Knowing what to sell from a portfolio can be more important that picking up new companies and the events of the past year have highlighted this for FE Alpha Manager Keith Ashworth-Lord. 
Investors have just emerging from a torrid year thanks to global trade tensions, tighter monetary policy, lacklustre economic growth and Brexit.
The FTSE All Share lost 9.47 per cent (in total return terms) while the average IA UK All Companies member was down 11.19 per cent. Only three funds in the peer group avoided a loss and one of them was Ashworth-Lord’s CFP SDL UK Buffettology fund, which was up by 0.37 per cent.
Performance of fund vs sector and index in 2018
Source: FE Analytics
“Last year was the hardest year,” the manager said. “All asset classes suffered and it’s been very difficult to grind it out.”
Ashworth-Lord typically loses two companies a year from his portfolio (often through a takeover) and replaces them with two new holdings. Last year, he sold four and added four.
“In all four sales, the stocks are now lower than they were when I sold. If I hadn’t have done that, we would have been negative in 2018,” he said.
“It proves that protecting the downside is every bit as important as discovering your upside. In my opinion, preservation of capital is the most important thing in this business.”
CFP SDL UK Buffettology sold funeral firm Dignity in January after the company was forced to lower prices to compete with cheaper rivals.
“This was the biggest disaster we ever had in the fund as it lost half of our money in a very short space of time,” the manager said. “We lost a lot of money in January on that one.”
Wealth management and employee benefit services Mattioli Woods was sold in January and March on the back of deteriorating financial performance, leaving the fund with “a very tidy profit”.
The next disposal was Domino’s Pizza.
“There’s about a dozen amber flashing warning lights over operational things, people issues and whole host of issues. I was very concerned and just thought there was too much risk,” Ashworth-Lord said.
“It’s not the business it once was – it’s more capital intensive, the returns are weaker, cash generation is poorer and there was been too many changes of finance director.”
Last year’s final disposal was Dixons Carphone as the manager believes that the world has moved past “peak smartphones” and the group will find it harder to grow.
Performance of Dignity in 2018
Source: FE Analytics
These four sales were replaced with music and audio products group Focusrite, specialist lender Provident Financial (having previously being sold ahead of its much-covered troubles), Warren Buffett’s investment firm Berkshire Hathaway and consumer credit reporting agency Experian.
“There are two reasons why I would sell a holding,” Ashworth-Lord explained.
“Firstly, something has changed with the business and isn’t going to get better any time soon. That could be anything: it could be management, industry development, regulatory pressures, technological disruption.”
He said last year’s sale of Dignity is a good example of this. Price comparison websites were never a problem for the funeral industry and firms had strong pricing power; however, the ability for consumers to easily shop around for better deals online started to hurt the company.
“An announcement that Dignity was cutting prices on no-frills funerals came out at 7:00 in the morning and by 8:30 I’d decided that this had driven a coach and horses through the business model in the short-to-medium term,” the manager said. “By 12:30 we’d sold the lot and we got back about half our money. I took a hell of a bath on that but it was right to cut losses there.”
The second sell discipline of Ashworth-Lord kicks in if he has done something wrong and realises his original investment case is not valid.
An example would be his brief ownership of Tesco in 2014. The supermarket was added to the portfolio when it said it would sell peripheral overseas businesses and work its existing UK assets harder.
The manager saw this as the ‘hockey stick’ moment, when the return on capital would start to rise, but within three months it put out a trading statement that essentially admitted it needed to compete more with discounters and would have to cut its prices.
“I saw that and thought ‘that’s not what I thought would happen’. We didn’t take too much of a hammering on that but I had got it completely wrong,” he added. “From this I learnt to never anticipate that ‘hockey stick’ moment and to wait to see it start to turn around. You might lose 10 per cent of the upside but your investment case will be confirmed.”
On the other side of the coin, Ashworth-Lord isn’t too quick to book a profit from successful holdings and prefers to run his winners. He said 12 of the 20 companies that were bought in the fund’s first few months can still be found in the portfolio.
“There are so few great companies out there that once you’ve got one, just keep it,” he said.
Performance of fund vs sector and index since launch
Source: FE Analytics
Since launch in March 2011, the £562.5m CFP SDL UK Buffettology fund has made a 200.90 per cent total return, outpacing the FTSE All Share and making it the best-performing member of the IA UK All Companies sector.
The FE Invest team has the fund on its Approved List and said: “We have been impressed by the disciplined approach taken by the investment team. Ashworth-Lord has strong investment disciplines and will stick to them.”
The fund has an ongoing charges figure (OCF) of 1.23 per cent.