Fund Positioning 30_06_2017

The Narrative

The fund currently owns investments in Akzo Nobel N.V. and Whole Foods Markets Inc.  We have detailed our thesis around both investments previously. There are obvious risks and these are not insignificant; but we regard these risks as worth taking in the fund because if our view proves correct, the equity value of both businesses will appreciate multiple times over the next decade.

The current corporate activity around both businesses has caused strong recent appreciation of their share prices. It has also generated a lot of media narrative that is critical of the director’s of both businesses. In these two instances, we regard the narrative as being generally opportunistic and misplaced. This narrative has real economic consequences.

The longer term upside we perceive there to be in both investments is largely subjective and is hard to defend. Director’s may hold similar views to us about the opportunity, but they are exposing themselves by rebuffing the current corporate interest because of the subjectivity of these views.

We suspect the suitors also hold similar views about the longer term opportunity. Their objectives are to use the narrative to force the directors to the table and entice and cajole a majority of shareholders into accepting the short term gain. 

Ultimately, the owners of the businesses need to decide. We are hopeful that there are enough of them that hold a view similar to ours, that it is rational in these two cases to take the risk and uncertainty of a longer term investment horizon, for the potential rewards.

Fund Positioning 31_03_2017

Long Tail Asset Management Review _ 2016

Fund Positioning 30_09_2016

Fund Positioning 30_06_2016

So you want to invest in UK and European bank shares: Seriously?

When we think beyond PEs and NTAs and whatever other sanitised numbers the market looks at and focus on the actual nature of banking as a business and what is going to protect our downside if we are wrong; we inevitably throw banks onto the too hard basket with regard to being genuine long term investment prospects.

We regard banks as being businesses with the following common characteristics:

• Low ROAs;
• Low transparency;
• High leverage;
• Economically sensitive;
• Cyclical;
• Generally disliked by their customers; and
• Trapped, a bit like mice on a wheel, relentlessly selling homogonous, commoditised products.

Not much has to go wrong for any business with these characteristics, for their equity to be wiped out.

The differentiators are credit culture and maybe, to lesser extent processing costs. We find the cost argument as being conflicted though because, if you believe you have a cost advantage you will push aggressively for scale to leverage this advantage and on some level inevitably (we think) you will compromise on credit.

Given the inherent leverage banks carry in their capital structures valuation measures like PEs or NTAs are meaningless to us with regard to offering downside protection of equity values. The people selling bank shares at todays prices are more than aware what their share prices have done recently and what the market thinks of their current valuation.

Maybe there is an argument that extended quantitative easing has had its desired effects and the system has healed… and therefore it makes sense to deploy capital into the banks today. Our concern though is all it has really done is just papered over the cracks, in which case the volatility we have seen since the Brexit vote is going to be with us for a while longer yet.

Fund Positioning 31_05_2016

Fund Positioning 31_03_2016

Japan tenet update

Japan tenet update (March 2016)