INTERVIEW SERIES: LF HAVELOCK GLOBAL SELECT – MARCH 2023

Last month, we interviewed Matthew Beddall and Neil Carter of Havelock.  This is how it went down

1. I first met you both in Edinburgh when along with several other managers of small (“boutique”) funds. You made a presentation to us in the Bonham Hotel. That was at least a year ago, I think? Can you remind me of the date and the size of the fund then? And tell me the size of the fund now?

Answer: You are correct, we met you at a Boutiques Breakfast event in Edinburgh on the 26th of April 2022.  On that day, the fund’s AuM was £63.5m, and as of today (13th March 2023), the fund’s AuM is £149.6m.

2. You launched Havelock – a “long only” global equity fund – in August 2018. Can you tell me a bit about yourselves? In particular your career paths leading up to the launch?

Answer: Matthew worked at Winton for 17 years, eight of which he served as Chief Investment Officer. As CIO, he had responsibility for overseeing all of the firm’s investment activities, including for the flagship Winton Futures Fund. During his tenure, Winton grew to have $32 billion in assets making it one of the largest hedge funds in Europe. He also sat on the Board as a Director, and on the Executive Committee.

Matthew previously graduated with a degree in Mathematics and Computer Science, and went on to earn a Master’s degree in Applied Statistics. He combines a long-standing personal interest in value investing with extensive professional experience in systematic funds, leaving him with a firm set of views as to how best to manage savings and investments – all of which he has applied to his own money.

Neil worked at Jupiter Asset Management for over 13 years, where he held a number of roles including Head of Strategy for Global Financial Institutions. He was responsible for distributing Jupiter’s products both in the UK and internationally, during which time he developed an in-depth understanding of the global investment management market.

Before Jupiter, Neil worked at Fidelity for four years, after graduating from his degree in Physics. He completed his Executive MBA at Henley Business School, where his dissertation focused on the importance of re-building customer trust in financial services. This focus on putting customers first has been embedded in the company’s culture from day one.

3. I am aware of how difficult it is to launch a new fund – with the very strict compliance hoops you need to go through – what on earth persuaded you to go it alone?

Answer: We both wanted to be running our own business, and based on our experience knew that the work required to get set up would be manageable if we took it one step at a time.

4. Why open ended with all the risks of redemptions when markets collapse and investors lose confidence?

Answer: We certainly understand the benefits and characteristics of fixed-capital / closed-ended structures, but the UK asset / wealth management industry is dominated by daily priced, open-ended investment company (OEIC) structures.  We invest in liquid companies, predominantly in developed markets, and therefore we don’t have any concerns about managing a daily priced fund, and the market reaction to Covid was certainly a robust stress-test for the portfolio.

5. What are your key investment strategies? For example, Terry Smith at Fundsmith likes global companies that generate free cashflow to enable them to grow. He likes consumer staples and strong brands like Estee Lauder & Pepsico – companies that are difficult to replicate.  You have enjoyed an impressively good start – 40% + in the last 3 years – in arguably difficult trading conditions. How have you done this, and do you think you can keep it up?!

Answer: We look for certain characteristics in the companies we invest in, such as a good operating track record (Return on Assets or Return on Invested Capital), strong balance sheet without too much leverage, and a share price which doesn’t rely on undue optimism about the future.  We also like to see things like ‘skin in the game’ such as founder or Senior Management share ownership, clear communication from Senior Management and evidence of good corporate governance.

Our sector exposures are a consequence of our bottom-up, fundamental company research as opposed to choosing sector exposures first and then trying to find companies we want to invest in.  Our investment philosophy and approach to investing will naturally lead us towards some sectors and away from others (e.g. expensive US-tech), but we are prepared to cast the net wide in order to find good investment opportunities.  As for whether we can keep up the performance of the fund, we will certainly continue to work hard and do our best!  It is important to remember that the time horizon for investing in our fund is at least 3 to 5 years, and it shouldn’t be used as a short-term tactical bet.

6. I think I remember you have a lot of your own capital invested in the business – can you remind me of the percentage at the start and the percentage now? (We like fund managers who have skin in the game!)

Answer: The percentage at the start was 100%. As fund has grown, the percentage this represents has reduced, but it is still 8% of the fund. Skin in the game and alignment of interests is important to us. This is not just a job for us, we are not simply employees earning a salary, we are business owners.

7. You run a fairly concentrated portfolio of equities – 35 at the last count. Can you tell me briefly about your top 10 holdings (representing about 45% of the fund) and again– briefly -something about the other 25?

Answer:

Top 10 as of 28th February 2023

8. How much attention do you pay to the macro-economic climate? Max Ward, formerly of the Independent Trust and on our Advisory Panel, was primarily focused on buying good companies and not easily side-tracked by the everyday noise caused by 24/7 economic news.

Answer: We do not make macro predictions, but we are, of course, macro aware.  One of our objectives is to build a portfolio which will be ‘robust in a range of (macro) scenarios’.  We also invest for the medium to long-term and the short-term focus of some market participants, and the associates’ movements in share prices, creates opportunities for us in this regard.

9. The UK is out of favour at the moment. Are you writing off the UK as a lot of other investors are?

Answer: No, we have always had a reasonable exposure to the UK since the inception of the fund.  I wrote a thought-piece about the UK market in October, a link to which is here 

We have several investments in the UK, and the majority have exposure to ex-UK markets in terms of where they generate their revenue.  It’s dangerous (or foolish) to write-off any market in entirety, and we look for company-level opportunities.

10. ESG – we have clients who are very keen to invest in companies that take Climate Change seriously and who are focussed on helping to achieve net zero. What is your ESG policy and would it preclude you owning for example Shell?

Answer: Our fund is not explicitly an ESG fund, although we do have a Responsible Investing Policy which precludes us from investing in Tobacco or Vaping, Gambling, Pornography or Adult Entertainment, Coal mining or Coal fired power generation.

11. How do you find time to find good global companies with such a small team? (Compare with JP Morgan Global, for example!)

Answer: We can use ‘the computer’ and reliable databases to reduce our investible universe to a smaller, more manageable number by looking for specific company characteristics (as alluded to above).  We have also researched many sectors or themes over the 5 years since we established Havelock, and therefore we are happy that we have already selected the company or companies we want to invest in within that sector in the immediate term.  We are confident that we have ample resources to cover the companies in our portfolio and conduct further research. In addition to myself, we have an analyst who has been with us for three-and-a-half years.  As our fund and business grows, we will of course be looking to increase our investment resources (in term of people and other resources).

12. You are 20% in Financials – can you explain your rationale for this weighting.

Answer: The broad sector categorisation doesn’t tell the whole story.  We own two banks, one European and one US bank, an aircraft leasing business, a UK insurance company and Berkshire Hathaway, which is classified as a financial, but in reality is a large conglomerate.

13. What is your criteria for (a) buying stocks and (b) selling stocks? What is your portfolio churn every year – that is buying and selling?

Answer: I think I have covered our criteria for companies to invest in. Portfolio turnover averages 20% to 25% per annum.  We do buy and sell holdings, in addition to conducting new research which is introduced into the portfolio with other companies exiting the portfolio as we believe they reach, or exceed, our view of fair value.

14. What is your outlook for 2023?

Answer: I’d direct you to this thought-piece written by me on the 14th of Feb 2023:  What have we learnt from history?

(Summary)

• We do not make investment decisions based on macro-economic forecasts but instead focus on owning a portfolio of companies that can withstand future economic threats.
• We believe in having a margin of safety and avoiding assumptions that favourable conditions will continue.
• We caution that the “playbook” that has worked well in recent years may not work in a world of higher interest rates, higher inflation, and lower profit margins.
• However, we also see potential opportunities for thoughtful investors in a new paradigm.

15. Lastly, what is the derivation of the name of your fund?

Answer: I am afraid the answer is very unglamorous! When meeting to discuss the details and plans for setting-up our company, a convenient meeting point was a pub in London with ‘Havelock’ in the title.  Email exchanges summarising the details of discussions and next steps were casually titled ‘Project Havelock’, and when the time came to incorporate the company, we had grown fond of the title of our project, and Havelock London was created.

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