​News»​Bull & Bear - Investment Week - 9/12/19

This opinion piece was published in Investment Week Magazine. It gives insight into Andrew’s investing style with Free Spirit.

Andrew Vaughan on UK Growth

  • Bull Points

    Better long-term investments are made when uncertainty, not optimism, has the upper hand

    Fund manager tenacity can make all the difference in delivering growth

  • Bear Points

    Sell recommendations focusing on near-term challenges and valuations may be damaging

    Volatility and weak share prices are testing. The need for cash can put paid to long-term plans

The pursuit of growth can make investors do odd things. They may be tempted to venture into less established businesses or into sectors such as technology, whose ‘growth’ label provides comfort that they are at least fishing in the right pond. Perhaps surprisingly though, some of the UK market’s strongest performers over the last quarter century have been long-established businesses in ostensibly low growth industries such as tobacco, engineering and support services.

What can we learn? Firstly, that rapid top-line growth is not required. A more reliable outcome can be achieved with single digit revenue growth, delivered by a combination of modest but persistent volume and price increases. This type of growth can be less capital intensive at the margin, requiring minimal incremental deployment of capital into operating capacity and working capital expansion. It is certainly easier to manage.

Looking further down the income statement, a steadily expanding operating margin can be a tell-tale of a strong business franchise and competitive position. As a lever for delivering growth in shareholders’ funds, it is hard to beat. Any company that can hold its average cost growth below its revenue growth can do this and can be found in almost any sector.

Balance sheet structure has a role to play. Judicious use of debt can enhance the return on equity, and share buy-backs can be transformative over the longer run in delivering per share growth in value. Compounded over time, a helpful financial structure can turn adequate returns into a ‘growth’ investment.

The UK market today offers plenty of companies where these factors are at play. In the media sector, the move from print to digital formats is driving down average costs and enhancing revenues from back catalogues of content and data, and subscription models that lock-in the customer. Sometimes these can be found without the obvious ‘growth’ price tag.

It is not just down to companies to deliver growth. Fund manager mindset is key. For every company that has delivered multi-bagger investment returns, there will have been a barrage of enticements to sell along the way. Today’s political uncertainty and associated risks to near-term earnings go with the territory of successful growth investing.

Andrew Vaughan is investment manager of the CFP SDL Free Spirit Fund at Sanford DeLand Asset Management.