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Value investing skills #4: Organisational edge

There are arguably four broad categories where it is possible for investors to enjoy some sort of advantage over their peers. Here we consider the organisational ‘edge’ and how value investors can benefit from one

15/03/2018

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

So far, in Value investing skills #1,  Value investing skills #2 and Value investing skills #3, we have highlighted the informational, analytical and behavioural ‘edges’ to be had through a value approach to investing.

Finally, having done the hard work to identify the investment pool you want to fish in, assess the quality of what you find there and decide whether to buy, you need to ensure you remain ahead of the game.

This is where value investors can enjoy a fourth advantage – an organisational edge.

#4 - Organisational edge

Over the course of the last 12 months, here on The Value Perspective, we have analysed roughly 300 different businesses and yet, ultimately, we ended up buying a very small proportion of those for our portfolios – somewhere in the region of 3% or 4%.

At first glance, that might seem odd – after all, pretty much any other organisation or business that was 4% efficient would soon cease to function.

Clearly a restaurant that only used 4% of the ingredients it bought would rapidly go out of business while a factory that was anything less than 80% efficient, say, would likely be shut down by its owners.

Should they be of a mind to, however, investors can afford to be very picky about which companies they do and do not buy into – indeed, here on The Value Perspective, we would argue the pickier the better.

That said, what we absolutely would not want to do is to lose all the work we have done on the various businesses we do not buy because if, rather than using a fraction of that work, we can use it all, that would lead to an edge.

Creating our edge  the archive 

The way we do that ourselves is by keeping a database of every company we look at, with all the information held in a consistent format – in effect, putting all our analysis in cold storage until such time as we need it again.

As we touched on in Value investing skills #3, we use a methodology that considers not only the potential rewards of buying into a business but also the associated risks of doing so.

Operating an archive of all our conclusions on these two aspects across hundreds of different companies allows us to do two things. The first is to monitor our portfolios, if we wanted to, on a minute-by-minute basis to assess the potential upside for every single company we own. That hardly counts as an edge, however, because every single investor with access to market data should be able to do exactly the same thing.

Using the archive

No, here on the Value Perspective, the real edge stems from all that work we carried out on the stocks we did not buy – all those businesses where we have calculated what we believe to be a fair valuation and therefore a suitably attractive ‘target price’ at which to buy in.

These profiles are sitting and waiting in our database should, at any point and for whatever reason, a company’s share price happen to drop significantly.

At that moment, we can dust down our existing analysis, update it for the new news and immediately be ready to go to work.

Thus, for example, when Provident Financial suffered a second profit warning last summer, all we had to do was update our existing analysis and in a matter of hours, having satisfied ourselves about the company’s new risk/reward profile, we were out in the market and building up a position.

That rapid response to changes in the market represents a significant edge over our competition – and is one we now enjoy in relation to the more than 800 different companies the team has analysed over the years.

What is more, as we continue to put ever more businesses under the microscope, that edge is only going to grow bigger.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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