It’s a cliché that human beings quickly adapt to new circumstances, but that has certainly been the case for us as fund managers as we have adapted to this new world. In the past, we had always believed it is vital to conduct face-to-face interviews with managers of the companies we invest in. But following lockdowns imposed in the UK and other countries after the outbreak of Covid-19 earlier this year, companies have been just as (and, in some cases, even more) open to communicating with us at Columbia Threadneedle Investments.
Many corporate executives are working from home too, of course, and simply have more time to talk to us. So far this year we have had virtual meetings with around 150 companies, so it has been a fantastic opportunity to conduct face-to-face, direct research into companies.
BRAVE NEW WORLD OF OPPORTUNITIES
While 2020 may have been a particularly dramatic year, it is important to recognise that the global economy is in a constant state of flux with new technologies, political upheavals etc, challenging business models year in year out.
However, our proven investment philosophy and process remains unchanged, with competitive advantage at the heart of our investment philosophy. It gives us the confidence that a company can maintain its market position and has the potential to deliver high returns and stable growth for investors over time. Our approach combines an analysis of company fundamentals, detailed industry research and a competitive advantage framework to identify the highest quality smaller companies from across the globe. When we do witness those economic challenges, these companies tend to be the more resilient.
WHAT ARE THE COMPANIES WE LIKE TO INVEST IN?
Our universe provides many opportunities to find these types of companies. One good example is WD-40, founded in California in 1953. It supplies the eponymous line of lubricants, degreasers and rust removal products. But even though WD-40 produces what might be deemed a commodity chemical, its powerful brand enables the company to achieve gross margins of 55% and EBITDA of over 20% (21% in 2019)1.
We have also been finding new companies in which to invest during the lockdown. These include Games Workshop, which sells Warhammer, an incredibly popular tabletop board game with a medieval fantasy theme that simulates battles between armies from different factions. Revenue and profits were already growing strongly prior to the pandemic and sales have further benefited as people stay at home and look for new hobbies to pass the time2. The Nottingham-based group derives three-quarters of its revenue from outside the UK and overseas sales are likely to grow further as the company expands into the US and Asia. We were unable to visit the company during lockdown but met virtually with management – and it’s a company our UK team knows well.
LEVERAGING COLUMBIA THREADNEEDLE’S DEEP POOL OF RESOURCES
We have a universe of more than four-and-a-half thousand stocks to choose from, but fortunately I can draw on the expertise of Columbia Threadneedle’s regional small cap teams, as well as the broader global research capability, to help source ideas for the global small cap equity strategy. They follow the same investment philosophy, so I am able to leverage their best ideas to create almost a best of the best portfolio of ideas in the global small cap equity strategy.
As an example, we collaborate closely with our colleagues in the United States. We have for instance, recently added Shift4 Payments, a leader in restaurant and hospitality payments, to the portfolio following research conducted by our payments analyst on the other side of the Atlantic.
So, while the coronavirus has had a dramatic impact on everybody’s working lives, the fundamentals of investment management remain unchanged. We are sticking to the investment philosophy and processes that have served our investors well in the past while exploiting the opportunities offered by new ways of working.