This letter is not part of the fund prospectus or offering documentation of VT Holland Advisors Equity Fund. Opinions expressed below are only those of the manager and shared for the interest of readers only. Qualitative terms like ‘great’ and ‘compounding’ are used only to explain the managers investing approach. Readers are instructed to look at the full disclaimers and fund prospectus.
Dear Investors & Friends
We recently held our annual informal meeting for the VT Holland Advisors Equity Fund This letter gives you access to the slides from that presentation. We have also just published our Quarter 1 Factsheet showing the fund NAV is up 9% year-to-date.
Hopefully much of what was included in the presentation would not be new to long-standing readers of our research/fund letters. That said, we tried to update our views, giving current examples where we could. Thank you very much to all those that came – some of which having travelled a long way to attend. Also for a robust and wide ranging Q+A session. We have made the slides from the meeting available here.
What I presented:
I presented on the structure of the fund; it being a UK UCITS standard model with high quality custodians, depositaries and administrators. Also, that the fund is now available on almost all investment platforms (see our latest Factsheet). After that I spent some time reflecting on my/Holland’s investment process, including:
- Our quest to find aligned owner-managers
- Our desire to invest in businesses with one of 7 Sustainable Competitive Advantages (SCA’s), which we outlined in our most recent fund letter. Those being:
- Scale Economics
- Network Economics
- Counter-Positioning
- Switching costs
- Branding
- Cornered Resource
- Process Power
- Noting that very often we like SCA’s that other investors find less obvious. e.g. we favour ‘Scale-Economy-Shared’ businesses like Amazon or TSMC’s ‘Process-Power’. Other franchise-esq investors might prefer ‘Brands’
- That our process is fixated on ‘Compounding’ the capital entrusted to us at the best risk adjusted long term rate we can; rather than on ‘growth’, ‘value’ or any other investing mindset.
We gave owned examples of these combined traits. Noting that a great number of the companies we favour are also the lowest cost producers in their industry.
Supernatural Compounders
Finally, we addressed the idea of looking for supernatural compounding businesses, i.e. rare companies that can achieve a higher rate of compounding for an extended period of time. A few reflections on this are shared below.
“ Compounding is the 8th wonder of the world. Those who understand it will earn it, those who do not are destined to pay it” Albert Einstein
The compounding maths shown in our 8th wonder of world chart on the Holland website illustrates a startling fact: That an investor compounding at 10% pa will have 6.7x todays capital in 20y time. But an investor compounding the same capital at 20% pa will have 38x!
This simple fact is the difference between the long-term returns achieved by exceptional investors (Buffett/Sleep/Bolton/Lynch) and market/fund manager averages. In the real world of investing achieving c.15-20% compounding is actually very hard to achieve. The reason is the difficulty found by many companies when looking for capital deployment opportunities at good rates of return.
Source : Next full year Results – March 2024
A chart from Next plc’s recent investor presentation makes this point well. Next is an excellent business making ROE’s of 60-80% pa. It is also very well managed, allocating capital almost perfectly. That being said, it has compounded for investors at c.12-14% pa in the last 25y (not more). The reason for this was that the company (especially in last 7y) had a very limited ability to allocate incremental capital at favourable rates. This being the case it instead wisely allocated this excess capital to repurchasing its own shares or paid dividends. Today Simon Wolfson’s unusual optimism suggest today’s outlook is maybe better than the last 7 years..? That said Next still acts as a useful example of what “very good” looks like, rather than “great”.
In order to grow at a rate closer to c.20% a business has to be able to re-deploy a high percentage of the capital it generates at a good future rate of return. Our recent study of this idea has thrown up three different groups of companies that we think have potential to redeploy (i.e. therefore grow) in this way:
- The first is a strong organic grower. Amazon was a good example of this in the last 15 years, as all of its capital was redeployed at similar to existing rates of return (c.30%).
- The second potential group of companies that might be able to compound shareholder capital at 15-20% rates are really well-run conglomerates. The ability to invest anywhere, using multiple structures (debt/equity/public and private) and using other people’s money (Debt/deferred tax/Insurance float etc.) gives a higher potential compounding ability than might exist in any normal single company (like say Next). Clearly such conglomerates need to be run by highly talented allocators and have the right structure. Past examples might include Berkshire Hathaway and Teledyne. Today a list might include Exor, Bollore and maybe even Biglari Holdings ..?
- The third area of potently 20% pa compounders is that of ‘Serial Acquirers’.
“When a company makes an acquisition, I purchase two cards. One to congratulate and one to commiserate. After 5 years I decide which one to send!” Warren Buffett
The quote above typifies our own and Warren’s view towards business acquisitions on average. That said it must be admitted that a few special companies historically have done an excellent job in acquiring other businesses whilst maintaining high returns on capital. As such they were able to compound at a fast rate by deploying more capital in the businesses they acquired. Danaher and Melrose are perhaps good examples. As of course is Constellation Software.
In the fund we own a few companies that we think fit each of the above criteria, and we are always happy to find more.
We hope you find the slides of interest.
Please do take a long look at slide two. None of this is investment advice, nor an inducement of any kind to buy units in our fund. All information is enclosed for your interest and use.
Andrew Hollingworth, Fund Manager
16th April 2024
The information in this document is based upon the opinions of Holland Advisors London Limited and should not be viewed as indicating any guarantee of returns from any of the firm’s investments or services. The document is not an offer or recommendation in a jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer. The information in this Report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. In the absence of detailed information about you, your circumstances or your investment portfolio, the information does not in any way constitute investment advice. Potential investors should refer to the relevant Prospectus and Key Information Investor Document for full information. If you have any doubt about any of the information presented, you should obtain financial advice. Past performance is not necessarily a guide to future performance, the value of an investments and any income from them can go down as well as up and can fluctuate in response to changes in currency exchange rates, your capital is at risk and you may not get back the original amount invested. Any opinions expressed in this Report are subject to change without notice. Portfolio holdings are subject to change and the information contained in this document regarding specific securities should not be construed as a recommendation or offer to buy or sell any securities referred to. The information provided is “as is” without any express or implied warranty of any kind including warranties of merchantability, non-infringement of intellectual property, or fitness for any purpose. Because some jurisdictions prohibit the exclusion or limitation of liability for consequential or incidental damages, the above limitation may not apply to you. Users are therefore warned not to rely exclusively on the comments or conclusions within the Report but to carry out their own due diligence before making their own decisions. Authorised and regulated by the Financial Conduct Authority (UK), registration number 538932. All rights reserved. No part of this Report may be reproduced or distributed in any manner without the written permission of Holland Advisors London Limited. Investment Manager: Holland Advisors London Limited (registered number 538932), registered office The Halt, Smugglers Way, The Sands, Farnham, Surrey, GU10 1NB.