'Rightmove can't be displaced': Buffettology manager on moving past a difficult year

UK equity market performance has attracted plenty of criticism in recent years, but as ever it depends where you look. Large caps and some unloved sectors – especially energy – have seen a resurgence at points, while small caps and quality growth shares have had a more difficult time in the face of rising rates.

This general trend can also be observed in the funds space. We recently noted that many UK funds with a value investing remit had shot the lights out in 2023, from Ninety One UK Special Situations (GB0033063636) to Artemis UK Select (GB00B2PLJG05) and the likes of Aurora (ARR) among investment trusts. By contrast, some of the funds known for backing companies with good structural growth stories have fallen out of bed.

One such struggler is the CFP SDL UK Buffettology Fund (GB00BF0LDZ31), which targets growth plays across the market cap spectrum. It once led many of its peers in performance terms, but has since run into tougher times. Having benefited from the fierce rally that marked the final quarter of last year, the fund made a modest 1.1 per cent total return in 2023, compared with a 7.4 per cent gain for the average fund in the Investment Association's UK All Companies sector and a 7.9 per cent return from the FTSE All-Share. The bear market (and growth sell-off) of 2022 had already seen the fund lose 23.4 per cent the previous year.

Keith Ashworth-Lord, who runs the fund, is candid about Buffettology's struggles, but broadly upbeat on his portfolio holdings and their fundamentals. He describes 2022 as a "rotten year", for example, but puts this down to deratings, saying "it was nothing to do with operating performance" among the companies he holds.

Last year arguably proved tougher in some respects, with Ashworth-Lord describing it as "the year of the earnings downgrade". The Buffettology fund certainly saw some bad news from its holdings. "We have seen some profit warnings," Ashworth-Lord says. "Most surprising to me were Diageo (DGE) and Croda International (CRDA). When hard liquor sales struggle, we know it's bad. It's tough out there and very challenging for companies."

Other holdings have had their own travails. A fund report from Ashworth-Lord covering 2023 describes Team 17 (TM17), which issued a profit warning and whose shares shed nearly 60 per cent last year, as the "largest disappointment" in the portfolio.

Quartix Technologies (QTX), another position, meanwhile, lost around 50 per cent, mostly in late November after a profit warning of its own, thanks to "disappointing progress in the UK and the US and a very poor acquisition overseen by the since departed chief executive". 

However there are some positives to hold onto. Ashworth-Lord noted of Team 17, for example, that sales for calendar 2023 were anticipated to be ahead of expectations despite tough market conditions, "underscoring the company's adeptness in identifying successful games and the benefits of its portfolio model".

"The primary issue has been management failure to control costs and implement appropriate checks and balances in a business that has grown quickly in recent years. This is something we believe is fixable," he added.

In the case of Quartix, he sees the return of company founder and 22 per cent shareholder Andy Walters as executive chairman as a big positive. But there are other problems in the portfolio, too, with Ashworth-Lord arguing that fund house Liontrust (LIO) needs 2024 to be "a year of rebuilding credibility".

The hope is that 2024 will also bring better things for the fund itself. Ashworth-Lord has himself argued that the team got "back on the front foot" in 2023, thanks to the fact that nervy markets allowed them to initiate five new portfolio positions.

The new positions

UK equity star manager Nick Train turned heads last year when he initiated a position in online property portal company Rightmove (RMV). Rightmove had seen its shares slide on the back of the news that OnTheMarket (OTMP) was to be taken over by US property giant CoStar (US:CSGP), with the intention of disrupting the market.

Train was not alone in this move, Rightmove being one of five positions initiated by the Buffettology team last year. As Ashworth-Lord puts it: "It has network effects: if you are an estate agent you have to be on it. It's not so reliant on the housing market, but we always thought it was too expensive."

Ashworth-Lord remains sanguine about the prospect of Rightmove getting dethroned by rivals. "It has seen off Zoopla," he notes. "We saw Google try it and couldn't do it. Rightmove can't be displaced."

The team has also moved into another market darling by buying Next (NXT). "We reentered Next in March, which [fell 10 per cent] when the chairman struck a note of caution and said the medium-term growth prospects aren't the best they have been," he says. A series of profit upgrades followed, boosting the shares last year.

This particular purchase is a notable one, given that a decision to call time on positions in consumer-facing businesses in the middle of the pandemic had seen the team previously sell out of Next in 2020.

"The decision to take Next out of the fund was a bit of a knee jerk," Ashworth-Lord admits. "I regretted selling it almost from day one and felt if I got the opportunity to go back in I would." He argues that the company has become stronger in recent years, from expanding its online business to buying Joules and Made.com assets on the cheap.

The team also reentered International Personal Finance (IPF), the credit provider. "We sold it in 2016 on regulatory concerns," the manager notes. "It has changed and become a digital business since then; it's not selling door to door." Two other additions to the portfolio came in the form of steam management systems manufacturer Spirax-Sarco Engineering (SPX) and telecoms testing company Spirent Communications (SPT). 

Ashworth-Lord has followed Spirax-Sarco since the late 1990s. "I always wanted it in the fund but it didn't seem cheap enough," he says. "It does have ebbs and flows, but it's not hugely cyclical."

Spirent, however, has had more ups and downs, including several profit warnings in 2023. Ashworth-Lord notes that this investment has been a "slow build" – in contrast to his usual approach of quickly establishing an entire position – in part because the company can be more cyclical than some others.

The team also exited one position in 2023: Darktrace (DARK). Ashworth-Lord says that the team became uncomfortable with corporate governance – in particular the use of what he describes as aggressive marketing practices.

The big names

The manager remains upbeat on Games Workshop (GAW), the holding probably most closely associated with the fund, noting in a recent update that it "again delivered with better-than-expected trading driven by growth across all channels". The company has also confirmed an agreement with Amazon (US:AMZN) to develop its Warhammer 40,000 universe for films and television.

The fund's second-biggest holding at the end of 2023, Dechra Pharmaceuticals (DPH), has this week delisted as a result of a takeover. Ashworth-Lord says it is "sad to see another great business soon to be lost from the public market", even though the deal did mean a strong share price gain in 2023.

Elsewhere, the fund sticks with some well-known market darlings, from Relx (REL) in the UK to Warren Buffett's own Berkshire Hathaway (US:BRK.B), one of the fund's two overseas holdings alongside pest control company Rollins (US:ROL). Turning to other holdings, Ashworth-Lord argues that London Stock Exchange (LSEG) has started "to prove its doubters wrong over the 2021 deal to buy Refinitiv" in 2023.

Others have come off the boil: MJ Gleeson (GLE) was among the fund's top performers in 2023 but did see its shares slump in January after the housebuilder warned that its performance from last year had not hit expectations. Sales dropped by 14 per cent, with gross margins falling below expectations.

Liontrust, once the fund's second-largest holding, is also a problem case, as per the team's comments about it needing to restore credibility in 2024 after a botched attempt at buying beleaguered asset manager Gam. Liontrust no longer sits in the fund's top 10 list thanks to a plunge in its share price and some paring of the business – although Ashworth-Lord stresses that divestment is related to liquidity management rather than concerns about Gam; the sales were to raise cash and accommodate any potential outflows from the Buffettology fund.

"When we got below [a stake of] 5 per cent it was seen as a Gam thing, but it couldn't be further from the truth," he says. "We have been selling it down steadily to keep the liquidity." However, he adds: "I was lukewarm about Gam: it was just buying assets on the cheap, is my take. I told them that the execution risk on this deal scares me." He said recently that the company could be vulnerable to takeover attempts if the situation didn't improve.

The manager speculates that other names in the portfolio could also be vulnerable on this front. "We have got Hargreaves Lansdown (HL.), which I think could be a takeover target to someone from the US," he says. "All we have seen in the last six years at HL is a deterioration of what was a very good business and lots of cost put in. Hargreaves to me at this price is a sitting duck." 

However, he praises the appointment of non-executive Adrian Collins, who served as executive chairman at Liontrust. With much bad news being priced in for plenty of the fund's holdings, Ashworth-Lord and investors will hope for a turn in fortunes this year.