Monthly Archives: November 2018

Hosking Partners – London

James SeddonJames Seddon is one of the Founding Partners of Hosking Partners. He previously worked with Jeremy Hosking at Marathon Asset Management from 2006 to 2012. Prior to that, James spent 19 years at Rowe Price-Fleming and T. Rowe Price International where he was a Senior Portfolio Manager of European equities for the European and International Equity strategies. James began his career at Schroder Capital Management and holds a degree in Physics from Oxford University.

Hosking Partners is an investment management partnership that started in 2013. The firm has around $9 billion of assets under management through one global equity strategy. The investment team of five seeks long-term investments using a fundamental contrarian methodology. Their differentiated approach has a long-term investment horizon through a diversified portfolio of stocks with a high active share. The investment philosophy incorporates a capital cycle analytical framework: the tendency of industries with high returns to attract new capital and more competition, which over long periods of time drives down industry returns until capital withdraws, returns recover and the cycle begins again. This is combined with a behavioural approach that uses mental models to assess companies and industries. The strategy aims for alpha generation over the long term.

Is the entire AUM of $9.5 billion in equities? Will AUM grow?
Yes. We also have the ability to invest in “equity like” distressed debt and maintain positions that become delisted.

AUM has grown at roughly $2 billion a year since inception – in this period we have reduced our base fee which given the existence of a long-term performance fee (measured over 5 years), reinforces our focus on generating long-term outperformance rather than adding incremental AUM.

Geographic split of equity assets?
US – 45%
Europe and UK – 22%
Japan – 4%
Developed Asia – 6%
Emerging markets – 21%

Any sector or geographic splits within investment team?
No – we all invest globally.

Do you incorporate ESG into your investment process?
We focus on the ‘G’ bit – governance – it’s the most important for investment returns.

Average turnover?
10–15% per annum.

How many stocks in your investment universe?
At least ten or twenty thousand! We invest right up and down the market cap scale and given the long holding period we can own large stakes in smaller companies. For instance, we own close to 20% of Michelmersh Brick (MBH.L) which has a c.£70m market cap. In contrast, we have a low exposure to the largest stocks in the MSCI ACWI benchmark.

Average position? Largest position?
We can get up to 4-5% overall. We have a very long list of names – close to 500 stocks, but our global portfolio looks very different to an index fund! The active share of each individual manager is around 90%.

Why so many holdings?
We think there is more risk in a concentrated portfolio. It’s harder to buy smaller companies and it may encourage less “risky” investments. Our diversified approach enables us to be able to make investments in risky areas, with potentially higher returns, like Italian banks or shipping companies because we are able to tolerate higher stock specific risk within the context of a diversified portfolio.

Top 10 Positions (30 September 2018):

Top 10 Largest Positions Portfolio %
Amazon.com, Inc. 3.2
Bank of America Corp 2.7
Citigroup Inc. 1.8
Alphabet Inc. 1.7
Costco Wholesale Corporation 1.5
American International Group, Inc. 1.5
PayPal Holdings Inc 1.5
Samsung Electronics Co., Ltd. 1.4
Delta Air Lines, Inc. 1.3
Lloyds Banking Group plc 1.2
Total 17.8

Which screens do you use?
We don’t really use screens. Instead, we use ‘mental models’ which help us find good investments. Some examples of these are the capital cycle, the power of incentives and insider ownership. For example, at Amazon where Jeff Bezos, the founder, still has a significant stake and is still running the company – that counts for something. Another mental model that applies to Amazon is “Jam Tomorrow” where a company is delaying profits in the short term for longer term benefits.

A further mental model we call “half time oranges”. This is where a company or an industry has been through an investment phase and is coming out the other side of that. The US cable
industry is a good example. The industry went through a big and unprofitable investment phase.

At this point, the industry was trading at very low valuations, well below the value of the capital that had been invested. A lot of people had given up at that point. That was just the time to get excited because improving returns were ahead of them.

Buy backs or dividends?
We are not wedded to either as characteristics of investee companies. We do tend to like buy backs as we are invested in stocks which we think are priced below intrinsic value. We own a number of the US banks which are doing this. Citigroup is trading below its book value which we think is going to grow over the next few years, during which time it is likely to pay out over one third of its market capitalisation in dividends and buybacks. These buybacks, at such a low valuation, will boost value for shareholders.

What are some areas of your portfolio that you are excited about?
US Airlines – The US airlines is an area we are invested in as the market appears not to believe that they will break the old cycle of dipping in and out of being lossmaking. They are really quite profitable at the moment and we think it is going to last. Profits will go up and down, but at a consistently higher level than in the past. The companies are priced on a very modest valuation relative to those profits and they are now buying back stock at a rapid rate, having already retired a huge amount of their shares.

We like the DRAM memory chip manufacturers. The industry has shrunk to three players and is much more disciplined. This is another area where the market doesn’t believe in the sustainability of the profits. For instance, in our view Micron is trading on a very low multiple of future earnings and is authorised to buy back nearly one third of its market capitalisation at the current valuation.

Motor Oil Hellas (MOT.AT) is a Greek refining company we like. In 2012, it was depressed because of the Greek (financial) crisis. It was also going through an investment phase, as it is about to again now, as they always like to maintain their refineries to ensure they operate at the highest level of complexity. It has a multi-generational family ownership structure which we like. It has been a good investment and represents a combination of the mental models – “half time oranges” and “inside ownership”.

As contrarians, can you invest in highly valued stocks?
Costco – is one of our long-term holdings in the “jam tomorrow” camp. It is highly rated, but its perpetually low grow margins (and low prices) help it to retain and grow its customer base. This approach helps it continue to win market share even in a very tough retail environment that is competitive and changing.

Do you have to meet management before you buy a stock?
We like to, but we don’t have to meet them before we buy.

How do you prefer to meet management?
No favourite way. We bought Sherwin-Williams, a paint company, after attending a housebuilding conference in 2008 when the whole industry was depressed. Its business model including its management and incentive structure stood out. So, we don’t just have to see companies one-on-one. We are not too rigid on how we get information as we know what we are looking for.

Has MiFID II affected you?
It’s affected a lot of people! Like most in our industry we are paying directly for research. We have narrowed the broker list a bit and we are contacting companies more ourselves.

Best companies at IR?
Dr Sun at TSMC has been doing it for years and is excellent.

Why should corporates target Hosking Partners?
We are genuinely in it for the long haul. We understand that businesses are best run for the long term and can go through ups and downs. We like to engage with management over long term issues and, when appropriate, offer constructive feedback.

Outlook for 2019?
Better we hope! We have had a lot of unpredictable macro issues dominating people’s thoughts – trade wars, Brexit, the strong dollar – and that’s all been quite difficult to deal with. It would be nice to see some resolution – at least of Brexit if not the trade issues. There are a lot of shares that are trading a lot lower than they were 12 months ago. So, we are a bit more optimistic for the future.

Also, hopefully the market will be less driven by liquidity. Already we are seeing a bit a more differentiation between the performance of some of the largest index stocks.

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