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Granola
Whilst I endeavour to eat fruit for breakfast these days, I still often succumb to a sausage roll. However, one thing is for sure, there would have to be a considerable shortage in supply chains (more on these later) for me to walk out of a coffee shop with the yoghurt and granola option!
So why have I titled this newsletter Granola?
You may remember a couple of anacronyms from the past. One of which has proved to be a disaster, the other a triumph (so far):
BRIC
Around 2005 these countries (Brazil, Russia, India and China) were considered the ‘holy grail’ of investment opportunity, whilst there has been some merit in Indian investment the others have had some very troubling times with hyper-inflation, extended lockdowns and assets being frozen as a consequence of war.
FANG
Facebook, Amazon, Netflix, Google. ‘FANG’ has subsequently been replaced by ‘The Magnificent 7’, Netflix fell out (after a huge derating following COVID-19) and was replaced by Apple, Microsoft, Nvidia and Tesla. As previously reported, these holdings have gone very well though, more recently, fortunes have been mixed where some continue to grow (Nvidia and Microsoft), some have seen momentum stall (Apple) and others have ‘run out of gas’ (Tesla). The jury is still out and we anticipate further divergence in performance between shorter term trends and longer term quality technology positions.
Talking of longer term quality holdings, this brings me on to the ‘Granolas’ or more accurately GRANNNOLASS being the latest anacronym in markets, the constituents of which are:
Company
Country Narrative Oats, nuts, dried fruit*
GlaxoSmithKline UK
Roche Switzerland
ASML Netherlands
Nestle Switzerland
Novartis Switzerland
Novo Nordisk Denmark
L'Oreal France
LVMH France
AstraZeneca UK
SAP Germany
Sanofi France
Pharmaceutical company with a focus on vaccines and specialty medicines Oats
Pharmaceutical company specialising in Cancer treatments and diagnostic instruments Oats
The global leader in machines used to produce computer chips Dried fruit
The world’s largest food & beverage company Nuts
A well-diversified pharmaceutical company with drugs used to treat an array of conditions Nuts
Europe’s largest company, the global leader in diabetes and obesity treatments Dried fruit
The world’s largest cosmetics company Nuts
French conglomerate specialising in luxury goods Dried fruit
The UK’s largest pharmaceutical company, specialising in oncology and rare diseases Nuts
Developer of enterprise software used to manage business operations Dried fruit
Pharmaceutical company focused on asthma and eczema Oats
*See conclusion for oats, nuts, dried fruit explanation
Clients might be forgiven for thinking this anacronym was created by Barratt and Cooke as 7 of the 11 companies feature prominently on our buy list, providing some of the key building blocks for portfolios. Furthermore, they carry considerable weightings within the underlying investments in the WS Opie Street Fund range.
‘Granolas’ was actually coined by Goldman Sachs as Europe’s answer to the ‘Magnificent 7’. Let’s be clear though, they are two very different groups of businesses.
The Granolas reflect a much broader section of the European stock market compared to the heavily technology biased Magnificent 7.
These companies boast long track records of resilient and sustainable revenues and profits. Luxury goods, food & beverage, technology and software all feature but there is one sector which stands out; the Pharmaceuticals.
European drug stocks continue to be at the forefront of improving standards of care across the world. They are global leaders and are aided by the obvious demographic trends of growing and ageing populations. Therefore, the risk to future prospects is more muted than in many industries (although, of course, there is always the risk of new entrants or company specific flaws).
It is the predictability and durability of earnings which we believe is the critical difference between the Granolas and the Magnificent 7.
The Magnificent 7 are all US based technology companies and are viewed by many as almost ‘invincible’, they are allegedly set to dominate a sector which offers strong growth prospects, not least the expected acceleration of the sub sector, artificial intelligence (AI). NVIDIA has dominated the headlines thus far where the semiconductor chip designer has seen its market capitalisation rise exponentially since the beginning of 2023, becoming the third largest company listed in the US (behind only Microsoft and Apple).
But, calling the winners in such new innovations has never been easy; Amstrad (computers), Nokia (mobile phones), Yahoo (search engines), Blackberry (smartphones), Friends Reunited (social media) are all examples of early leaders which were soon caught up by competitors. Although a couple of the Magnificent 7 have proven to be robust (Microsoft and Alphabet have been dominant for decades now), the long-term sustainability of earnings in some areas, which has been driving the recent share price momentum, is yet to be tested.
Whilst anacronyms and sayings (such as the dot.com boom) are often created close to the peak of a cycle when the market has ‘euphoric enthusiasm’ for a certain trend, it is interesting that the term ‘Granolas’ was conceptualised when some of the constituents were actually out of vogue, consequently some of the valuation multiples remain well off their highs and therefore the share prices look attractive.
Whilst ASML (the European play for Nvidia in the semiconductor space), Novo Nordisk, L’Oreal and SAP have been stellar recent performers, conversely GlaxoSmithKline, Roche, Nestle and Sanofi have been far less exciting. The expectation is that investors will, once again, be rewarded by premium quality, well capitalised, expertly managed businesses which generate good visible cash flows and, importantly, have stood the test of time.
The expectation is that investors will, once again, be rewarded by premium quality, well capitalised, expertly managed businesses which generate good visible cash flows and, importantly, have stood the test of time.
The argument behind the attractiveness of the Granolas could similarly be used for global consumer goods stocks which have been out of favour for a couple of years.
Global brands
In the January newsletter I talked of Diageo’s disappointing share price and I am pleased to say the drinks manufacturer has seen it’s share price find some support. Estee Lauder, a cosmetics company (from across the pond) has also recovered from its lows, now standing at $145 having been as low as $102 in early November.
Colgate Palmolive has continued its upward trajectory yet the wider sector newsflow hasn’t all been stellar as the share prices of Reckitt Benckiser and Nike demonstrate. We keep the whole sector under review. The 2023 spring/summer sell off (fuelled by interest rate rises) was one of the first times in history that the global consumer brands sector did not act as a lifeboat providing buoyancy in a falling market; in fact it underperformed Index averages. However, in general, global brands remains a sector to have ‘on side’ in the current environment.
Moving with the times: water and tobacco companies
My goodness I’m glad that we have disposed of the majority of holdings in these two sectors (subject to considerable capital gains constraints and special circumstances). Tobacco had been a ‘darling’ sector for income seeking clients for generations as not only did the likes of Imperial Tobacco, BATS and Philip Morris provide good dividends but potential growth as well. However, problems with the smoking ban, lawsuits and advertising (many will remember the iconic scene of Dennis Taylor holding his cue aloft in the 1985 snooker world championship, having potted that final black against Steve Davis, an extraordinary 18.5m viewers tuned in to watch when it was sponsored by Embassy, the cigarette company) in addition to changes in smoking habits, renders this a sector we are now keen to avoid.
We have put a firm restriction on investment for clients who have opted for an ESG mandate which will only be removed if we see better practices and Governance (the G in ESG).
Equally, the recent press about British water companies pumping record levels of sewage into rivers and seas has been startling. The discharge of raw sewerage into our water system is a total disgrace, not only is it dangerous (to the extent that the Cambridge cox could not be thrown into the Thames following victory, a tradition that possibly dates back to the inauguration of the race in 1829), but it is an ecological abomination. When talking of ‘ESG’ forces, the press always leads us straight to carbon emissions but there is so much more to ESG. Water companies are now contributing to destroying marine life, a natural filter of carbon in the atmosphere. As such, whilst we do not hold this sector on our buy list, we have put a firm restriction on investment for clients who have opted for an ESG mandate which will only be removed if we see better practices and Governance (the G in ESG). Incidentally, Xylem remains on our list as a company which focusses on clean water solutions.
Inflation
I was talking to my children about inflation last weekend. I explained that when I first went away to school I would write home every Sunday, which was how we communicated in those days rather than via an emoji in a WhatsApp! In 1987 a first class stamp cost 18p yet on 2nd April 2024 the cost of a first class stamp was 135p. That’s inflation! To be fair one of my absolute favourite 10 minute slots of the week is on a Saturday, when Mark the postman and I chat about the boxing, football, rugby or the place from which he rescued the dog that I had lost! I do however fear Mark doesn’t benefit much from this inflation and nor will it go into the pot for Mr Bates and his poor comrades affected by the awful Post Office scandal.
You will probably have heard the recent inflation numbers; CPI fell from 4.0% to 3.4%, a marginal ‘beat’ on expectations. Whilst Hunt and Sunak might have started to claim victory, much of this is from the easing of supply chains and the energy price cap falling out of the numbers, neither of which is down to Conservative policy. We are still a fair way from the 2% target and let us not forget this is still a 3.4% rise in prices on top of 2 years’ worth of massive rises already. Whether inflation manifests itself in shelf prices or goods reducing in size via ‘shrinkflation’ (disappointing girth to Easter eggs this year), costs are stubbornly high and in the service sector inflation remains at 6%. I’m pleased to say that bar a small increase in the nominee fee, we have kept our charges as they have been for the last 10 years, absorbing costs that many would pass on to their customers. As you will know, inflation is measured on a basket of goods and services, which clearly has to develop over time, but to see pints of Guinness and rotisserie chickens substituted for vinyl records (niche), air fryers and pumpkin seeds is a little bit sad. We are still a fair way from the 2% target and let us not forget this is still a 3.4% rise in prices on top of 2 years’ worth of massive rises already.
Interest rates
UK base rate remains at 5.25%, but the Bank of England might soon be able to take their foot off the neck of consumers and ease them a little.
We envisage that towards the end of the summer there will be some welcome respite for mortgage holders. It won’t quite be enough to oil the wheels of credit, perhaps ‘this time’ (though we say this every time) consumers will realise the danger of cheap debt which is only cheap whilst interest rates are low, except in the US where mortgages are purchased on 20 year terms (a sensible strategy which gives the Federal Reserve a bit more room for manoeuvrability).
A fall in rates will be good for companies as not only will it soften the cost of corporate borrowings but it will also mean that depositors will start to look again to equity markets for returns. Rates will not fall off a cliff though, and the days of free money seem well behind us, but at least the Bank of England have now got to a rate from which they can cut.
Whilst we are in the year of an election it is important to note that central bank policy has always had a far greater influence on stock and bond markets than the incumbent government. We look forward to Andrew Bailey’s next visit to Norwich; it is encouraging that he tours the regions.
Whilst we are in the year of an election it is important to note that central bank policy has always had a far greater influence on stock and bond markets than the incumbent government.
Not all portfolios are the same, they are dependent on client appetite for risk, objective, time horizon and market timing of entry (where some portfolios went in three generations ago and some very recently). However, on balance the absolute numbers over the recent six month performance period have been encouraging. Of course, the previous period was challenging, that’s the cyclicality of markets and many felt a similar level of frustration. That said, we will always invest for the long haul, it’s an ultra-marathon rather than a 30 yard dash, and as I look down portfolios now I really do believe they remain well set.
Performance reporting
I am pleased to add that we are now reporting portfolio performance on a total return basis (capital movement plus income generated net of costs)
For too long we have undersold ourselves by just presenting the capital numbers, where income was often received on top but paid away to client bank accounts. We continue to absorb all charges within the performance report i.e. the percentage reported is after all costs. Furthermore, we now show the benchmarks in their total return form i.e. including the roll up of income to ensure that you can compare ‘like with like’. Some clients have been asking for this for some time; it has taken a while to find a suitable solution which incorporates income not retained by us, but it is a really positive new development.
We never know what will be thrown at us next with atrocities of war, pandemics, changes in Governments, cybercrime; however, I feel we are positioned prudently yet with some good scope for growth whilst our research analysts continue to find exciting new opportunities.
Dividend growth
Occasionally I get told by some clients that these newsletters aren’t technical enough, I totally accept that, but our preference has always been to try and write in clear, understandable English so that at the very least all readers get an idea of portfolio positioning and our views on markets. As a consequence, the narrative tends to be thematic rather than too analytical. We do however do deep research behind the scenes which we are becoming increasingly happy to share with clients.
Edward Sidgwick and Harry Dodds have written a piece on dividend progress (growth) and the importance of this to the long term total return of an investment. So often we get distracted by current yield, which doesn’t take into consideration the price paid and is actually less important in the long run than the rate of dividend growth. Their report can be found on our website www.barrattandcooke.co.uk/ insights. If you would like a hard copy or would like such analysis to be sent to you on an ad hoc basis do let your Investment Manager know.
We will always invest for the long haul, it’s an ultra-marathon rather than a 30 yard dash, and as I look down portfolios now I really do believe they remain well set.
Other news
We have witnessed Farmers across Europe saying enough is enough. We await further news on immigration and the debacle of the Rwanda agreement. We have seen Trump gain strong support in the Primaries despite heavy litigation. We wish our King and Princess well in their fights against cancer. We salute Alexei Navalny, the bravest of men.
Stephen Skinner
Those clients who had portfolios managed by Stephen will know that he retired on 5th April 2024. Stephen served Barratt and Cooke and our clients with excellence, expertise, diligence and above all care. It is testament to him that so many clients wanted to bid him farewell and have their moment to say thank you. I know from correspondence with some of them that this was heartfelt thanks with absolute sincerity.
Put simply, Stephen had become a friend to many. He is a man of great integrity and his retirement has been planned for some time, so he was able to pass on his encyclopaedic knowledge of Trust management to Alastair Jackson and Nicholas Burrows, who worked closely with Stephen, as well as the wider team.
I thoroughly enjoyed working with Stephen and shall miss his sense of humour and dry wit. It was a particular pleasure for me to work with him when we sat next to each other in the Disaster Recovery site during COVID-19; we even managed to share his biscuits whilst social distancing! He supported me as I penned the most challenging of these publications in April 2020 as the pandemic hit. Whilst we had confidence markets would recover, they were in freefall and the unknowns at that stage were extraordinary. He was a great sage, reassuring me as I wrote. As a former secretary of the Norfolk County Cricket club I can only describe his tenure here as built on the foundations of a Boycott like defence but with the flair of Kevin Pietersen (I’m not sure he’ll like that analogy – but I hope he takes it as a compliment!).
Thank you Stephen from all of us, clients and staff alike, we’re grateful for all you have done. We look forward to turning your ton into what Graham Gooch called a ‘daddy hundred’. As you have always said, ‘it’s a team game’ and we’re ready to kick on!
Conclusion
I’m surprised it was pumpkin seeds rather than granola which made it into the inflation basket; the trendy cereal is now a staple on many breakfast tables.
Whilst the ‘Magnificent 7’ is full of zest, the ‘Granolas’ (per the chart on page 1) provide a fantastic mix of:
Oats
The more conservative, high dividend paying plodders
Nuts
A little more flavour, with slightly more attractive growth prospects.
Dried fruit
The ‘zing’ in terms of likely volatility, but potentially the holdings which put a smile on the face.
As you set out on an ultra-marathon you will never regret having granola for breakfast! Similarly, I do not think we will regret siding with some of the granola stocks, but there is of course plenty of scope for numerous other opportunities (including US Technology). However, above all, when valuations of certain sectors are hitting mind boggling, potentially unsustainable levels, it is positive to know that the slightly less ‘trendy’ old school staples are catching the eye.
And so we await the date of the UK General Election and look forward to reading the manifestos. We are trying to become ever more transparent with our investment process and rationale for portfolio construction, and in this context let’s hope the major political parties show us their plans too in order that the electorate can make an informed judgement come polling day. We will see.
William Barratt ChairmanApril 2024
