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| Economic Crisis Investor Interview Q&A with Mark Sheppard, Chairman of M & L Capital Management Given the current shocks within the financial markets recently, what are the biggest short to medium term challenges now for Manchester & London Investment Trust and your clients? The global lock-down provides a unique challenge for Fund Managers. Recessions often see sales down 5 per cent or so, not 80 per cent like we are seeing now! Most SMEs live "hand to mouth" and have very restricted working capital that can last weeks rather than months. Yes governments have announced many measures but do you know anyone who has got that cash yet? If the mechanism of distributing such cash is through the Hight Street banking network then we are deeply concerned that will fail. The High Street banking network is disorganised, inefficient and runs on legacy IT systems. They simply cannot process this aid quickly enough. Thankfully we came into this event with significant hedges in place and our portfolio is Tech Focused, which has materially outperformed in this period. However, we are not taking anything for granted, few businesses or strategy will be completely immune if disruptions extend for a long time. Given your analysis of the industry sectors most heavily impacted by volatility in the market what changes are you making to your investment strategy? We have always been considered somewhat radical in our approach to constructing a portfolio. Many argue that we are too focused which increases portfolio risk. We have often countered that expanding the portfolio into lower quality holdings actually increases risk. So now we have started to mull on a new radical portfolio construction thesis: Focus on stocks that are predominantly virtual in nature and have extremely limited human intervention apart from Intellectual Property generation. So we have cut stocks with too much “human” which means we have disposed of both Disney and LVMH. These are painful cuts because both stocks are of the very highest quality and both have performed superlatively for us BUT through our new filter attached to our Risk Analysis, these two stocks failed. We may well buy them back but we would like to see them at lower levels before doing so. Naturally the bear market trend now has impacted the overall evaluation of most investment portfolios, however for those with available liquidity, do you think there are major and/or niche opportunities now for currently undervalued assets? The operational leverage of high debt, capital intensive, low margin, cyclical businesses have been exposed for what they are: Weak. We are regularly contacted by suggestions that we should now sell the high quality stocks we own that have proven themselves resilient (like Amazon and Microsoft) and we should buy ‘undervalued’ Cruise and Hotel stocks. We do not cut what has worked on the hope that what has not worked may start to work. In a sharp V recovery, we will miss out but that looks unlikely to occur? In terms of Manchester & London Investment Trust market specialisation, what can it offer to new investors given the current market dynamics? We reiterate our view that the key theme in modern day investment is the battle of Supremacy between Man & Machine. Who exactly are we looking to for salvation now? The data models and algorithms of Imperial College, Microsoft Teams, Verily (Google) and Amazon? This black swan event is likely to further accelerate the shift from Man to Machine. For example, we have regularly told Investors that the Cloud will be one of the most exciting areas of growth in the next decade. CEOs who have not implemented 365 in their businesses and hence cannot operate effective home working solutions are likely to be replaced by those that have. Cloud growth will be meteoric for the next few years within the businesses that survive. How do you thing the current crisis and the exposure of the susceptibility of all markets to viral pandemics will change national and regional healthcare and emergency planning policy over the longer-term? The virus and the points we have made about the resultant accelerating adoption of automation and the forthcoming virtualisation of businesses, leave the Human in a disrupted position. Surely an Army Reserve equivalent of the NHS would be a sensible idea. This TA-NHS would recruit people who would train and then work in the Health Services intermittently so that at such times as these (or even every winter when the NHS is overworked) these workers could be productively engaged? Certain key tasks like supervising testing would require little training. Are there other specific issues, challenges or opportunities that you believe investors should be more aware of going forward? Yes everything you previously believed you could rely on, will become disrupted. If you are not changing daily you will fail. The Value Thesis, the Buy and Hold Thesis, the Bricks and Mortar can't go wrong Thesis, all DEAD! Mark has a degree from the Economics department of the University of Exeter Mark is a qualified chartered accountant (Deloitte) and has previously worked at ABN Amro Hoare Govett. M & L Capital Management is an Alternative Investment Fund Management Firm (AIFM) specialising in Intellectual Property rich, fast growth, Global Equities. Their flagship fund is the award winning (CityWire & Investment Week), London Stock Exchange listed, Manchester & London Investment Trust plc, which has been listed on the LSE’s Premium List since 1997. For more details see: www.mlcapman.com |
| The M&L INVESTMENT JOURNEY | The shift from Man to Machine The Industrial Revolution started in the North of England in the early 1800’s where the first step was taken by the Machine in its long trek to gain supremacy over Man. Further chapters of progression have included the automated factory, telecommunications, computers, mobile computers, advanced sensors, robotics and software. At each step Man has reaped the rewards of productivity gains whilst the Machine has gained power. |
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| The returns of stock market indices focused on technology have outperformed the traditional equity markets in each discrete decade performance. This has not happened by accident as companies that invest in R&D build competitive strengths that lead to superior operating margins, dominant return on invested capital ratios and excessive cash flow. Once software is built its marginal cost on incremental sale is extremely low which makes its marginal profit extraordinarily high. Combine this software with the platform/network effect and such companies can drive an exponential growth in returns. The superiority of these exponential financial metrics are underestimated by many market commentators who misunderstand how quickly the growth of such companies can generate excess economic value and market dominance. |
| Today we approach the position where the Machine is usurping and disrupting the dominance of Man. Many may not like this Brave New World but history has shown that hindering the tide of progress is pointless and economically destructive. Join our journey and accept and harness the great economic gains of the continuing empowerment of the Machine. |
| 25th - 27th November 2020 | Carlo IV Hotel Prague | Czech Republic |