When nothing is sure, everything is possible
A message from our Chief Executive
To all of our clients,
I hope that you, your families, friends and colleagues are all safe and well.
This has been a particularly difficult few weeks for us all, as we have grappled with new ways of living and working, faced rising anxiety for our friends and loved ones, and come to terms with missing family, holidays and celebrations. One member of our team quite accurately described this as a “pandemic of grief and disappointment” and no-one has escaped its impact.
I am sure the headlines about financial markets will have given many of you cause for concern too. Positioned as they are for long-term growth, while portfolios have held up well compared to world equity markets, they have not avoided the recent volatility completely. I therefore want to take this opportunity to thank all of you for sticking with us through these challenging times. Thank you for your loyalty and for the confidence you have shown in the team, both over the last few weeks and throughout the history of Veritas. It is truly appreciated.
We can all speculate about the change this crisis will bring to our everyday lives. As stories of ‘Clap for Carers’ demonstrate, this crisis has brought out the best in many people. There is a growing sense of purpose as we come together to support the more vulnerable in our communities and fight a common enemy. It has also brought out the best in the Veritas team and I would like to thank everyone, across both our offices, for their hard work, dedication and adaptability during this time.
We all look forward to seeing you again soon but in the meantime, I hope you enjoy reading the following update from the Investment Team.Mark Rayward
Sticking with what we know
Once the current travel restrictions are lifted, Aachen Cathedral in Germany is expecting a lot of visitors. It’s hosting an exhibition on gold craftmanship this summer and decided a while ago to include the shrine to St. Corona (who, depending on which website you read, may or may not be the patron saint of lumberjacks and resisting epidemics). This decision must be down to one of two things: it is either an amazing coincidence or someone there has a very accurate crystal ball.
When nothing is sure, everything is possible1
If it is the latter, they would do well to share their insights with world leaders. Despite numerous warnings of the chaos a global pandemic could bring, including from Bill Gates and the World Economic Forum2, most governments have struggled to keep up with events. At a recent virtual conference, the Vice Chairman of BlackRock described the crisis, not as a black swan event, but as a “grey rhino”: everyone knew this was possible but did nothing to prepare.
Meanwhile debate is raging about the long-term impacts. Will the huge rescue packages from governments3 be enough? Will they lead to inflation? Or deflation? Will there be a debt-fuelled crisis? Or will loans be written off? Will there be tax rises to pay for it all? Add to the mix the pre-existing political and economic issues (e.g. the US-China trade wars, Brexit negotiations, the build-up to the US Presidential election, tensions in the Middle East) and the outlook becomes very unclear indeed.
Sticking with what we know
We have no crystal ball at Veritas. We have never focused on timing markets or making economic predictions – these are impossible tasks, and this is certainly not the time to start trying. We cannot tell you how this crisis will end, but we can tell you what we’ve been doing to protect and grow your capital over the long term. We’ve kept things simple and stuck to our investment philosophy and process. This means investing in companies which will benefit from long-term structural trends, such as the rise of the online world, changing demographics and increasing regulation, regardless of what’s happening at the macroeconomic level. Because of this our exposure to more cyclical sectors such as mining and banking, which have fared worst during this market upheaval, is limited.
Although we didn’t see this particular grey rhino coming, we were ready for it because we use the good times to prepare for the downturns. Before we buy a single share, our companies are strictly judged for certain characteristics: strong balance sheets, resilient business models and a culture which focuses on long-term sustainability.
Balance sheet strength is one of the first things we look for during our research process but it’s also something we check time and time again. Eleven companies widely held across portfolios are net cash (i.e. they have more cash than debt) and most other companies held could pay off their debt in just a few years without cutting capital expenditure4. For some companies, times like these can be a golden opportunity to prepare for the future: materials company Avery Dennison says its aim is to have the resources to “lean in” and invest whilst others have to pull back. After all, history has shown that in times of crisis, the strong usually get stronger.
Having resilient business models doesn’t mean companies will avoid difficult times completely, but it does mean they should be well-placed to weather the storm. With operations in China, Amphenol, which makes sensors and connectors for electronic products, has not been immune to the impact of coronavirus. But with manufacturing facilities around the world, amazing cost control and multiple trends fuelling demand for its products, we believe the company will deliver long-term growth even if the share price wobbles. The emphasis on local autonomy means each business has the freedom and flexibility to adapt to the situation as needed, so many of its operations in China are now back up and running, and there have been no cases of coronavirus at any of its sites.
Culture may be the most difficult of the characteristics to measure but in a crisis, it becomes even more relevant. How someone behaves when the chips are down gives a very good picture of who they really are. As well as supporting all employees affected by site closures, toy manufacturer Hasbro is donating toys to 200 Save the Children sites in the US and is contributing to the “No Kid Hungry” scheme which is replacing free school meals during the crisis5. Unilever has committed €100 million to help stop the spread of coronavirus by donating soap, sanitiser, bleach and food to organisations around the world. The company is also protecting its small suppliers by offering early payment6. While this demonstrates a strong commitment to doing the right thing, it also shows which management teams plan for the future.
Test, test, test
This refrain may have become the mantra of the World Health Organisation over recent weeks but it is something we have believed in for years. We have spent considerable time stress-testing valuations for our companies both old and new, imagining worst-case scenarios and what these could do to the balance sheet and share price. This means that when the downturns come, we can use them as an opportunity to buy new positions and add to existing holdings where we have strong, long-term conviction.
This is exactly what we have been doing over the last few weeks, buying small positions in new companies Tractor Supply and ADP where appropriate, and topping up positions in Hasbro and Amphenol amongst others.
Wherever there is uncertainty, there is opportunity7
At the same time, changes to the way we live and work have opened up opportunities for some companies. Loon, a subsidiary of Alphabet, has a creative solution in the form of internet balloons. These provide data services to remote areas, greatly improving communication infrastructure which many argue is crucial in the fight against coronavirus. The Kenyan Government has recently placed a large order8.
Consultancy firm Accenture came to the rescue of many clients by helping them to set up remote working technology. Once the worst of the crisis is over and long-term business continuity plans are reviewed, Accenture’s expertise is likely to be in demand again. Thermo Fisher Scientific’s reputation for excellence is also paying dividends. Its own plans to protect employees, buildings and supply chains are so robust that the company features in continuity plans for many of its customers who trust that Thermo will be able to keep things up and running, even if they can’t themselves.
Some longer-term trends have accelerated, especially as we’ve become increasingly reliant on technology to keep us connected to the outside world. As China and the EU pledge to use the coronavirus crisis as a prompt to increase spending on clean energy and electrification, semiconductor companies, such as Infineon Technologies, should get a healthy boost to long-term demand.
With its share price already up more than 25% over the last 12 months, Microsoft stands to be another big winner. Who hasn’t relied on at least one of its applications in the last few weeks? And companies are increasingly making use of its full suite of products: the number of daily users of Microsoft Teams jumped from 20 million to 44 million in a matter of weeks9.
Still sitting around one table
A very small fraction of the increase in Teams use is down to Veritas. While it hasn’t quite been business as usual, technology has certainly got us close to that point. Thanks to quick thinking and a lot of hard work from our Operations and IT teams, the entire company was relocated to 50+ home offices, dining tables and bedroom dressers across the UK and Switzerland by the time the government’s movement restrictions came in.
We are a small, close-knit team and our culture of curiosity, openness and collaboration is central to the way we work. Although we are many miles apart, technology has meant that this culture is still alive and kicking. Our daily investment meetings have taken place as usual: debates have been as lively and informative as ever, meaning we can continue to exercise good judgement and make sound decisions for our clients. Plus, a slightly shaky rendition of “Happy Birthday” and the chance to peek inside colleagues’ houses have provided some much-needed entertainment!
No one knows how long the current situation will last nor what the longer-term impacts will be. But no matter the duration or the outcome, we will stay focused on doing what we do best: protecting and growing our clients’ assets to ensure they meet their long-term inflation plus targets. With perhaps just the odd break to google flights to Aachen.
1. Margaret Drabble, English author
2. Event 201 http://www.centerforhealthsecurity.org/event201/
3. At the time of writing, the UK and German Governments have announced measures equivalent to 15% and 17% of GDP respectively while the US has approved an initial $2.2 trillion package
4. Veritas Investment Management, HOLT
5. https://www.cnbc.com/video/2020/03/23/watch-cnbcs-full-interview- with-hasbro-ceo-brian-goldner.html
7. Mark Cuban, American entrepreneur