‘Widespread caffeine use explains a lot about the twentieth century’ – Greg Egan

Back to school this week and so time for a little portfolio cleaning…which is the hardest part of investment management by far.  The reason for this is quite clear: because you have to admit that you have been wrong at some level.

We sold out of the portfolio’s positions in the US industrial General Electric and the Swedish retailer Hennes & Mauritz both of which crystalised losses, which is clearly both regretful and disappointing.  Our rationales for these actions are quite simple: we see better scope to make profits over the next year in other portfolio holdings.  Therefore we have added to these positions funded from the sale of the holdings in GE and H&M.

Portfolio management is – to put it simply – comparing and contrasting different investment opportunity stories, appraising the risks and rewards and deciding upon an appropriate allocation based on a particular Fund’s profile.  The Global Dynamic Opportunities Fund is looking to make investments around the world which provide attractive return potentials over the next year.  Upon our re-reviews, we ascertained that there was more scope of achieving this by adding to our investments in UK bank Barclays, Kingfisher (the owner of B&Q and Screwfix), Anheuser-Busch InBev (the world’s largest brewer) and French-listed cement and building materials companies LafargeHolcim and Saint Gobain.

We made one other change to portfolio composition during the week.  Last Friday – in a surprise announcement – Whitbread announced that the soda behemoth Coca-Cola would be buying its coffee shop chain Costa (one of the two key businesses – along with Premier Inn – that the FTSE-100 company owns.  This announcement was excellent news for one of our largest investments and following a sharp share price rise, we significantly top-sliced the position.

It was almost impossible to predict the Coca-Cola deal but one of our main rationales for buying Whitbread shares nearly a year ago, was the scope for value creation in their portfolio via corporate action.  The company itself – under pressure from activist shareholders – had announced that the Costa chain was going to be spun-out as a separate entity, an action which ultimately induced Coca-Cola’s above actions.

We are retaining a reduced investment in Whitbread for the time being believing that one final step in value creation by centre on the sale of the Premier Inn franchise to another hotel/travel group.  To this end, the company’s proposed capital markets day early next year should provide further insights.  Overall, however, we are extremely pleased with how the Whitbread investment has played out to date, showing that our focus on trying to identify attractive investments which are – for one reason or another – mis-understood by the wider financial markets continues to offer scope for value creation.