Holding pattern- When there are fewer attractive assets to buy, value investors buy fewer assets
In one or two recent client meetings, we have been asked why the turnover of stocks being bought and sold in our portfolios has increased of late. Let’s be clear on this – it hasn’t. Taking the Recovery fund as an example, you can see from the table below that portfolio turnover this year is in line with the long-term average of about 20% – an extremely low level in the context of the broader market.
This low average turnover is clear evidence of our genuinely patient approach to investing and of the five-year time horizon we adopt when we buy into businesses. Nevertheless, as you can also see from the table, there are times when portfolio turnover spikes and it does so on opportunity – for example, in the merger and acquisition frenzy of 2005 when a number of our holdings were the targets of bids
Then, in 2008, the portfolio went through its own ‘great rotation’ as we moved out of stocks that had held up quite well against the ravages of the credit crisis and into the then bombed-out bargains of the UK market, such as housebuilders and retailers. Since then, turnover within the portfolio has remained relatively constant though the actual number of holdings has been falling.
Back in 2009, the total was just shy of 70 whereas today it is below 50 – indeed we would expect it to continue to drop for some months yet – and this may well be what is prompting those questions about turnover. However, there is nothing sinister behind the fall – it is simply that, when there are fewer attractive investments out there to make, we make fewer investments.
Here on The Value Perspective, we never look to force a portfolio. If there are lots of businesses we think are worth buying – as was the case in 2008 and 2009 – then we will buy lots of businesses. Equally, if the market opportunity is shrinking, the number of holdings in our portfolio will do likewise.
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