Oldfield Partners (OP) has a credible approach to investing which centres on finding value for money. Eleven years ago, Richard Oldfield, who used to chair Oxford University’s endowment committee and ran investments for the Rausing family in London, founded the company with three former colleagues from Mercury Asset Management. The firm is now 25 strong and manages over $4 billion in long only equity assets. Simply put, OP invests in public equity shares from round the world when they are out of favour, unloved and essentially cheap using diversified portfolios of about 20 stocks. They understand the difficulty of making predictions (e.g. on the vagaries of economic cycles), instead taking great care to analyse the long term values of companies.
One investment strategy managed by OP which has been finding exceptional values in which to invest is global smaller companies managed by Harry Fraser. For example, in 2012, the smaller companies strategy invested in Sonic, the number one player in the drive-in fast food segment in America. While fast food offerings have faced criticism, Sonic’s customers continued to love Sonic’s offering and the investors’ money doubled in short order. When the shares of Blackberry traded below the value of the cash on its balance sheet, OP’s analysis identified the opportunity to own the intellectual property for nothing, and these shares doubled too.
Every company in the portfolio has something special about it. Harry mostly invests where management have substantial stakes in the company. Furthermore, many have attractive market niches and have the potential to be taken over. All have sound balance sheets and are purchased by OP at low valuations. Overall the portfolio trades at just 11 times earnings and close to book value. For companies with good returns on equity and little debt this is very attractive both in absolute terms and compared to the wider universe of smaller companies, which trades at over double the valuation. Considering the business and balance sheet qualities, the portfolio is remarkably cheap.
The environment for this type of value investing is excellent. While growth companies have been rated ever more highly over the last nine years, the stock-market potential is now in the more sensibly valued part of the market where common sense prevails over unbridled optimism. The chart below shows that investing in ‘value’ – or cheaper companies should beat the market in the long run. But this requires patience during periods when highly rated – or ‘growth’ – companies become ever more expensive. We have just been through a nine year period of that, leaving, OP believes, some really attractive values to be had. Thus OP foresees that the next period should be very exciting. In this environment, Harry is spoilt for choice and the carefully chosen portfolio is doing well. The recent referendum in the UK has thrown up a multitude of opportunities – Harry has been able to invest in strong and growing companies such as Stagecoach and Bovis Homes at dividend yields of nearly six per cent more than twice covered by their earnings.
David Jones, a former global research MD at UBS Warburg, who now looks after Middle East investors, and Harry Fraser, the portfolio manager who specialises in global smaller companies investments, regularly travel to the Middle East from OP’S London office.
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