Sanford DeLand’s Buffettology fund has become a renowned name among UK investors after making 246.2% since launch in 2011 and soaring ahead of the IA UK All Companies sector by 146.5 percentage points.
However, the £1.3bn portfolio has not been unharmed by the shift in sentiment away from growth, with returns dropping 13.4% over the past year.
Most growth funds that thrived from the abundance of free cash over the past decade have struggled in recent months as high inflation has driven value investing into favour, but Buffettology’s manager, Keith Ashworth-Lord is not concerned, stating “when you tend to look back on things, it's just like a little blip on a chart so I don't worry about it”.
Total return of fund since launch
Source: FE Analytics
He admitted that it has been a “very painful” few months for the fund, but Ashworth-Lord was confident that the rigorous standards a company has to display before he invests means that his assets are robust against market movements.
The criteria is so strict that he has been unable to find enough companies to exceed the 35 holdings cap even if he wanted to – it has 31 at present.
He said: “The problem is that we just cannot find enough great businesses because they don’t exist.”
Ashworth-Lord noted that the current bias towards value stocks was a short-term fad, predicting a massive resurgence in growth assets when markets become less volatile.
He added: “It feels to me like tension in a coil - it’s being tightened and there’s no reflection of that in the share value, in fact its quite the opposite despite performance improving.
“The coil is being tightened and the longer that goes on I think the bigger the bounce back will be.”
Although this bounce-back will rapidly push up the share price of growth stocks, not all of these companies will survive, he said.
He anticipates that many businesses without purchasing power will crumble under the pressure of the coming months.
With weaker business plans swept away by economic pressures, stronger business models could remain robust and snap up market share when things stabilise.
Ashworth-Lord said that “what you shouldn’t do is add value to the fund for the short-term.”
He added: “It's a fact of life that people seeking short-term performance often do get it but at the expense of the long term.”
Eric Burns, chief analyst at Sanford DeLand agreed and reiterated the importance of not letting market movements sway your investment strategy, adding: “I think shutting out of that noise is an important discipline.”
Many investors and fund managers have increased exposure to defensive assets such as commodities in recent months but Burns said that this is not something the team behind Buffetology and Free Spirit – the firm’s other UK fund – felt necessary.
While “too many people treat investing like buying a casino chip”, Burns added that the team looks beyond the share price to examine whether or not a company is strong.
He said: “We sleep well at night knowing the sort of businesses we invest in are very well equipped to cope with the more difficult backdrop that we're now seeing.
“We would rather own businesses like that than so-called cheap value plays because we think there's a bit of a reckoning coming for businesses like that – it's probably already started.”
Although management has confidence that the fund’s assets will persevere, Ashworth-Lord said that redemptions are his main concern at the moment.
When the team first saw signs of the rotation to value, they knew forced selling could become damaging for the fund so they removed £300m, split evenly across all holdings to create more liquidity.
Redemptions so far have reached just short of £100m, but these early precautions have kept losses low, according to Ashworth-Lord.
He said that this was felt the most when the share price of AB Dynamics, which dropped from around £17 down to almost £10 after a forced seller facing redemtions had to sell their shares in the company en masse.
Having the security of that reserved capital was appreciated at the time, but Ashworth-Lord said that he hoped investors in Buffettology remain confident in the fund’s future prospects, adding: “The only the only thing with running an open-ended fund is that investors patience can be dried, and they might not have the patience that I do.”