Investing in companies with strong balance sheets, minimal debt and a returning revenue — while keeping a hefty chunk of cash in the fund itself — is the secret to beating the market turmoil, a manager has claimed.
Andrew Vaughan is manager of the tiny Sanford Deland Free Spirit fund that outperformed the vast majority of its peers in the IA UK All Companies Sector.
The £6m Free Spirit fund is the second-best performer of the 253-strong sector over the past six months, losing just 1.6 per cent compared to an average loss of 18.4 per cent. Over the past three years, it has returned 25 per cent compared to its peers who, on average, have lost 11 per cent.
Mr Vaughan said: “Our performance has been strong for a number of reasons. We have had a big cash balance in the fund itself, which helps performance during market downturns, and had already invested in companies with a recurring revenue stream.
“The companies we invest in also have rich balance sheets so are less exposed to the crisis than those with massive debts.”
Sanford Deland follows the principle of business perspective investing when choosing which companies to invest in, which starts from the premise that there is no distinction between part ownership — like buying shares in a company — or outright ownership.
Therefore, every investment decision Mr Vaughan makes goes through the same rigorous process as if the fund was buying the entire company.
He said: “We’re interested in the business itself and we’re very reluctant to buy or sell, so we won’t trade it quickly.
“It helps you tune out of ‘the city’. We try to understand the economic circumstances of the business — knowing the product and the business’s competitors, whether there is a long-term argument for the company’s success, and the balance sheet.”
The fund will only invest in the business if the valuation is correct. If a company passes stage one, economic evaluation, and stage two, the valuation, “it goes in the fund”.
Mr Vaughan also said because the fund rarely traded, so rarely sold out of an investment, it needed to have a cash buffer in order to be able to buy when a business was right.
At the moment, about 17.5 per cent of the fund is held in cash but going into the crisis, cash accounted for 19.7 per cent of the portfolio. An open-ended fund, such as the Free Spirit fund, is only allowed to hold up to 20 per cent in cash.
He said this level had helped him manage the downturn effectively. “When other managers were scrambling around and selling to meet redemptions or buy good value stocks in the crisis, we did not have to.”
Only two holdings have been sold since the downturn began — SSP and S&U.
SSP — which operates branded catering and retail units at airports and railway stations around the world — has seen 57 per cent wiped from its share price since mid-February.
Mr Vaughan said: “It’s entirely dependent on customers going through these places and this is something which I think will change long term, not just through the crisis.”
He also sold out of niche consumer and motor finance provider S&U, because the coronavirus could “create an environment which could see credit defaults” increase.
imogen.tew@ft.com
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