Anyone who has been alarmed by the volatility in equities this year should bear in mind that some of the best times to invest in the past have been when markets have resembled the “Wild West”, according to Gabrielle Boyle, manager of the Trojan Global Equity fund.
Boyle started her career on a European equities desk in September 1990, a year after the fall of the Berlin Wall and a month after Iraq invaded Kuwait. Meanwhile, inflation in the UK stood at 9.5% and the average interest rate on mortgages was 10%. Yet she pointed out that despite this challenging backdrop, it would have been a mistake to take an overly defensive stance.
“Europe in those days was like the Wild West – shareholder rights were not top of the agenda,” she said.
“Governments were privatising assets, there were tonnes of IPOs and it was a crazy time. But despite all the currency devaluations and the ERM [Exchange Rate Mechanism] crisis, it was a golden age to invest in European equities: annualised returns were in the high teens. It's a reminder not to get too carried away.”
Performance of index in 1990s
Source: FE Analytics
The manager also pointed out that the high inflation in the UK in 1990 quickly dissipated, to 5.9% in 1991, then 3.7% in 1992 and 1.6% in 1993.
While Boyle wasn’t making a prediction that price increases today would be brought under control just as quickly as they were back then, she said she has been able to apply the lessons she learnt in the turmoil of the early 1990s to the other shocks she has encountered throughout her career – including a second Gulf War, the Long-Term Capital Management bailout, the dotcom bubble and the financial crisis.
“You've got to remember bad things happen,” she continued. “They are happening at the moment.
“We obsess about these exogenous causes and macroeconomic events, which are obviously so important to our lives and valuations and so on. But one of the fascinating things is that you've always had companies that just beaver away doing their thing, delivering great returns, investing in their business, adapting and growing.”
A key characteristic that Boyle looks for in businesses is resilience, which is one of the reasons why she holds three of the 30 best-performing European stocks of the 1990s in her portfolio today: Roche, Heineken and L'Oréal. Even the 1990s was relatively recent in these companies’ history: Roche and Heineken were founded in the 1800s, and while L'Oréal is a relative youngster, launching in 1909, its enduring appeal is evident from the fact its “because you’re worth it” slogan has been a household phrase for more than 50 years.
However, Boyle warned that a company’s history and longevity are no guarantee of future success. She highlighted accountancy software company Sage as an example of a former holding with an impressive track record that has fallen behind competitors such as Intuit.
“We first invested in Sage in 2006, then bought Intuit in 2013, and they were both very good investments for us,” the manager said.
“But while Intuit was really early in embracing the move to a subscription model, Sage always gave excuses. Intuit invested 18% of revenue in R&D over the past 10 years, whereas Sage’s reinvestment rate was much lower.”
Performance of stock over 5yrs
Source: FE Analytics
Boyle said that when she speaks to Intuit today, its focus always seems to be on solving customers’ problems, whereas Sage always appears to be on the backfoot – she pointed out it increased prices in its core mid-market segment at a time when it was facing aggressive competition from Intuit and Xero, “which didn’t work terribly well”.
She has subsequently sold Sage and increased her position in Intuit.
“Not all companies are created equal, and it's quite easy to fall in love with them and get stuck,” Boyle continued.
“The reality is companies need to adapt. We're living in such dramatic, fascinating times. And if they don't have that willingness to change, adapt and reinvest, and potentially move away from something that they've done very successfully in the past, it can be a problem.
“We as investors obviously also need to adapt and not get too set in our ways. To quote Warren Buffett, you need a lot of curiosity for a long time.”
Other managers take a different view on Sage – the company is a top-10 holding in top-rated funds such as Royal London Sustainable Leaders Trust, TB Evenlode Income and Finsbury Growth & Income Trust.
Nick Train, the manager of the latter vehicle, recently pointed out that Sage trades at an enterprise-value-to-revenue multiple of less than half that of Intuit, and less than a third that of Xero.
“Sage is a business that is making progress – it needed to,” Train said. “Sage is not yet in the same league as Intuit or Xero, but it's actually getting closer to those businesses than the extraordinary valuation disparity implies.”