Monday, February 07, 2005
Fidelity manager's familiar philosophy
Yesterday's Sunday Times featured an interview with the so-called crown prince of stock-picking, Sanjeev Raja, manager of Fidelity's UK Aggressive fund.
Fidelity is the UK's largest fund manager, custodian of more of the British populace's assets than any rival. The title crown prince might not fit too well on Raja, however, Fidelity's own Anthony Bolton has a produced a formidable return in the last 25 years. This article waxes lyrical on Bolton's excessive successes:
Since 1979 he has returned over 3,000 per cent against an All Share Index that is up only around 1,300 per cent.
Peter Lynch, also of Fidelity, enjoys legendary status amongst stock-pickers after achieving 29.2 percent annualized return for the Magellan fund during his thirteen year tenure.
But let's not do Raja down too much. Though we haven't had to look far to find Bolton and Lynch, apart from each other, the pair are almost peerless in the fund management arena.
In the interview, Raja explains his stock-picking strategy:
What gets me excited is when I discover a stock price that is completely divorced from the company’s prospects, 30% or 40% undervalued. That is what I am looking for, and that is when I will decide to buy.
Sound familiar? In this post I outlined my modus operandi - I seek to buy stocks at a 30% discount to fair value. It's encouraging to learn a manager at the world leading fund houses sees the logic in this approach. The margin of safety makes a lot more sense than Derek Mitchell of ISIS Asset Management's lackadaisical methods.
Raja spent three months "having a think" on an extended holiday in Venezuela, reading Buffett and Ben Graham, echoing my experiences albeit in the huge public parks of Paris in 2002, when I discovered The Intelligent Investor and finalised my strategy in just over a week.
Raja's strategy consists of five tenets, here's my thoughts on each.
1 Find out a company's strategic direction. What is it trying to achieve, what are its three-to-five-year horizons? If it has several divisions, products or geographical territories, discover which have the highest priority in terms of investment and management time.
This boils down to growth. Where is the growth supposed to be coming from? The investor then must ascribe some probability of this being achieved and the magnitude of any increase in earnings. All very sensible but I'd be concerned this can distract the investor from the crucial matter of valuation. And how well qualified are you to judge the company's market anyway?
2 Look at the quality of management... See how in touch the branch or factory managers are with head office, and whether head office really knows what is going on out in the branches. Find out how closely the middle-ranking executives share the optimism of the boardroom.
Again, it makes sense but I'd have thought this level of insight would be difficult to acquire reliably.
3 Check the underlying drivers of the business: sales, the growth rate of the company's market and its market share, what decides price, which products are or are not growing. How free is the company to raise prices? How ruthless is it about cutting out losing lines?
Crucial and a key question. Tick.
4 Industrial context. Is the industry fragmented because barriers to entry are very low, suggesting it will always be competitive because of new entrants, or could a large number of players shrink through mergers or business failures? How easy is it for customers to switch supplier?
This is what Peter Lynch refers to as a 'defensive moat'. An investor must be au fait with the challenges particular to an industry and a company's strategic position against competitors or price squeezes. Vital.
5 buy into a good quality business if it's cheap enough, and a mediocre one if it's way too cheap. He wants to know how good the cashflow is, the underlying profitability and the price/earnings ratio that the shares are on in relation to others in the sector.
I'm in full agreement with Raja again here and have oft-blogged on the need for valuation against sector peers and the imperative requirement of valuation. My only qualm however, is why was valuation ranked fifth in this list of magic secrets?
In February thus far my own funds have continued to progress. I look forward to regaling you all over my next few missives.
The Artful Dodger
Fidelity is the UK's largest fund manager, custodian of more of the British populace's assets than any rival. The title crown prince might not fit too well on Raja, however, Fidelity's own Anthony Bolton has a produced a formidable return in the last 25 years. This article waxes lyrical on Bolton's excessive successes:
Since 1979 he has returned over 3,000 per cent against an All Share Index that is up only around 1,300 per cent.
Peter Lynch, also of Fidelity, enjoys legendary status amongst stock-pickers after achieving 29.2 percent annualized return for the Magellan fund during his thirteen year tenure.
But let's not do Raja down too much. Though we haven't had to look far to find Bolton and Lynch, apart from each other, the pair are almost peerless in the fund management arena.
In the interview, Raja explains his stock-picking strategy:
What gets me excited is when I discover a stock price that is completely divorced from the company’s prospects, 30% or 40% undervalued. That is what I am looking for, and that is when I will decide to buy.
Sound familiar? In this post I outlined my modus operandi - I seek to buy stocks at a 30% discount to fair value. It's encouraging to learn a manager at the world leading fund houses sees the logic in this approach. The margin of safety makes a lot more sense than Derek Mitchell of ISIS Asset Management's lackadaisical methods.
Raja spent three months "having a think" on an extended holiday in Venezuela, reading Buffett and Ben Graham, echoing my experiences albeit in the huge public parks of Paris in 2002, when I discovered The Intelligent Investor and finalised my strategy in just over a week.
Raja's strategy consists of five tenets, here's my thoughts on each.
1 Find out a company's strategic direction. What is it trying to achieve, what are its three-to-five-year horizons? If it has several divisions, products or geographical territories, discover which have the highest priority in terms of investment and management time.
This boils down to growth. Where is the growth supposed to be coming from? The investor then must ascribe some probability of this being achieved and the magnitude of any increase in earnings. All very sensible but I'd be concerned this can distract the investor from the crucial matter of valuation. And how well qualified are you to judge the company's market anyway?
2 Look at the quality of management... See how in touch the branch or factory managers are with head office, and whether head office really knows what is going on out in the branches. Find out how closely the middle-ranking executives share the optimism of the boardroom.
Again, it makes sense but I'd have thought this level of insight would be difficult to acquire reliably.
3 Check the underlying drivers of the business: sales, the growth rate of the company's market and its market share, what decides price, which products are or are not growing. How free is the company to raise prices? How ruthless is it about cutting out losing lines?
Crucial and a key question. Tick.
4 Industrial context. Is the industry fragmented because barriers to entry are very low, suggesting it will always be competitive because of new entrants, or could a large number of players shrink through mergers or business failures? How easy is it for customers to switch supplier?
This is what Peter Lynch refers to as a 'defensive moat'. An investor must be au fait with the challenges particular to an industry and a company's strategic position against competitors or price squeezes. Vital.
5 buy into a good quality business if it's cheap enough, and a mediocre one if it's way too cheap. He wants to know how good the cashflow is, the underlying profitability and the price/earnings ratio that the shares are on in relation to others in the sector.
I'm in full agreement with Raja again here and have oft-blogged on the need for valuation against sector peers and the imperative requirement of valuation. My only qualm however, is why was valuation ranked fifth in this list of magic secrets?
In February thus far my own funds have continued to progress. I look forward to regaling you all over my next few missives.
The Artful Dodger
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