Poll fault – We didn’t know who would win the election but we knew the pundits didn’t either
“You might as well ignore anything any pundit has to say on the outcome of the 7 May polls.” So we wrote two months back in Polls apart, which raises something of a dilemma – given our longstanding and often-stated antipathy towards forecasts of all kinds, just how pleased should we feel about correctly predicting political commentators would fail to call the result of the general election?
Enough with the false modesty. Our point, as it always is in the context of forecasting, is the only certainty about the future is it is uncertain and thus hard to predict. Given that forecasters prove this time and again by getting their pronouncements wrong, what would be the point of factoring any of them into our investment decisions?
In the months before the election, plenty of people – including the bookies – expected Ed Miliband would now be residing in 10 Downing Street and, if that were to happen, consensus held it would be very bad news for sectors such as banking and utilities. We will of course never know if consensus would have been right or wrong but let’s focus on what all this has meant for a single company.
Earlier this year, here on the Value Perspective, we looked at adding to our position in Centrica. The wider market believed that, in common with other utilities businesses, its share price would be hammered under a Labour government expected to freeze energy prices. Our view, as it happens, was there were plenty of other reasons not to like Centrica, including some poor decisions on capital allocation.
However, we had also identified a number of potential positives, including a new chief executive and finance director, who could address some of those capital allocation concerns. Furthermore, we believed structural factors in the UK represented as much an opportunity as a threat because historic underinvestment in domestic power supply made Centrica’s assets more valuable.
Thus, while most of the market was myopically focusing on politics, we took the view things were probably not as grim for Centrica as people thought – incidentally, since its profit margins were running at half their long-term average, even a modest recovery would likely lead to a significant re-rating – and we also had a free option on Miliband not winning, which is what of course transpired.
We cheerfully admit this sort of approach to investment is hardly glamorous or exciting – it is just playing the averages. Nevertheless, the day after the Conservatives won their majority; Centrica was one of the companies that duly led the UK stockmarket higher. Ultimately, it is a classic example of how value investors ought to be able to take advantage of bad headlines to make good investments.
The market can and does work itself into a state about fears – and hopes – that turn out to be wholly illusory. Here on The Value Perspective, we may have got our pre-election anti-forecast right but that does not mean we will be getting cocky. We are well aware that, just as we ourselves did not know how the election would turn out last Thursday, we cannot know what will happen next week.
By focusing on the long term, we avoid buying into any prevailing opinions or other ‘noise’ that could influence portfolio decisions. We are mindful of their possible impact but can point to more than 100 years of history that shows an unemotional, valuation-based approach to investing should deliver over the long run – regardless of anything the economic, political and other forecasters might have to say.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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