Investment Process

  • Ideas sourced from network and quantitative screening
  • Investment Team due diligence results in ‘Springboard’ investment (c.2-4%) or expanded DD
  • Expanded due diligence circulated to and enhanced by IAG
  • ‘Core’ investments (initial 5-15% NAV), typically a block trade or company re-financing
  • Active management involves Stakeholder engagement, Results/Industry and thesis monitoring
  • Exit liquidity through corporate activity (primarily) or secondary market demand (larger investors post recovery)

The process by which the above philosophy is put into effect is unashamedly simple. It is focused on establishing a proper understand of a potential investment’s business fundamentals, a clear view of intrinsic worth and the catalysts for change and value realisation. There are four stages:

Idea identification is driven both organically and systematically. We generate ideas through our interest in markets, innate curiosity about companies and incentive to find outstanding investment opportunities. We have large, established, arguably unrivalled, networks across the UK small cap universe. This is bolstered by the networks of the IAG. In addition we quantitatively screen the small cap universe for companies with depressed valuations and profitability relative to history. These ideas inevitably lead to an initial company meeting (we often have met them historically), preliminary analysis and the development of a simple potential investment thesis.

Due diligence is then commenced on those companies where the initial thesis and meeting confirm an opportunity may exist. The amount is significantly greater for potential ‘core’ investments. Huge amounts of information are now available to investors. The key is having the skill to know what is important, the ability to analyse and enhance our understanding of risks and specific drivers of a company’s intrinsic value and the time and dedication to do the work required. A focused portfolio significantly increases the time we have relative to other competitors, where typical small cap portfolios have 60 to >100 holdings. During the process for potential ‘core’ investments, the Investment Advisory Group (IAG) is contacted for their insight, network opportunities and initial concerns. This is then incorporated into the diligence process. Prior to entering into a ‘core’ position a thorough investment memorandum is circulated to the IAG and Board. We would seek executive management buy-in (if no change is needed) to the strategic and operational changes required to drive value and where appropriate will seek Board representation. For non-‘core’ investments a simpler investment memorandum is documented.

“conventional wisdom suggests that for investors more information these days is a blessing and more competition a curse. I’d say the opposite is true, coping with so much information runs the risk of distracting attention from the few variables that really matter.”

John Neff

Execution: The manager has full responsibility for investment decisions which will have been discussed within the Investment Team and, for ‘core’, the IAG members. For ‘core’ investments a ‘block’ stake or company financing event is usually needed which will involve liaison with company advisers. All orders are managed by Harwood’s highly experienced in-house dealer. Regularly the opportunity for a ’core’ position is not immediately available and thus a ‘springboard’ position will be taken if the upside is clear and patience is required to scale up.

“search the parks in the world’s cities, there are no statues to committees.”

Barton Biggs

Post investment, holdings are monitored through on-going financial results analysis, meetings with management and Board members, input from industry, sector and company analysts or experts. For ‘core’ investments, a summary ‘annual review’ will be circulated to the IAG and Board, including an updated target valuation/price. For all investments ‘exit’ theses are established at the outset. For ‘core’ investments this will often require high levels of Board engagement, communication with other shareholders of our views, and a pro-active approach, leading to a sale of the business and a ‘control’ premium. Secondary market sales are also possible as other investors re-consider a rehabilitated company, usually with business and share price momentum.

Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust"

Charlie Munger