monitored closely and constantly stress tested. The first thing we do is identify interesting ideas. We’re always meeting analysts, companies and other third-party strategists and specialists.
We sit down once a week as a smaller team to review these ideas and decide what our priorities are based on, where we are in the business cycle and how we feel about the current shape of our portfolios. We then allocate ideas to individual managers who go off and do the necessary research. They tell us what they’ve learned and if we think the idea has legs we will present it to the wider investment team at our Thursday afternoon meeting, with a full presentation.
If the consensus is that it’s a good idea, it can go straight onto the approved list, if not then we put it on the watch list. But to get to this point it has to be a pretty good idea – so the discussion then is usually more about how it fits relative to other names in the portfolio and whether the valuation is right, a crucial determinant of likely future return.
You played a big part in designing the approach to researching companies and presenting the information internally. What are you looking for in a company?
We ask questions like: What are the major drivers of demand? Why do people or businesses buy a company’s products or services? What is going to drive growth in demand? What are their competitors like? What is their market share? What are their profit margins? How does that translate into cash generation and how sustainable is that?
We start to build a picture of why this company makes the returns it makes and whether those returns can be sustained for an investable period, that for us is five years plus. Beyond building an understanding of a company, we also look at the environment it is operating in and for secular trends that can drive growth or indeed disrupt it.
What are the most important characteristics you are looking for?
We’re trying to find the best companies, irrespective of region, and a key measurement of that is return on capital over and above the cost of capital. In other words, whether a company can generate a better return on money than the bank. The key is finding companies that can make high returns consistently and that have built barriers to entry that we believe are difficult for others to overcome. This characteristic gives these companies the enviable position of optionality – where they can decide whether to reinvest that profit and continue to grow or return it to shareholders. We like a bit of both – maintenance of capital growth plus some income.
Debt is important too. We’re averse to high debt levels because that can kill a business, especially when interest rates are rising. If a firm is generating a good return on capital and isn’t heavily indebted, it offers us a lot of reassurance. It creates a valuation floor. If we’ve chosen well, clients can make attractive returns. If we’re wrong, the risk of loss is greatly diminished.
Given that a protective moat is crucial to maintaining high returns, a lot of our focus is on disruption. We can identify today’s winners fairly easily, but the harder part is judging the potential for others to come in and threaten that leadership. One obvious example would be the role the internet has played in changing routes to market. Online marketing and social media have lowered the barriers to entry in many sectors and it is now easier for consumers to compare price and quality. The advent of smaller food and drinks brands such as craft beers are an example of how a changing market place can threaten established incumbents.
It means we have to accept that the world is constantly evolving – we have to monitor the way that consumers and businesses are behaving and ensure our companies will benefit from these trends.
Do you limit the size of your equities list?
Yes – we don’t have a set limit, but we try to keep it tight, so we have 60 or so names on the list now and we try to keep the end exposure of those companies diversified in terms of geographic mix and also in terms of end market demand.
It is quite a small list then?
In portfolios that can also hold funds we probably have between 20 and 25 individual companies. But in portfolios that can only contain direct equities we would hold up to 40 companies. The reason the list is longer than that is because all our portfolios are bespoke to the client and therefore we need to provide all portfolio managers in the investment team with the option of owning higher yielding companies for those clients that require income.
Equally, some clients have a higher risk tolerance and longer-term time horizon. These clients can hold higher growth companies that reinvest all their earnings. We need to have a few of each but, as I said before, the majority of our core holdings are a mix of growth and income.
You say JH&P is distinctive in buying direct equities. Is there anything else distinctive in your approach?
I think it’s important to mention that we are all generalists. We don’t encourage people to over-specialise on any one specific area of expertise, so you don’t just focus on technology stocks or the utilities or banks. Our view is that everything is interlinked and no sector operates in isolation. So to understand how one part of an economy is affected by another, you need to build a broad understanding. If you’re just focused on one area, like industrials, you end up incentivised to push companies from that sector onto the list, even though it might not be the right time to be in industrials.
Are there not downsides to everyone being generalists – surely specialists offer something extra too?
They do and one of the things I’ve been very focused on in the last two years is making sure that we have the right kind of specialist external research coverage to support us and offer more in-depth work. These providers are often the starting point for our own research and we use them to test our theses.
We believe external research is so important that we have a ring-fenced budget so that there is a pool of money that will always be there. Research is something that can be easily cut back if markets are struggling and a wealth manager’s own profit and loss is being crushed. But our view is that that’s when you need research most, because that’s when the market has gone on sale – when all our good ideas have potentially got cheaper and we want to pick the best opportunities.
What do you enjoy most about your job?
I really enjoy working for clients, and I think that’s the same for all of us – it’s why we’re here. But equally we are all fascinated by the world around us and by what makes it tick and how it is changing – I don’t think you can be a good stock picker if you aren’t. That’s what I love most about this job – everything we read and everything we see or experience can be informative. It all contributes to your wider knowledge and can inform where you look for your next good investment idea.
Posted on 25 Feb 2019
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