“Words are cheap. The biggest thing you can say is ‘elephant’ “ – Charlie Chaplin
I am sometimes asked why I bother with large capitalisation shares. After all – so the theory goes – they are so large as to be impossible to really understand, additionally they are so picked over by other analyst/fund managers that adding value is tough and, in any case, elephants do not gallop.
Well I do not know about that. Too many years ago to remember the most influential of my former bosses told me that ‘everything – no matter how big or complex – can be analytically boiled down to five bullet points and two charts. The skill of the analyst is to determine just what those five bullet points and two charts are’.
The words still resonate with me nearly two decades after I first heard them. Ironically many of the more interesting investment situations, I have found over the years, are in those larger corporates where because of their size and complexity, real opportunity can be found in simplifying them down to the most critical elements. This is something which a shorter-term sentiment driven financial market is not very good at doing and, in turn, this is why the investment anomalies the Dynamic Opportunities Fund are looking to access do become available even in the billion Pound plus market capitalisation we look for.
Another useful angle is groupthink i.e. the psychological trait that makes it difficult for individuals to speak up against the crowd. We have all been there but in the investment world – with its necessary focus on performance and returns – it can easily crimp decision making. I certainly remember once being told that the required performance of a Fund back then I was managing should be ‘average’. You can see why legions of analysts and fund managers see less risk in consensus decision-making, despite probably knowing that the psychology of the crowd can easily push situations into extremity (either positively or negatively).
And finally, elephants can gallop. To push back on the notion that larger companies do not have the potential to generate attractive returns you just need to pour over the fluctuating share prices in the FTSE-100 or the S&P 500 thanks – primiarly – to some of the matters noted above. In terms of potential and opportunity it is an area we feel very comfortable operating in on behalf of the Dynamic Opportunities Fund.
Finally, some portfolio news. We sold in full – at a handsome profit – our holding in the Italian oil giant ENI. Nearer the start of the year, we had taken the view that not only were energy assets good value, but the uncertainty over the Italian economy and political scene, had made the cash generative and sensibly run ENI business particularly cheap. We recycled most of the monies raised into three existing holdings: Apache, DowDupont and Gilead. All three names have reported their latest corporate insights recently and which – upon analytical reflection – we still see share price appreciation scope…after working out for each of them our five key bullet points and two favourite relevant graphics/charts naturally!