Chapter 1: What is the background of the Temple Bar Investment Trust?
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Welcome to Merrin Talks Money, the podcast in which people who know the markets explain the markets. I am Merrin Somerset Webb, and this week I am speaking with Ian Lance, who is a manager at Temple Bar Investment Trust. Ian, welcome to Merrin Talks Money.
Thank you, Merrin.
Right. We have a lot to talk about. It's been exciting times for you, right? This year is the 100th anniversary of the Temple Bar Investment Trust, right?
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Chapter 2: How has the Temple Bar Investment Trust performed since 2020?
I think the top 10 is around 50% of the portfolio. Yeah.
Yeah, so this is very focused. So when you find a bargain, you really go for it.
We do, although actually you might be surprised to find that actually sometimes we put 3% or so into the portfolio. But I think the important thing is letting it run. So basically not being too quick to take your profits on things. I mean, I keep going back to the banks. The banks would be a fantastic example of that. you would have had lots of opportunities to have sold banks as they went up.
And by and large, we just kind of let them run, let them run. And of course, then they end up becoming a sort of 5%, 6% type position.
OK, so what makes a stock a good value stock as opposed to a value trap? I mean, it's a standard question, right? There's a lot of stuff that looks very cheap, but in fact, maybe it's got an awful lot of debt or it is obvious to you that its profits may remain low indefinitely, etc. How are we distinguishing between a great value buy and a value trap?
Unfortunately, buying value traps is almost an occupational hazard. If you spend your entire time saying, I'm going to avoid companies that I think might be a value trap, then you are going to miss the ones that actually aren't, the ones which actually, it turns out that the market has just overreacted in the downturn in earnings.
But by and large, we do stay away from companies with too much debt. And I think that's, you know, myself and Nick have been running for 30 years. When we look back at the things that have gone the worst for us, often it's just companies with weak balance sheets because when things went down, they didn't have the ability to basically stay the course.
So you've got to buy something with a decent balance sheet. And then we do try to buy things where we think, that the earnings can be higher on a five-year basis. And we're not always going to be right about that, but it is our starting point. So we're not just buying cheap rubbish. We are buying things which we think have suffered temporary dislocation.
That might be because of something in the company that's done wrong. It might be because of an economic downturn. It might be because of the business cycle or commodity cycle or something like that, but where we can see some sort of route to the earnings recovering in the future.
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Chapter 3: What is the philosophy behind value investing?
The valuation is absolutely crazy. The share price today, I suppose, is about Ā£2.70, something like that. They are forecast to be 50p of earnings.
But that rather reflects lack of confidence in the management team being able to amalgamate things in the way you've just been talking about.
It absolutely does, which, funnily enough, we like, actually. So the market is giving new management 0% probability of improving things. We would say if they could just stabilise earnings at 50p, what do you put that on, 10 times or something? That would be a five quid share price from kind of Ā£2.60 today. And actually, we think that they can do better than just stabilise the earnings.
So at the moment, the market doesn't agree with us. So we will see.
You don't want the market to agree with you for a while, right?
Well, not yet. Not yet. No, but eventually.
Yeah. Let me ask you about another one on the top 10 before we move on to different things. GSK, you've got there at number five. Yep. That seems to keep coming up when I talk to fund managers and listen to Doc Picker speak. GSK is very popular at the moment.
Yeah, although funnily enough, actually, I wouldn't say that there was a ā that's not really a sort of recovery story. I think that it's just a situation where within healthcare, the market just became very, very negative on healthcare companies. And actually, you know, these are reasonably good companies.
They're not uber-growth companies, but, you know, they can normally knock out sort of 5% or so earnings growth. And that's absolutely the case with GSK. Their record in terms of new drug discovery has not been fantastic over the last few years. But, you know, there are some very good businesses within the company. And yet it just got down to a very, very low multiple.
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Chapter 4: How do you identify undervalued stocks?
Nike, the share price has gone from $180 to $40. At $180, it was doing $4 of earnings. So people were paying 40 times earnings for Nike just ahead of a period in which the earnings went from $4 to $1.50. So, and, you know, that is a fantastic example, isn't it, of where both of those bits went wrong.
So, in other words, the earnings were not as great as you originally thought they were going to be and you were paying too much for those earnings in the first place. You put both of those things together and you just get this horrific, you know, combination of derating on lower earnings. That's the story across lots and lots of these.
Another example, Starbucks earnings has gone from $350 to $230. People are still paying 40 times earnings for that. There are examples in the UK, Reckitts. Reckitts did 320 of earnings back in 2018. They're forecast to do three this year.
So again, you know, the earnings for a lot of these things have just not been nearly as good as maybe people anticipated and you paid the wrong price at the start.
I mean, that doesn't necessarily tell you that you shouldn't look for high quality companies that you think will grow fast. It just tells you that it's very risky to overpay for them. I mean, the message is very simple.
Yeah, it is. And actually coming back to this point about the fact that we rotate around the market to where the value is, people often laughed at the fact when we joined RWC, as it was in 2010, we owned Microsoft. We were value investors when Microsoft. Why?
Because in 2010, all the tech guys would tell you that Microsoft was basically, it was like old technology was going to get disrupted by all the new entrants and so on and so forth. Microsoft was trading on eight times earnings back in 2010. It had net cash on the balance sheet. There's a fantastic example, I guess, of what you're talking about.
There you had what you might call a quality stock, but it was available at a really low valuation, which is just, that's your nirvana, isn't it?
Are you seeing any of that now as we move away from the idea that quality growth is it's okay to overpay and there's some of those stocks have done pretty badly or worse than expected. Anyway, is there anything in there that you can now pick up and say this is quality growth and value at the same time?
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Chapter 5: What distinguishes a good value stock from a value trap?
If anything, if they do that, it's going to make the inflation problem worse, not better. And so, yeah, I do find that a bit worrying.
OK, so even you are awake a little at night. OK, so one last question. One last question. Ian, what are you reading at the moment?
I have just finished Lionel Barber's biography about Son, Myoshi Son. And I have just started Jeremy Grantham's book, The Diary of a Perma Bear.
Oh, have you? The new one. We had him on the podcast, you know. Did you listen to that?
I did indeed, yeah. I almost don't need to read the book, actually.
Yeah, and I saw him again the other night. I mean, he's just so interesting, so interesting. And Lionel's book is great too. Strong recommendations. Thank you, Ian.
Those are both good books. What I tend to do is I have a list of books at Christmas time. My family just buy me investing books, and then I basically spend the rest of the year reading them.
They're my investment books in the odd pair of socks, and that's that.
Exactly. Yeah, exactly right.
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Chapter 6: What sectors have performed well for value investors recently?
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