Caledonia: Time is on your side, if you know how to use it
Each investor looks at markets through a different lens. Our view is informed by our long history as a fifth-generation family office. The lessons from our past show the key to reliable investment returns is taking a long-term approach, harnessing time rather than working against it.
Caledonia (CLDN ) has a unique history, starting life as a shipping business and, over time, evolving into an investment trust with a long track record of delivering consistent returns for shareholders. We have developed a clear set of values and have learned lessons from our history. We recently launched a new manifesto to further embed those lessons and values in our business, which we have called ‘time well invested’. We believe these lessons have broad applicability for everyday investors.
While we invest in both public and private markets, what we look for in companies is the same. Our priority is to support high-quality businesses with predictable, reliable revenue streams and high barriers to entry, and that take a long-term approach to ownership.
The four Ts
History has demonstrated that in the fullness of time, these companies will outperform and deliver strong compounding returns. To find and select these investments, we use the ‘three Ts’ framework: team, thesis and track record. However, a fourth T, time, can be added to help reap the rewards.
Firstly, it is critical to understand the team running the company you are investing in. We invest in companies with excellent leadership that can not only set a company’s strategy and galvanise its employees to deliver, but also adapt to an ever-evolving market environment. Change is the only constant and companies need leaders who can react accordingly.
In some cases, in our private capital business, we have managed a succession or brought in new management best suited to the environment in which the business is operating. This past year we sold Seven Investment Management after nine years of ownership. In that time, we managed a leadership succession to support the business as it developed a new strategy, expanding into direct-to-consumer distribution.
We brought on board a new CEO and chair alongside new members of an executive committee to deliver on this vision. Ultimately, it is the people in a business who are responsible and accountable for delivery. Backing the right team is essential.
The second T, thesis, is the basis on which the investment will grow. Caledonia’s central thesis is to find companies in established sectors with predictable and reliable revenues. We look for companies with a track record of repeatable free cashflow that deliver consistent returns to investors while being run for the benefit of all stakeholders.
Our investment in Watsco typifies this process. Watsco is the largest distributor of air conditioning, heating and refrigeration equipment in the US. It provides a product and service that is necessary, operating at scale in a market with high barriers to entry and opportunities to further improve through technology and digitalisation. It is a company with a clear view of its forward earnings, which has consistently borne fruit. Since our first investment in 2017, it has delivered a 22% annualised return (as at 31 July) for both our capital growth and income portfolios.
The final T is a company’s track record. How a company has delivered historically is not always indicative of future performance but it is a critical consideration. Credibility is key for companies. This is built over years of delivery against targets and an ability to react to evolving market conditions. No matter how great a strategy is, if the company has a track record of poor delivery, then the outcomes remain highly uncertain.
Time horizon
The three Ts framework has been the cornerstone of our investment approach for some time, but we can perhaps add a fourth T: time. This applies both to time in preparation for investment as well as hold periods.
Our bottom-up research includes extensive due diligence, which often takes years, as well as patience to make sure we invest at the right time. From there, our time horizon for investments is much longer than many other investors’ average hold periods. This allows us to look through short-term issues and cyclicality and buy companies on the basis of our fundamental analysis.
An example of this from our current portfolio is Oracle, a company we have held for about a decade. The company is exceptionally cash-generative with high levels of recurring profit, which provides a degree of protection.
At the time of our original investment, we were confident growth would be able to accelerate, driven by the company’s transition to a cloud and subscription business model alongside a significant programme of buybacks. Its share price has had periods of volatility over the years, which has allowed us to buy on weakness and top-slice our investment on strength. Over the years the investment has delivered strong compounding returns – 17% annually since 2014.
Investment trusts are a great way for investors to access markets and investment expertise in a tax-efficient manner, but it is critical to scrutinise your approach and have a clear plan.
Private investors can use the very same framework when analysing their own investments. Time is their biggest ally. Those who focus on funds that think in terms of ownership rather than trading and manage investment risk effectively rather than taking advantage of shorter-term market trends will see that returns will follow.
Mat Masters (pictured below) is CEO of Caledonia Investments, the £1.8bn Cayzer family-backed multi-equity, global investment trust.
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