Investors and businesses alike should think less about the news than about technology, says Adrian Frost of Artemis.
“If investment management is a bit like doing a never-ending crossword, then I feel as though, for 30 years of my career, I was being given the quick crossword,” says Adrian Frost of Artemis. “And now, for the last five years, I’ve been given the cryptic crossword.”
Some investors today remain focused on the global financial crisis, the unprecedented economic and financial policies that followed it, and the political shocks of the past 18 months. Yet very few of them anticipated the succession of surprise events that have held the headlines in that time.
"I meet clients who ask me: how was the portfolio positioned for the general election?" says Frost. "I say to them: did you know the outcome? If I think back to the events of the last 12-18 months, I would have got them all wrong."
Yet Frost believes investors should be more focused on a very different kind of disrupter: technology. Although technology has always played an important role in business, its recent form in transforming entire sectors at breakneck speed is remarkable. This is what he means by having to now work through the ‘cryptic crossword’ as an investor.
“The internet, big data, computing power, mobile devices, price transparency, and the ability to feed back: blogs, ratings, Instagram, TripAdvisor, Snapchat, WhatsApp - these are in their way transforming and bringing about competitive threats the likes of which we’ve never seen before,” says Frost. “And that’s a big challenge.”
“Now I like a challenge, but then you give me electric vehicles, battery storage, driverless cars, and I begin to think: ‘OK we’ve got enough challenges to deal with.’ But that’s what makes it fascinating, and that’s what throws up threats and opportunities for an investment manager,” says Frost.
As a result of these changes, entire industries are being disaggregated - in other words, the unchallenged dominance of a few major players is subsiding. New entrants can now gain significant market share in a very short time. One recent example won plenty of press attention: in June it was reported that George Clooney was selling his tequila company to Diageo for $1 billion1, just four years after it was first created.
Investors therefore need to be sure that an established player is not technology's next victim, but is learning to harness technology to its own ends. One example Frost points to is Rio Tinto, the world's largest and lowest-cost miner of iron ore. The company needs trucks to transport the ore from its Australian mine to Perth, 800 miles away - and it'll need to do so for 30 years, given the expected lifespan of the mine itself. Already, 20% of its fleet of 370 trucks are driverless, and controlled from Perth. As Frost points out, that means those trucks require no shift changes, lunch breaks or phone stops - instead, they can operated 24 hours a day. A similar principle, of course, can be applied to transportation costs across a very wide range of sectors.
Yet the digital disruption should not be overstated either, as it doesn’t fundamentally change Frost’s underlying approach to investing. Ultimately, the financial prospects of a business – and its broader sector – need to look appealing over the long haul.
“We have a very long-term view about the cash flow of the companies we invest in,” says Frost. “For us, a good company is one where you can take the share certificate, march to the end of the garden path, and bury it – as secure as possible in the knowledge that, if you dig it up in 20 years’ time, it’s going to be more valuable than it is today. That’s really the Eldorado of investment management – a 'buy-and-bury'. Life’s not quite like that, of course, but it’s about how far down that garden path you can get.”
An important element of this long-term approach is to focus on the dividend - but not simply on a short-term basis.
"So far, history has told us that an above-average yield which grows over time has served investors pretty well in absolute and relative terms," says Frost. "It's not right for us to simply bang the table and tell a company that everything is about the dividend. Because if the company then doesn't invest in the business, they will actually shorten the sustainability of that dividend and cashflow - they will be making themselves a less attractive buy-and-bury stock."
Instead of seeking excitement in the short term, Frost's approach is to select companies that will help to future-proof the portfolio, which means companies with sustainable earnings and a long-term growth outlook. As he pursues that goal, it then becomes the responsibility of the end-investor to mimic that approach, avoiding the temptation of regularly switching between investments and opting, instead, to keep their focus on the horizon.
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The opinions expressed are those of Adrian Frost of Artemis Investment Management and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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