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Economic Crisis Investor Interview

Q&A with Mark Sheppard, Chairman of M & L Capital

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

Are there other specific issues, challenges or opportunities
that you believe investors should be more aware of going

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
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.

Join the EMEA Investor & Economic Forum Market Intelligence
& Event Community
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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
Next Planned Live Forum Edition: 2022 - 2023 | EUROPE | EMEA