John William Olsen has a long-term investment strategy and it impacts all aspects of his investment process, his setup, and the way he works. He has followed the same strategy since 2002, first at Danske Bank in Copenhagen and now at M&G Investments in London. He is responsible for the Global Select strategy, the Pan European Select strategy, and the recently launched Positive Impact strategy. His long-term focus has been successful throughout market cycles and in different market environments. Learn about how he works and invests and about some of his holdings.
(The interview has been translated and edited for clarity.)
Can you describe your overall investment strategy?
“As a long-term investor, the most important thing is what kind of companies you buy and how strong their business models are. The second most important thing is the price you pay. A distant third is the selling discipline. It’s more a buy and hold strategy.”
“We approach each investment with a ten-year horizon. If we were to hold this company for the next ten years, is it likely they can thrive through economic cycles and withstand competition? Will they be able to reinvest in their business and generate incremental returns for the shareholders?”
“We look for companies with a good cash return on capital. Companies that can grow by reinvesting the cash into the business at attractive returns and compound over time. It doesn’t have to be high growth, but it does have to be profitable growth and the companies have to be resilient over time.”
“The main performance contribution has been from the long-term compounding and less from the initial value uptick we get by buying at attractive valuations. Both are obviously important. But if you look at my long-term performance, it’s the compounders that have contributed a lot. Some companies have added perhaps 900 or 1000 basis points to performance. The biggest losers have detracted far less. If you give the compounders time, the performance can be fantastic. Over time, they can multiply many times. When the stock price overshoots and a holding gets a bit expensive, but the fundamentals are intact, I usually adjust down the weight rather than selling it completely. I couldn’t benefit from the long-term compounding if I took profit every time a stock went up 20%. If I did, I would also need more holdings and to make frequent changes in the portfolio.”
How do you look at the portfolio construction?
“With an average holding period above 6 years, I usually just invest in a few new companies each year. I don’t trade a lot or try to position the portfolio to a certain market outcome. So, it’s important to have a balanced and diversified portfolio. We typically own a group of large stable growth companies that continues to perform in the background. I have been invested in some of them for the past 18 years. Then we have a part of the portfolio with a bit more business risk but with a significantly higher upside.”
“We have around 30 holdings. The largest are typically relatively low-risk companies. In my experience it’s better, risk-wise, to take larger positions where we see limited downside risk and take slightly smaller positions where we see a huge upside, but with higher business risk. It helps smooth the performance and brings balance to the portfolio.”
How do you structure your work and setup to maintain a long-term focus in an industry that often concentrates on current events and performance?
“When I joined M&G, I had the opportunity to put together a new team from scratch and it was important to get the structure right.”
“Given the low turnover and long-term focus, the investment process is very research-intensive and it’s a big decision every time we invest in a new company. We spend most of our time doing due diligence on companies we might buy in the future. We usually don’t buy right after we have done the research, but we build a backlog of companies that we know really, really well. We typically spend three weeks to two months to do a deep dive on a company. This results in a large report we can use as a starting point if we consider buying the company in the future. It takes time to go through the companies. My team has done 190 deep dives since I joined M&G five years ago.”
“One way we maintain a long-term focus and avoid biases is our ‘no-pitch’ philosophy. In the investment industry, you usually have analysts who pitch ideas to the portfolio manager. If you have three or four people who work directly for you, as I have, and they each pitch ten ideas a year, you easily get lured into increasing the turnover and you have to say no all the time. I don’t get the point of having people who work for you trying to sell you things. So, they are not allowed to pitch anything. The analyst makes a due diligence report on a company and we discuss the strength and sustainability of the business model and what it’s worth in different scenarios. When you do work on a good company, you often want to buy it. So, the starting point is: you can be sure we’re not buying the stock. Just do the research and write the report. Then we discuss it and add it to the research library.”
“We have also banned a number of words. For example, we don’t do investment cases, we build scenarios. You can be 100% sure that an investment case is not going to play out exactly as you predicted. Scenarios help to stretch your brain and force you to look at different outcomes. What if everything went wrong for the next five years? What if everything played out perfectly? When you use scenarios, you get less stuck in your assessment and it’s easier to have an open mind when things change.”
“If things happen to develop into a bad scenario, that’s unfortunate, but then we just take another look at it. We analyze if something has changed fundamentally in the business model, we look at what went wrong and whether they can fix it. Then we do new scenarios and recalculate the value in each scenario. You eliminate a lot of emotions and make more rational decisions this way. And we have no pride when we consider selling a company. It does not matter if a stock has gone up or down since we bought it. We just look at the fundamentals, and we have a setup and a process that helps build the mental discipline necessary to do it.”
“We also don’t ‘play themes’ or ‘make bets’. Investing shouldn’t be confused with gambling. Our job is to find great mispriced assets, to provide a good long-term return for our investors.”
Quality companies are often popular. When do you get a chance to buy them at a good price?
“I usually buy companies when they are mispriced due to short-term concerns in the market. Even good businesses see large fluctuations in the stock market. I utilize the long-term horizon to pick them up at attractive valuations. My watchlist includes 300 companies I have identified throughout my career that I would like to own at some point. You can call it our investable universe. It’s the companies on this list we do almost all our work on.”
“Companies become mispriced for a lot of reasons. It can be growth concerns, cyclical headwinds, management changes, investor perception or other short-term issues. If we have done the work in advance and we don’t see any fundamental changes to the business model or the market it operates in, then we can live with two years of negative growth or short-term uncertainty. We just need to believe they will be back on track at some point.”
Can you give a couple of examples of these mispricings?
“One example is American Express (AXP:US). Their history goes back more than a hundred years. It started as a freight forwarding company. An express messenger carried money, securities, gold, or other valuable items from one place to another. They traveled by train or stagecoach across the country. American Express guaranteed the delivery and replaced it if it was stolen, so they gained the customers’ trust. This trust helped them to move into financial services, and they have been able to adapt and grow the business since then. It is essential that they don’t lose the trust of the customers; as long as they have that, they will be able to adapt and survive.”
“We bought American Express in late 2015 and early 2016 when they had a downturn. They lost a big customer, Costco, that made up 10% off the topline and 6% of the bottom line. At the same time, Chase launched a competing credit card targeting American Express’ Platinum Card users. The market got nervous and the stock tanked. The earnings multiple went from 19 to 9. We agreed that the issues would impact the profit, but only for a couple of years. We didn’t see significant long-term issues. We used the events to pick up a really good company at a cheap valuation.”
“Another example is software companies doing a cloud transition. We have a couple of those. One is ANSYS (ANSS:US), which makes very high-end simulation software. Another is Manhattan Associates (MANH:US), which sells omnichannel retail software.”
“You typically see a couple of years of poor revenue and high cost while the transition is going on. They move from a one-time license sale to a subscription model with recurrent payments. Then you reach an inflection point, it could be in year four or five, and the profits really take off. Just like you have seen in Adobe and some of the other software companies. The uncertainty can provide some great investment opportunities.”
“Manhattan Associates sells omnichannel retail software to all the large retailers in the US. They help them coordinate their online business with their brick and mortar business. If a retail business wants to compete with the large online players, they need this kind of software. Manhattan is a clear market leader in the niche and has the best offering. They go through this cloud transition and instead of selling a license with a large upfront payment, they now get a small upfront payment and an annuity throughout the contract period, typically eight years in this case. The revenue will decline in the first years, but the net present value of the whole contract is significantly higher.”
“Manhattan Associates run their own cloud instead of outsourcing it to Amazon. So, they need to buy servers and the cost goes up. The faster the transition happens, the more the server cost will impact the profit. The price-earnings multiple looks crazy the next two to three years. But in reality, the company is just building value.”
“Another portfolio company going through a cloud transition is ANSYS. They have 700 PhDs in Pittsburgh developing simulation software. They can simulate all types of physics, while their competitors usually only do one. ANSYS can do everything from airflow and heat to fluids and materials. 98 of the top 100 industrials are customers. All the large car manufactures, and all the Formula 1 teams use it to optimize their products. It’s really high end.”
“ANSYS have bought competences within different types of physics in acquisitions and integrated them into their overall system. They are by far the biggest player and it does not make sense for competitors to try to copy them. ANSYS is putting so much money and brainpower into the niche and they are too far ahead. It makes more sense to collaborate with ANSYS, and that’s what most do. They are open to integrating different applications from other companies with their simulations and they build partnerships to become integrated into ecosystems across industries. If you look at a company like Autodesk (ADSK:US), with its very advanced design software, they typically use an integration from ANSYS for the simulation part.”
WH Smith (SMWH:LN) is one of your largest holdings. Why do you like it?
“It’s a very interesting and relatively small UK company. Local investors are surprised when I tell them that I buy quality companies and WH Smith is a top holding. In my view, the fundamentals are still misunderstood.”
“WH Smith have a presence here in the UK, with convenience stores in high streets. The stores are often very worn down and located in high streets in suburbs with just two or three other small shops. People come to get the newspaper, cigarettes, books or convenience items. They might have a post office in the corner where you can pick up your packages. Many of the products are structurally challenged and it has given some investors the wrong impression.”
“Besides high-street stores, they run convenience stores in train stations. They’re typically much nicer stores where you buy magazines and things for your train journey. They started to grow in the airport segment some years ago. They won concessions at Heathrow and Gatwick and used it as a stepping-stone to the international market. The travel business is very interesting. They leveraged the skills and cash flow from the high-street stores to grow into travel. This segment now makes up 70% of the business”
“In the challenging high-street segment, they have been able to grow EBIT in the past ten years despite headwinds and declining sales. They are fantastic at space management and they are adaptable. In high-street stores, they keep finding products with slightly higher margins to put on the shelves. And they have adapted to changing consumer habits and demands. Eight to ten years ago, CDs and DVDs made up 25% of their sales; today, that’s obviously zero. They replaced them with office supplies and other product. They put a Costa Coffee machine in one corner and a post office in another and whatever other convenience product they can find to increase margins and gradually adapt to consumer demands.”
“These skills have been valuable in the airport business. They often compete for concessions with players with an airport background. It could be duty-free store operators, players like Relay, Dufry or local operators. Most competitors are used to a more protected environment with less competition. When WH Smith take over from the local operators, they are typically able to increase gross profit per square foot by 20% from day one – like they did in their first international stores in Copenhagen Airport.”
“Because they are so sharp at allocating and optimizing their space, they give the airports a better deal. Airport concessions are typically made for ten years, as they don’t want frequent change. The strong track record in airports they already operate in helps them win new concessions. They’ve only lost three bids, based on what they have disclosed. They won the rest. However, it takes time to gain market share due to the long contracts.”
“With less than 2% penetration in international airports, the most profitable segment, the potential is huge. It’s a company that can keep growing, with its current business model, for the next 20 years without reaching its full potential. It’s rather unique to find companies with such a long runway and where you can look so many years into the future.”
“They also did an interesting acquisition in November last year. The American travel market is the largest and WH Smith had no presence in it. It’s a difficult market to penetrate, you need agreements with each state and local partners. To get access to the market, they acquired InMotion. It’s a very well run business that sells electronics in airport outlets. It gave them an organization and platform to enter the US market. At the same time, they can take the InMotion concept international.”
“Both in train stations and airports they are good at driving additional sales when people enter the stores. In tests, they were able to show that it didn’t hurt sales in the other shops in the station when they introduced new products. The increased sales were a pure uptick in profit for WH Smith and for the station owners. They have started to do the same in airports and it helps improve profitability even further.”
“The fear of competition from e-books and other forms of electronic entertainment gave a good entry point in 2014 when a number of hedge funds shorted more than 10% of the share capital. However, despite the increased popularity of e-books, the sales of physical books have kept growing in airports. People like to read books when they fly. The 6-7% underlying volume growth in air travel is also a driver. And even if the habits in book reading should change, WH Smith are able to adapt. That’s what they have done in the past.”
“The stock has a free cash flow yield above 5%. It’s a stable business with a lot of growth options.”
The M&G Positive Impact fund
In November 2018, M&G Investments launched the M&G Positive Impact Fund. The fund is managed by John William Olsen. There has been a lot of interest since the launch. They are seeing interest from across customer segments, from institutions, advisors to private investors, and from family offices alike.
The fund invests in companies that make the world a better place. Rather than trying to impact the companies, which can be difficult with small minority stakes, the fund invests in companies that make a positive impact on society. In an impact fund, unlike in a regular sustainability fund, they are obligated to measure the impact the companies make, report on it, and follow it up.
The fund holds companies that have a positive impact on society by addressing the world’s major social and/or environmental challenges. They have identified three major challenges on the environmental side and three on the social, and invest in companies that make a difference in these areas.
The goal is to create a portfolio that delivers a return on par with, or better than, a regular global equity fund, but at the same time own companies that make a positive impact.
The portfolio is diverse and has little overlap with the benchmark. Holdings range from Danish Ørsted (ORSTED:DC), which has made a transition into green energy, to Australian Brambles (BXB:AU), which sells reusable pallets. Other holdings include banks in emerging markets that provide microfinancing and other services, and technology companies that make the grid or utility companies more efficient.
M&G Investments is an investment manager in the UK and overseas. It is an autonomous business within the Prudential Group, running its own retail and institutional funds operation and functioning as the asset manager for Prudential in Europe.
They launched the first ever UK unit trust in 1931. Today they have offices in 16 countries and manage £341 billion of customer assets (as of 1H 2019) in investments including bonds, equities, infrastructure, property, alternatives, and cash.
M&G Investments equity fund offering:
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