Ten questions for...

Monday 28 January 2019

Simon Barnard 
Author: Maha Khan Phillips

Simon Barnard, CFA

Simon Barnard, CFA, is portfolio manager of the Smithson Investment Trust, which became the largest investment trust launch in history in October, after raising £822.5 million at initial public offering (IPO). He talks to Professional Investor about his career, and experiences in the investment industry.

1. What brought you to the investment world? Was it always something you were interested in?

I was fortunate to know from an early age that I wanted to be an investor. Perhaps it’s because my family often struggled financially while I was growing up, but for as long as I can remember I have been interested in the concept of creating and compounding wealth through investing. This led me to focus my energy on learning how to invest, particularly in equities, but also to tailor my school and university subjects towards accessing a career in investing. As it happens, it is still a subject which I spend much of my free time reading about.

2. What has been the biggest challenge you have faced in your career?

Years in which you lose money are always difficult, even if you have a long-term focus. I remember a time a few years ago which was particularly stressful because one company I owned in large size was performing very poorly, despite what I thought was an extremely attractive valuation for such a good company. It taught me that valuation is not a good short term predictor of performance. 

3. What it’s like being part of a record breaking Investment Trust IPO?

It has been incredible, I feel so fortunate and privileged to be a part of it. The IPO beat all of our expectations. The fact that so many investors were willing to commit to the new fund before its launch really speaks volumes to the trust that has been created by Terry Smith and Fundsmith, based on consistent strong performance.  

4. Tell us a bit about your current role?

As portfolio manager of the Smithson Investment Trust I am responsible for selecting and managing the investments held within the fund. These require constant monitoring and analysis, along with searching for new potential investments, although the positions in the fund are rarely traded. This whole process couldn’t be done without the rest of the Smithson team - Will Morgan and Jonathan Imlah – and the oversight of Terry Smith as the CIO of Fundsmith.

5.What trends and themes do you believe are particularly important at the moment?

In general, I try to ignore most market and macro-economic themes. Although many people do try to forecast such things, very few (if anyone) are consistently correct in their predictions. Therefore, the only trends or themes which interest me are those which are causing companies I’m focused on to trade at attractive valuations. Such themes currently include market concerns around rising interest rates, Brexit and the US/China trade negotiations, all of which have led to some high quality companies to trade on lower multiples than we have seen for a few years. Although I don’t know how these issues will play out, at least I know that a certain level of risk has now been priced into these equities, which is a good place to start our analysis.

6. What is your investment philosophy/approach?

My investment philosophy is now well defined, although it’s ultimately the result of distilling the views and actions of many successful investors whom I have studied over the last 15 years (including Terry!). It can be summarised by saying that I look for companies which have high returns on invested capital, strong free cash flow generation and have reasonable prospects of reinvesting that cash back into the business at high rates of return, which should generate compounding earnings growth over the coming years. The sustainability of those high returns and cash flow (i.e. their competitive advantage) is key to the process. The idea is then to buy these companies at valuations which provide me with an outlook for double-digit total shareholder returns per year, and then hold them for as long as this remains true (preferably indefinitely). This long term outlook essentially lowers my risk of capital loss on individual investments, because the longer you hold a growing company, the more likely you are to make money. Put it this way: if I were to hold the S&P 500 index for 1 day, I’d only have about a 50/50 chance of making money. If I were to hold it for 15 years, I’d be almost certain to make money (as there has been no 15-year period since 1930 when you would have lost money – although it could, of course, happen again in the future!). Risk and time are more closely connected than many people appreciate.

7. Where do you see the biggest opportunities at the moment?

I only look at a few industries, those which I believe will generate strong shareholder returns over time, which include technology, healthcare, consumer and some industrials. That means I tend to ignore any capital intensive or very cyclical industries. So, out of the industries I focus on, I think there are some particularly interesting companies in software at the moment, where there is still strong growth, recurring revenues, extremely high margins and good cash generation (leading to reasonable cash-based valuations). There are also a few high quality industrial companies which have been caught in the US/China trade tariff crossfire which look attractive at the moment.

8. Something we don’t know about you?

Being a motorsport fan, I raced cars for several years (until my first son was born, at which point I could no longer justify the risk to my health!).

9. One thing you would improve about the business of asset management if you could…

I would remove short term performance measures for analysts and portfolio managers. It can often lead to decision making which is not in the best long-term interests of clients.

10. How did you come to study the CFA Program, and has it been a rewarding experience?

The Program was supported and strongly encouraged at the firm I began my career with, so it was a natural progression after joining the firm. Studying accounting within the Program was invaluable, and it was also rewarding to learn about other parts of finance which I was not directly exposed to through my role.

 

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