In August, the NAV was up 0.4 percent on a total return basis and the share price was up 0.6 percent, on a total return basis, while the index was up 2.4 percent
As 2020 progresses market participants are in danger of losing the plot – I know I am. Too much time staring at screens, too much misinformation, too much volatility. And for professional investors almost certainly not enough time spent having a reflective, sobering cup of coffee with a respected colleague. I wasn’t designed to work as a sole trader.
I need to stop and think. And whenever I do that I always turn to what the companies we invest in are actually doing. In particular those companies that take a long term perspective when investing in their own business. Here are a number of such decisions recently made by portfolio companies.
Diageo announced the purchase of a craft gin in the USA – Aviation American Gin. This brand part-owned and endorsed by celebrity Ryan Reynolds. No I hadn’t heard of him, but that is almost certainly the point. Basically we’re pleased to see that some companies are robust enough to be doing deals in the current environment. It is a reassuring sign that boards aren’t just in fire-fighting mode and that balance sheets and liquidity are in good enough shape to make investments for the future. And although Diageo is far from betting the farm on Aviation it is not a trivial deal. Total consideration could be up to $610m, with an initial tranche of $335m. It is also ostensibly an expensive one. Aviation has been in exponential growth and Diageo is paying 20x sales for the right to try and take the brand to another level. As others have remarked, the deal is reminiscent of its acquisition of George Clooney-sponsored Casamigos in 2017. A transaction that raised eyebrows at the time, including ours – because of the headline cost. But a deal that looks smarter and smarter as the US spirits boom continues, with premium brands leading the way. Diageo has the balance sheet, the distribution and the expertise to make these deals work and we were cheered to see the announcement.
RELX too bought a business in August. The company was SciBite, a Cambridge-based privately held company that creates software for the pharmaceutical industry, helping it analyse data to create efficiencies in drug discovery. Terms were not disclosed, but rumoured to be c£65m. Clients include AstraZeneca, GSK and Novartis. Again, this is not a transformative deal for RELX, but a classic one nonetheless, adding to its capabilities in science and pharma research. The company has now spent some £800m in 2020 on similar data/AI assets – thereby reinforcing its position as a global leader in the provision of important information and tools to important and growing industries. In due course and in happier times we’d wager that newly bullish stock market investors will ascribe billions of pounds of new value to this short £1bn of 2020 acquisitions RELX has made.
We also applaud Burberry pushing ahead with its joint venture new store in Shenzhen, partnering with Tencent. Apparently this will be the interactive store which will revolutionise the shopping experience and stand as a signifier of what shops will look like in the digital age. If you want to know more, consider this: on entering the store you will create a profile and be given a digital avatar in the form of a cartoon fawn that hatches from an egg. Burberry says that retail and luxury innovation used to happen in the West, but now the East is where experimentation is done and where youth is most responsive to new digital marketing. It’s great that Burberry has such brand resonance in this part of the world and still has an appetite to invest and innovate.
By the way, we note that Burberry shares are down over 30% in 2020. Meanwhile, Prada shares are essentially unchanged – we own those in our global fund. Now, Prada is not Burberry, nor vice versa, but there are real similarities in the investment case; not least that both still have strategic issues to work through to become better businesses. So it is hard to analyse the difference in share price performance between the two as being anything else than a punitive discount being placed by global investors on a company that is listed in London, rather than Hong Kong. Apparently global investors have an aversion to the UK stock market, but this is, in some cases, getting ridiculous.
