We reconnect with Rosemary Banyard, who launched the VT Downing Unique Opportunities Fund, almost catching the market bottom in March 2020. Rosemary focuses on investing in high-quality UK companies in the market capitalisation range of £150m to £10bn. She explains what she means by a high-quality company and provides some illustrations by talking about MJ Gleeson (GLE.L, market cap £270m), her best performer from last year 4imprint (FOUR.L, market cap £1.27bn) and Mortgage Advice Bureau (Holdings) (MAB1.L, market cap £368m), which was hit by the disruption to the mortgage market last year from the unfunded budget. A key trait of high-quality company investing is the patience of waiting for returns to compound, which Rosemary recently articulated in her article “Can you bear to wait?” which we have reproduced below, and this key trait comes through in many ways in this interview.
“Can you bear to wait?”
By Rosemary Banyard – Manager of the VT Downing Unique Opportunities Fund, January 2023
This article was first published on www.downing.co.uk and is reproduced here with kind permission.
Albert Einstein is credited with the statement: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.” When it comes to investing in equities, I believe that the power of upward compounding will only work if two criteria are met: you are prepared to take the long view, and you select investments with high and sustainable returns on equity. There are other perfectly valid investment strategies, such as buying into turnarounds, or buying companies that are out of favour and selling them on at a higher valuation when they return to favour. These harness human intervention and shifting market or macro sentiment respectively. Compounding requires a different mindset. Patient investing is hard: financial markets encourage activity. Corporate financiers make money from deal-making; brokers make money from trading; at the start of this and every other year, sell-side analysts issue “Best Ideas” buy lists; the monthly factsheets required of fund managers exert a subtle pressure towards both short-termism and hyperactivity. The observation of 17th century mathematician Blaise Pascal is relevant here: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
I want to illustrate the power of long-term compounding by analysing two UK companies. Both are consumer-facing businesses, one domestic and one international, and both have pursued fundamentally organic growth strategies for many years. In both cases an investor would not have needed to take any view on macro-economic factors, such as the outlook for consumer spending or interest rates, to make very good returns. All that was required was, in the words of Charlie Munger, to practice “sit on your ass investing: you’re paying less to brokers, you’re listening less to nonsense…”
My first example is UK homewares retailer Dunelm. The business was founded in 1979 and listed in the UK in October 2006 with a valuation of £340m. The founding Adderley family sold some of their holding at IPO, although if you read on you may conclude that they shouldn’t have sold a share! However, the family still owns over 40% of the company, which I view favourably, as it provides stability, a positive influence on the culture, and plenty of know-how. In the 17 years since IPO, Dunelm has invested over £500m into tangible and intangible assets, doubling the store estate to 177 sites and building an online business which accounts for over £500m of revenues. It has only spent £25m on two small acquisitions, so this is a fundamentally organic growth story. By my calculations Dunelm’s return on average equity has exceeded 38% in every year since flotation. Revenues have risen roughly fourfold to over £1.5bn, and pretax profits sixfold to over £200m since IPO. All of this has been internally funded: net share count has risen by just over 1% (yes, you read that right) since listing. Charlie Munger once observed with his usual acuity that “Over the long term, it’s hard for a stock to earn a much better return than the business that underlies it.” Dunelm exemplifies this: its consistently high return on equity has driven excellent returns for shareholders. Since flotation, dividends have exceeded £850m, and a business which has repaid its public investors two-and-a-half times over is now generating over £200m annually in profit. Dunelm now has over 10% of the UK homewares market but is targeting a 15% market share and is also developing a furniture offering on top. What’s not to like?
My second example is fantasy table-top miniatures business Games Workshop. This business floated in 1994 with a valuation of about £35m and in the succeeding 28 years has grown revenues 17-fold to over £400m and pretax profits 34-fold to over £150m. It has invested over £260m in tangible and intangible assets and paid out £449m in dividends. The net share count has only risen by 13% in 28 years. Games Workshop has not made an acquisition in the last 20 years and states in its most recent interim results that “we are not planning any share buy-backs or acquisitions.” So, shareholders can reasonably expect a lot more dividends in future, and it is worth noting that the most recent dividend declaration at 130p per share is more than the entire 115p original listing price of the shares, and that in recent years the company has made five dividend declarations per year. Games Workshop had a period between 2006 and 2009 when returns on equity were weak, actually in single digits, but they have generally exceeded 20% in most other years and exceeded 50% in each of the past five years. The recent success has reflected greater monetisation of the group’s intellectual property and the success of one-man stores under a dynamic new (albeit home-grown) chief executive. The greatest rewards to shareholders so far have also come in the past five years, highlighting that patience has been advisable to maximise returns. The business has global appeal and potential, and the company clearly agrees, saying recently: “We are very confident in the Warhammer hobby, and our business model and its resilience.”
To conclude, there is a great deal of money to be made from identifying great businesses which can sustain high returns on equity and owning them for the long run. The last word goes to Charlie Munger: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
