Q: What’s your investment philosophy?

A: We take a pragmatic approach and we like to invest in industries which have attractive returns and which are growing both revenue and earnings. Whilst there are well managed companies in the industries that are shrinking or have historically low returns, we believe that over a longer period of time, financial returns of industry leaders converge to the industry returns and these companies do not generate wealth for shareholders.

We like to find companies where we have a clear view about what the management wants to achieve and how they want to achieve it. We are reluctant to invest in highly acquisitive companies that are serial acquirers and therefore you can’t measure the health of core business. We shy away from companies that are highly aggressive in their acquisition accounting.

Q: What are the key elements of your research process?

A: We have an active policy of meeting companies. We try to learn about management, long-term strategy and business fundamentals. During the reporting season when companies are visiting investors and making presentations we rarely get a chance to learn longer-term aspects of managing the business and industry fundamentals. However when we visit companies our discussions tend to be more focused on the business and where the management wants to be in five to ten years from now than on what is reported in the latest quarter.

Q: How do you go about finding ideas?

A: Sectors and stocks can go in and out of favor. When stocks and sectors are out of favor, we look at the fundamentals of the company and decide if we agree with market assessment. If we find a value and if the stock meets our criteria of the long-term health of the business, then we analyze at the company in detail. We do not believe that market always discards companies with longer-term potential but it does happen more often than one would think.

Q: Can you give an example of how you put your core investment beliefs into practice?

A: The oil service sector is a good example. I think the companies in the sector will have sustained earnings for the next three to five years. If you talk to the large oil companies about the short and long term outlook for the oil price, you can get a slightly different story from them. But the consistent story you get, whether you are talking to BP or Shell, is that they cannot spend enough money to find and process oil. The constraint they face is not how much cash they can generate to fund capital expenditure, but it is the lack of engineering human resources, the lack of additional drilling equipment and the slow pace of refinery upgrades. That tells me that the pricing power in this industry lies with the engineer and not with the customer, whereas if you were talking about most normal engineering companies they rarely have had pricing power.

In recent months, when the oil price and the share prices of large-cap oil companies have been going down, that has led to a sell-off in the oil service sector. In our view this is an excellent opportunity to add positions in the oil service sector, because the fundamental need to expand capacity has not changed and bargaining power is still with the oil services company.

Q: Do you look to find mid and small-cap companies or do you generally look across all spectrum of the capitalization?

A: It’s good to find small and interesting companies that have exciting potential but we don’t want to fill the portfolio with too many of these because you then become hostage to any size bias within the market. Liquidity is also an issue in terms of trading out of any position which doesn’t go according to expectations.

Q: Can you give an example of such a holding from your portfolio?

A: GTL Resources is a small company we have been holding this year. It’s only quoted in the UK and all its operations are in America. They are building a large bio-ethanol plant in Illinois, so there is a conversion of corn into ethanol. In America, there appears to be an industry level effort in generating alternative energy sources that can be environmentally friendlier.

In my estimate the company will take 12 to 18 months to generate sufficient earnings to justify a much higher share price. That is the time horizon that I’m working on for this investment.

Q: Do you like to anchor your portfolio with larger names and then build satellite holdings of these small and mid-cap stocks?

A: I am not rigidly committed to any market cap in the portfolio. Opportunities come in at all market cap levels. At the moment the firm has a heavy weighting in the larger companies, but that reflects current attractive valuations, that seems to be common in the UK market that is also the case with sectors that we are exposed to.

If I felt there was value in the mid to small-cap market, if I felt that the market sentiment was likely to move in that direction, then the fund would quite quickly change its view about the relative weight that would occur.

Q: How is your research process organized? Do you prefer technical research or fundamental research?

A: Let’s look at Tate and Lyle as an example. At the beginning of the year, all the attention at Tate and Lyle was on Sucralose, which is an artificial sugar. They have a large customer base for the product and very high patent protected, operating margins. But the concern in the market is how long those excessive margins can last.