My best investment - Gervais Williams, Manager, Diverse Income

View the Diverse Income company profile page

Since late 2011 markets have performed strongly.  Plenty of stocks have appreciated and most funds have delivered decent returns.  My best investment over the last couple of years has been Quindell plc that has appreciated from our initial purchase at 2.5p per share to 35.75p now.

There aren’t many that do as well at that, but there are some characteristics that most of the big winners like this share.

Firstly they tend to be small companies initially, often very small companies.  The great advantage of smallness is that the businesses tend to be immature, and therefore offer much greater upside potential.  The market capitalisation of Quindell at the time of our initial investment was around £40m.

Second these companies manage to develop a new service or product that is well positioned for market adoption.  In the case of Quindell they found a way of reducing the claims cost of motor insurance claims.  Claims costs had risen sharply over recent years as those in accidents were encouraged to claim for ‘whiplash’ neck injuries by unscrupulous lawyers, and other companies rushed to provide replacing hire cars to those in no fault accidents.

And lastly quoted companies can take advantage of their quote to raise additional capital to accelerate their growth.  Quindell have made a series of acquisitions to widen their range of services to insurance companies, and that has grown the scale of their contract wins.

Stocks that rise as fast as this imply sizable risks, and some fund managers remain wary.  However, in my view the major insurance companies that have given them many millions worth of contracts will have done very detailed due diligence prior to confirming these.  In addition, though the company has consumed working capital during this period of growth, it has raised more than sufficient capital along the way so the balance sheet has a net cash balance.

The bottom line is that the company is forecast to make 3.8p of EPS for 2014 and 5.1p next, so despite the scale of the price rise it still remains on a sub-normal market valuation. Quindell has been and continues to be a wonderful investment but in truth it has far exceeded our aspirations.  The whole point about portfolio management is that risks are moderated by diversification, and it is this diversification that permits us to invest in a range of stocks that might be the Quindells of the future.

Disclaimer

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice. Whilst Miton has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.