Introduction: Barnaby Wiener oversees the MFS Prudent Capital Fund in London, which targets total returns over cycles by investing in a wide range of diversified assets. He has been at MFS for 21 years and is a former Captain in the British Army. This is an edited version of our discussion.
GH: You talk about the continuous balance between wealth preservation and wealth creation. Where are you at the moment?
BW: We’re at the extreme end of wealth preservation, as our book is currently positioned as defensively as it could be. It’s driven by our assessment of the opportunities arising from the risk and return opportunity available to us. And that is driven by a combination of valuation and an assessment of fundamentals, both at a micro and macro level.
Right now, generally, equities are risky relative to their history, and at a macro level, there are huge imbalances that have developed over a period of decades. It seems inevitable that until we actually address those imbalances, the system will become ever more fragile.
At the micro level, we see so many sources of disruption and threat for individual business models, partly driven by new technology. It makes it a challenge to find companies we have real faith in with respect to the durability of their cash flows and business model.
GH: Why do you place such importance on the ‘principal versus agent’ problem? It features at the start of your investment beliefs.
BW: The only person that matters is the principal when it comes to the investment. We’re all operating on behalf of a principal, whether it’s a wealthy family, or an individual with a retirement plan. There are so many layers of intermediation in our industry. Someone who’s directly charged with the responsibility of managing money must have the mindset of what’s in the interest of principal, the owner of the money.
The background to its prominence was my frustration with the constraints of traditional relative return investing and being measured against the benchmark.
GH: You have list of attributes that you look for in a company, but you admit that no company meets all these criteria. And there’s no algorithm that allows for a trade off. With great companies such as Apple and Facebook, how does your investment process balance the risks? For example, the risk of regulation for Facebook, the risk that the next iPhone model might fall behind Samsung.
BW: We all struggle with it. It’s fascinating that I can have conversations with colleagues looking at the same business through a similar lens but still coming out with a different conclusion. From our perspective, we’ve never been able to get comfortable with the sustainability of the Apple franchise, partly because it is so dependent on the next product. The value proposition means Apple products are extremely expensive. Yet I know the extent to which people are willing to sacrifice a huge percentage of their income on an Apple product.
We believe Facebook is inherently a more durable business model than Apple, because of the extraordinary platform as well as Instagram. There are negative aspects but I think people are locked in. It’s an extraordinary tool for connecting with people and for advertisers to reach that target audience. For particularly small companies who don’t have the means to advertise on traditional media like TV or billboards, Facebook and Google have given them a route to market that didn’t exist before.
There are obviously concerns about how the internet is regulated, not just Facebook. We’re being paid to take the risk, but nothing is ever clear cut.
We try to be disciplined and rational in our approach, but all decision making involves an element of gut instinct and emotion.
GH: You say that all equity investing has an element of guesswork, and yet valuation is your primary investment tool. How do you reconcile those positions?
BW: Actually, we spend much more time focusing on our assessment of the durability of the business, because there are lots of companies trading on optically-cheap valuations which we don’t go near, such as banks and energy companies or companies that have challenged business models. Valuing bonds is a pretty exact science but valuing equities is not, because you don’t own any right to the cash flow. So ultimately, we take a holistic approach, with a focus on sustainability.
GH: Some prominent fund managers place great emphasis on calculating the intrinsic value of a company, but you think DCF (discounted cash flow) analysis is too much guesswork.
BW: The financial world in general has become enslaved to the Excel spreadsheet, and I don’t think that is ultimately healthy. Most of the things that really matter can’t be measured in a cell in a spreadsheet. One example is corporate culture. I think it is one of the biggest indicators of long-term success in a business. You can’t quantify that but you know when you see it.
This is a job that involves subjective judgment, with an overlay of a rigorous approach of questioning. But ultimately, we make judgment calls.
GH: All fund managers say they think long term, but they face pressures to perform in the short term. Where is the biggest challenge to long-term thinking strongest? Is it from your clients, your own self esteem, or from your company expecting you to perform well?
BW: I don’t feel it’s a significant challenge with clients. We’ve been clear about our approach and that there’s a risk that we will be defensively positioned as the market goes up. I think clients understand what we’re doing. They’re not buying the strategy purely as an equity strategy, the volatility is much lower and our peer group is multi asset.
The internal incentive structure is designed to reward the longer term, and it helps to have been at the firm for over 20 years. The biggest pressure is probably self esteem. I can’t completely detach myself and say it’s just an academic exercise. I would like to get it right. It’s frustrating when a strategy is wrong for a while.
GH: Also in your guiding principles, you talk about the need to know your own weaknesses. Are you talking at a personal level or a company weakness?
BW: It’s more about being aware of personal biases. One’s biases can be a good thing, but you need to be conscious of one’s self knowledge.
GH: For many of our readers, the biggest challenge is the asset allocation piece, deciding how much to have in each asset class. What guidance do you have for someone with say a million dollars to finance their retirement?
BW: Firstly, what is their timeframe? The shorter the timeframe, the more liquidity they need. It also depends on the valuation of financial markets. If they buy into equities at peak multiples, they can take a long time to retrieve losses. Understanding the mathematics of compounding is also really important. If they lose half their money, they have double it to get back to the start.
You could say just invest and leave it there, and that’s true in theory. But we can’t divorce ourselves from our emotional response, and who’s really willing to endure that kind of market volatility. It’s all very well say, you got a million dollars fully invested, and in a bear market, it goes to $400,000, that’s alright because we’re at the bottom of the market. The reality is, you’re sitting there thinking, I’ve lost over half my money.
I think people should err on the side of conservatism, but that doesn’t mean be fully in cash. Our investment strategy is trying to manage that on behalf of the end client. It’s designed to give people peace of mind.
GH: What major insight does your experience as a Captain in the British Army bring to your investing?
BW: I think it’s a broader perspective on life. The financial world can be in a bubble of its own making. There are many aspects beyond investing that show what one’s values are. I think some people get wrapped up in the trauma of investment decisions, and it helps to be somewhat detached. The army was a very different experience to the one I’m in now.
Graham Hand is Managing Editor of Cuffelinks, and he met with Barnaby Wiener on 20 March 2019. This article is for general information purposes only and does not consider the circumstances of any investor.
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