I looked at some of the less exciting sides of Tate and Lyle’s business. They are a large manufacturer of High Fructose Corn Syrup, (HFCS) which has been an unappealing market to be involved in as there have been far too many manufacturers of HFCS operating at below optimum capacity. They had no pricing power, margins were low, profits were going sideways and this was regarded as a deeply unattractive business, both in terms of the profitability and perceived earnings quality.

However I thought that this could be an interesting market to be in going forward because we were seeing operators leaving the industry, so capacity was reducing. We also had a high natural sugar price and customers of corn syrup can either buy corn syrup or sugar and if the price of sugar is going up, then they’ll switch to corn syrup.

Our research on Archer Daniels Midlands which is very much involved in this industry, revealed to us that this industry is set for better days. With that research and insight we bought shares in Tate’s. We were hoping for the price of corn syrup to start going up. A small change in the corn syrup price would lead to a large increase in Tate’s profits. A re-evaluation of the medium term growth rate for HFCS revenues would lead to a re-rating of the shares on the back of upgraded earnings.

Q: How do you go about building a portfolio?

A: There’s nothing revolutionary about what we do. The fund has around 65 holdings, which is a little less than it had at the start of the year. We select companies based on fundamentals and if that leads to concentration in a sector we do not mind it.

We measure ourselves against FTSE All Share Index. There are around 650 stocks in the index and there are about 65 in the portfolio. So 90% of the companies out there don’t make it.

Q: What are your buy and sell disciplines?

A: An ex-colleague used to say, every morning, when you turn on your computer you’re buying your own portfolio all over again. Every morning you say which stocks and their positions in the portfolio you are comfortable with. And if you can’t be happy about every position or every stock in your portfolio, then you should consider selling it. So I do try to be tough on stock losses and on using the sell discipline. I think it’s a good discipline to have.

For example, we bought a holding in Countrywide Properties, the estates agent. We bought it for two reasons – first, we felt that it was a far better business, operating in a far stronger market then the stock market was prepared to give it a credit for. The other reason was that there was going to be a change in legislation in the UK about how houses are sold. Countrywide was extremely well placed to take advantage of that.

What happened was that at the very last minute the government decided to abandon the change in the law and the shares fell 10% on the day of the announcement, which was quite painful for us.

What we did is we looked at the company again and asked ourselves whether we would want to buy the shares just on the industry fundamentals given the current share price despite the falling shares and the change in the law. And the answer was ‘yes’. To us the business appeared robust. The short-term outlook is very buoyant, that at this share price it’s a buy though it may be a while before the market gets over the disappointment of the change in the law not taking place.

We also had a meeting with the company and not only were they quite unhappy with what the government had done, but we felt that if the stock market didn’t properly start to value the company then the company would do something about that themselves. So instead of selling the shares we added to our holdings. And the company then announced they were going to take themselves private. That’s a perfect example of reassessing a stock and recent changes in business environment and then taking a decision.

Q: What kinds of risks do you monitor and what do you do to mitigate them?

A: A lot of our risk control is common sense. We have limits in terms of the overweight and underweight in our holding in relation to the index. We tend not to go above 2% either side of stock and 5% of sector allocation in the FTSE All Share Index on an individual stock. This guideline covers 99% of the likely outcomes in terms of building this portfolio and managing portfolio risk.