An investment manager essentially wears three hats – undertaking company research to keep up to date with existing holdings in clients’ portfolios and to identify new investment ideas; managing portfolios on a day to day basis; and regular contact with their clients including providing valuation reports and attending meetings.
When wearing the company research hat, the investment manager’s search for new ideas is wide ranging and includes investigating potential opportunities amongst both large and small/mid cap companies. Often investment opportunities present themselves when a company’s management has taken the decision to make major changes to the existing business. This often involves reshaping the historic core business and adding one or more new divisions thus transforming a more traditional business into a very different company. Management will set out the strategy for how they will deliver the newly shaped business over the coming years. The process is often accompanied by a re-rating of the shares. When looking at such opportunities time needs to be given to understanding the business as it is at the start of the process and what it will look like in the future. Key to all of this is meeting the management, understanding their strategy and building the confidence in their ability to deliver on this strategy.
Two examples of such investment opportunities that we have added to clients’ portfolios recently are Connect Group and St Ives.
Connect Group (formerly known as Smiths News) was originally part of WH Smith but has been a stand-alone business since the demerger in 2006. The company is being transformed from its historic focus on newspaper and magazine distribution into a much broader distribution business. The company is the UK’s largest newspaper and magazine wholesaler and a leading UK book supplier. Diversification is being achieved via acquisitions such as Consortium (a leading specialist distributor of consumable products to the education market). Significantly in recent weeks management have announced a tie up with Amazon to offer same day delivery for customers to collect their parcels from their local convenience store and the proposed acquisition of a specialist distribution company.
From an investment perspective, Connect Group is a company at an interesting stage in its development. The rating is still low as investors continue to assess how management will deliver their target of having 50% of the company’s profit from outside newspaper and magazine wholesaling by 2016. It is clear that management are putting the strong cash flow from the historic core business into new, higher margin, long term growth areas. The shares trade on a low price to earnings ratio, have a high yield and good dividend cover.
Another example is St Ives where the management are further on in the reshaping of the business. They have completely restructured the legacy Print business (exiting the commoditised operations such as magazines, direct mail, Report & Accounts printing). The reshaped core publishing business is cash generative, providing resource for the mostly acquisition led diversification of the business. Management have made good progress building a faster growing, higher margin Marketing Services business which is focused in particular on data and digital marketing. The shares have started to be re-rated but, as is often the case in such situations, there is still more to come.