Simon Edelsten of Mid Wynd International discusses fund's profitable switch from US online colossus to three leading Japanese automation companies.
Knowing when to take profits on a successful investment can be one of the trickiest decisions investors can face, particularly when it concerns online juggernaut Amazon.
Shares in the American e-commerce giant have leaped 57.5% in the past year as its growth shows no signs of slowing but Simon Edelsten, co-manager of Mid Wynd International (MYI), has no regrets about selling the investment trust’s former 2.7% position in Amazon (AMZN.O) half way through last year.
That’s because he and co-managers Alex Illingworth and Rosanna Burcheri enjoyed a profitable ride, buying in when the shares traded at around $400 in April 2015 and completing their sale when they broke through $1,000 in June last year.
The shares have since jumped around 26% to over $1,200, valuing the Jeff Bezos led company at $592 billion (£437 billion), making it the fourth biggest company on the US stock market behind Microsoft (MSFT.O), Alphabet (GOOGL.O) and Apple (AAPL.O).
But the Citywire A-rated team, who also manage the Artemis Global Select fund, are sanguine having used their Amazon profits to buy Japanese automation stocks Nabtesco (6268.T), Daifuku (6383.T) and Yaskawa (6506.T), which have mostly done even better, soaring between 44% and 120% in the past six months.
The 96% rise in Daifuku is particularly neat because as a world leader in warehouse automation it is a cheaper play on the rise of e-tailers such as Amazon and its rivals, which need increasingly sophisticated depots to serve the world explosion in online shopping.
Valuation is a key point for Edelsten. Amazon, with its shares now trading at 310 times their earnings of the last 12 months, had simply become too rich for his liking. While rivals at Scottish Mortgage (SMT), are happy to maintain Amazon as their biggest holding and focus on its impressive growth in non-retailing areas such as web services, Edelsten and the team at Artemis see danger signs in its original retailing business, particularly after last year’s surprise $13.7 billion acquisition of Whole Foods.
‘This [grocery] is one of the most difficult sectors within retail – you’ve got the lowest margins and short shelf life. That’s a long way from where Amazon started, popping high-margin CDs through letterboxes,’ said Edelsten.
‘Amazon has also grown in high-population-density countries like the UK and America, but its newest territory is Australia. That will increase overall delivery costs per package. It’s clear that the easy, lower-cost territories have been done, so there are strong reasons to believe future growth will be less profitable,’ he explained.
Edelsten admits that Baillie Gifford’s James Anderson and Tom Slater, who have turned the £6.5 billion Scottish Mortgage into the biggest and most successful equity investment trust in the UK, may be right to hang on to Amazon in the belief that its huge re-investment in its businesses will reap even bigger rewards down the line. But for him it’s too dangerous.
‘Firms, like Amazon, that have huge capital expenditure programmes and make their profits only when they’ve taken over the world are very hard to value. I want to feel a margin of safety on how much cash they’ll make per share over the future and that got harder to judge last year,’ he told Investment Trust Insider.
It’s an approach that will appeal to some investors. Since winning the contract to run Mid Wynd from Baillie Gifford in 2014, the Artemis team has re-established the £163 million investment trust as a good but less risky performer in the global sector.
Over three years the shares have delivered a total return, including dividends, of 64.7%, according to Numis Securities data. That beats the 53.7% of the MSCI World index and the 61.3% average of all global equity trusts. True, it’s miles behind the 92.3% achieved by Scottish Mortgage but its growth has been generated with nearly half the volatility of its big rival and a third less than the sector average.
The portfolio is deliberately less concentrated with 55-70 holdings each accounting for between 1.5% and a maximum 3% of assets. By comparison, Scottish Mortgage has 75 holdings but nearl7 9% invested in Amazon, its top position.
‘I think investors in the fund are comfortable with us leaving parties early – especially when there are new parties going on in less fashionable parts of the world that we can join instead,’ said Edelsten.
Charge of the robots
Yaskawa and Nabtesco, which make vital components for robots, now account for 1.2% and 1.6% of the fund after their recent surge. Yaskawa is a leading manufacturer of DC server motors that enable machine workers to move and Nabtesco makes the reduction gears that render nimble enough to handle eggs and soft fruit.
Daifaku, now 1.7% of the trust, is also a play on robotics, as it provides the machines to load and move pallets without fork lift trucks and their drivers. ‘As Amazon expands, which is going to need more automated warehouse space, just about everyone who is trying to compete with Amazon will need to automate as well,’ said Edelsten.
The purchases of the three stocks have made automation the dominant story in the portfolio, at 17% of assets, ahead of other growth themes such as online services, tourism, healthcare and emerging markets consumers.
Japan is a world leader in robotics. The trust’s exposure also includes stakes in Keyence (6861.T) 1.5%; CKD (6407.T) 1.1% and Toyota Industries (6201.T) 1.1%; and outside Japan a holding in US laser manufacturer IPG Photonics (IGP.O)
The managers' interest in automation has grown over the past four years as the price of robots has fallen and the range of activities they can undertake has risen. As production costs have tumbled, multinationals have moved factories back from emerging markets to bases closer to their home markets where they can respond more quickly to customer tastes.
For example, last year saw Canon (7751.T) move camera manufacture from Thailand to Japan while Adidas, which has faced criticism for the use of child workers, has opened fully automated plants in Germany.
‘Where companies like this lead, others will have no choice but to follow. So this is now a major trend,’ said Edelsten.
Small but growing
Although small by the standards of the AIC Global sector, Mid Wynd has more than doubled in size since May 2014 when Artemis replaced Baillie Gifford after the retirement of its previous, longstanding manager Michael MacPhee. That increase is partly down to good performance and a bull market that has swelled asset values but an active discount control policy - that aims to keep the share price within 2% of net asset value - has also helped, enabling the board to issue 26% more shares, including nearly £6 million released in a placing and open offer last year.
Ongoing charges of 0.67% a year include an annual management fee to Artemis of 0.5%.