Commentary

The underperformers during the month included Stagecoach and East Japan Railway, both down 12% in local currency terms. One of the enduring consequences of Covid-19 is likely to be more working from home. Technological developments over the past ten years have made straightforward what previously was more problematic. Employers resistant to flexible working will find it more difficult to resist in the future. Management teams in service businesses that we have met virtually over the past few months have, almost without exception, said not only that a large proportion of their employees work from home, but that they are more productive. Most of these companies are now looking at how they might reduce the amount of office space they use. Businesses which rely partly on commuter travel may suffer. Stagecoach, with its buses, and East Japan Railway, with its trains, are among these.

Bus businesses are generally fairly stable businesses, and Stagecoach has been able to produce operating profit margins of around 10% on revenues of about £1 billion. It may be able to do so in the future, with the ability to reduce frequency of service and to vary price on its monopolistic routes. The operating profit of Stagecoach’s bus business has ranged from £100-£150m over the past seven years. The enterprise value is now just £700m, which is exceptionally cheap for what should be a stable business provided that the working from home impact is not too great. East Japan Rail is also a remarkably stable business. Until Covid 19 its revenues and profits have moved in a narrow range for a decade and more. The company has been naturally affected by the suspension of services not only on commuter routes but on the route from Narita airport; and it has missed out on the expected benefit of the Olympic Games in Tokyo. But the Games have been postponed, not cancelled, and East Japan Rail has an asset value well in excess of the current share price.

The list of stronger performers during the month was headed by Alpha Bank and Deutsche Bank, up 19% and 12% respectively, both remaining at large discounts to their asset values. There are signs that, where lockdown has been eased, the bounce back in economic activity is closer to V than to U or to L. Of course, a second wave, locally or globally, would be very damaging. But if easing continues then the combined effects of enormous fiscal and monetary stimulus and of pent-up demand are likely to create stronger growth than was feared. The European Commission recently revised their forecast for German GDP growth next year to over 6%. Bank write-downs may therefore be much less drastic than feared; and banks such as Alpha and Deutsche have in any case much stronger balance sheets than they had twelve years ago before the global financial crisis.

Jamie Carter is leaving the firm to take up a position at Longview Partners.  Jamie was one of the founding partners of the firm with Richard Oldfield and Nigel Waller in 2005, and has been chief executive since 2013.

Jamie has played a key role in the development of the firm over the last 15 years, and all his partners are grateful to him. He goes with our best wishes.

The board has asked Nigel Waller to become chief executive.  He will delegate a great deal of the running of the firm and client relations to his colleagues on the management committee Chris Driver, John McEwing and Ed Troughton and to Dave Gallagher in the US.  This will allow Nigel to remain firmly focused on his role managing the global and EAFE strategies with Andrew Goodwin and as chief investment officer. The investment team is not impacted by Jamie’s departure.