The concept of “buy and hold” investing – whereby managers aim to find superior companies and hold them over the long term – has been wrongly favoured by many investors over recent years, according to Argonaut’s Barry Norris (pictured). 
The FE Alpha Manager, who heads up three pan-European growth funds and one pan-European absolute return equity fund, said it is important for managers to be able to change their investment cases abruptly if necessary, rather than ride out long periods of underperformance and hope for the best.
This is despite the fact many well-known managers in the industry – such as Nick Train, Terry Smith and Sebastian Lyon – will hold a majority of stocks in their portfolios for at least several years. In fact, Lyon, who heads up the £4.4bn Trojan fund, has held 13 of the top 15 stocks in his portfolio for at least five years and a further four for over 10.
“It seems to have become more consensual in recent times that there exists a single superior buy-and-hold process of stock market investing to which all fund managers should aspire involving identifying companies with superior qualities; investing in those companies and holding onto the stock forever with blind loyalty,” Norris said. “We have never believed in one-decision stocks that you can buy and tuck away forever.”
One of the reasons for this, according to the CIO and CEO of Argonaut, is that quality investing doesn’t always lead to stronger returns. Instead, he believes outperformance is primarily driven by corporate earnings or potential surprises on the trajectory of company profits.
“Our suspicion is that higher quality companies perform best in overall anaemic growth environments in which profit growth for average companies is difficult and where a low interest rate environment supports higher multiples for long duration assets,” Norris said.
“This accounts for the outsized returns from the quality style since the great financial crisis and the unnatural degree of its current popularity.”
Performance of indices since 2009
Source: FE Analytics
Aside from this, the manager argued that a company’s attributes will change over time regardless of how superior they look relative to other firms at entry point.
He said it is “axiomatic” that companies will change and warned there will always be a number of drivers including the erosion of competitive advantage and the fluidity of demand tailwinds.
“To us the notion of a ‘forever’ investment is bunk: our job is to notice when the facts change and to be prepared to sell winners and certainly never fall in love with our stocks,” he added.
In fact, Norris said there have been times in his investment career in which he has shorted positions which were previous favourites.
While he admitted this can be “highly contentious, emotionally difficult and fraught with reputational risk”, the CEO believes it is a manager’s duty to be able to make such judgment calls for their clients.
Within his FP Argonaut Absolute Return fund for instance, he sold out of former favourites – turbine manufacturers Vestas and Siemens Gamesa – earlier this year and instead built up significant short positions within the portfolio, due to a combination of stock-specific and broader macro concerns.
Norris said the multi-year wind turbine industry earnings upgrade cycle was broken by a profit warning by Siemens Gamesa in July this year.
The warning came as it revealed the Indian market, which had accounted for up to a quarter of the group’s profits, had ground to a halt owing to a change in the tendering process for new projects, he said.
“This got us thinking about Vestas,” he said. “The stock was barely changed after the first Siemens Gamesa warning owing to its zero exposure to the Indian market and analyst views that the problems were likely stock-specific. But was this really the case?
“And even if, as was generally agreed, Vestas was the higher quality company, would its own profitability be dragged down by weaker competitors like Siemens Gamesa who might be tempted to start a price war on turbines to fill their factories as they coped with the air pocket in demand caused by the Indian market?
“Moreover, although Vestas had no exposure to India, it derived around 30 per cent of its revenues from the German market where we learnt that changes in wind auctions would likely result in a significant downturn in installations over the next two years.”
Despite Norris’s broader investment case concerns and his decision to short, he said every sell-side analyst he spoke to regarding Vestas continued to believe Siemens Gamesa’s problems were stock-specific.
However, the manager said the stocks were further harmed by US president Donald Trump’s proposal to immediately abolish the tax relief which wind developers receive, despite initially agreeing to roll out the changes over four years.
In addition, Vestas’ report – which was released earlier this month – said it expected shares to fall 15 per cent in Copenhagen and noted “accelerated competition and decreasing profitability” in the market area.
“Are there any wider implications of our successful 180-degrees pivot on Vestas? Most obviously the necessity to keep an open mind to the facts changing on any investment no matter how previously lucrative the trade,” Norris reasoned.
“More importantly, the necessity to carry out our own research, think independently and not be reliant on the opinions of third parties no matter how ‘expert’ they might seem.
“Moreover, a good investment idea – which is a stock thesis with asymmetrical risk reward – requires conviction and capital, without which it is simply another lost opportunity.”
The manager said it is vital to keep conducting in-depth research across both existing and potential single-stock positions across European markets.
While he said this won’t guarantee success across every holding, he pointed out that a consistent focus on generating alpha from short and long positions is statistically enough to generate lowly-correlated returns for investors.
Norris said he had recently attended a ‘quant’ investment conference where it had been suggested that fundamental investors, like his firm, were doomed if they did not buy data sets from quant companies “that would give enlightened managers the necessary edge to compete and survive”.
“These snake oil salesmen could not envisage a world where it was possible for anyone other than sector specialists with access to proprietary data to generate alpha.
“Our lucrative wind turbine investment pivot is a stark example that alpha generation does not require access to proprietary data and that industry experts and sector specialists often completely fail to see the wood from the trees in the handful of companies that they follow.”
He added: “In normal markets which reward stock pickers, it continues to be perfectly possible for generalist fund managers who do their own research, spot opportunities and ask pertinent questions to thrive.”
FP Argonaut Absolute Return aims to provide positive returns in sterling terms over rolling three-year periods.
The fund – which has no specified benchmark – has returned 4.78 per cent over the last three years.
Performance of fund over 3yrs
Source: FE Analytics
As can be seen from the above graph, however, investors should note that it has experienced significant levels of volatility. Over this time frame, it has recorded annualised volatility of 12.74 per cent and a maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) of 28.32 per cent. This can be attributed to a torrid 2016, in which the fund finished the year down 25.63 per cent.
FP Argonaut Absolute Return has a clean ongoing charge figure (OCF) of 1.02 per cent.