Former top UK stock picker Tim Steer argues most stock disasters can be spotted in advance if investors look for the warning signs in company accounts.
The manager, who ran funds for New Star and Artemis and gained a Citywire rating for over three-quarters of his fund management career, retired in 2015 and has written a book explaining them.
Steer highlights how these firms' woes could have been spotted well in advance in their annual reports. He also illustrates the lengths companies can go to in a a bid to disguise the true state of their businesses.
In this video interview, he discusses some of the highlights from his new book.
Can't watch now? Read the transcript
Dylan Lobo: Hello, I’m joined by former New Star and Artemis fund manager Tim Steer. Since retiring from fund management in 2015, Tim has been working on a book covering 22 compelling tales about companies that suffered dramatic falls in their share price.
Titled The Signs Were There, the book criticises both fund managers for failing to see the warning signs, and the system, which Tim describes as ‘broken’.
Thanks for joining us today Tim and a fascinating book you’ve written. There are so many investment books out there, why did you choose to write this book in particular?
Tim Steer: Well as you know, I’ve written for papers in the past, I enjoy it, I retired and I thought a good way of putting my past 25 years’, 30 years’ experience together with my writing skills, it would be a good thing to write a book. There are a lot of interesting stories, a lot of interesting lessons and, of course, the book is quite topical because in 2018 we’ve had three pretty major company disasters in terms of Carillion, Patisserie Valerie and Conviviality.
DL: I’m not a fund manager but reading his book, it’s pretty basic advice that you feel like, people who’ve studied, who’ve taken the decision to be a fund manager, should know these rules. It’s like a footballer failing to put on their shin pads or a boxer not putting on their gum shield.
TS: Well it’s not quite as simple as that. Being a fund manager, there are a lot of attributes you have to have to be a successful one. But one of them is to look at and interpret financial statements. Some people are good at it and some people are not very good at it and they rely on other attributes to try and outperform the market. But looking at accounts is very, very important, particularly post Mifid II when there is less and less decent quality research out there for a fund manager to run, you’re going to have to more work yourself. And one of the places to do that work is to look at the annual report and accounts of companies that you may or may not wish to invest in.
DL: one of the stocks that is featured in the book is Capita. Now Neil Woodford, who is widely considered one of the UK’s best fund managers, has held onto Capita for a long time. Why do you think he did that? You saw the warning signs, but he didn’t.
TS: I can’t answer for Neil on why he kept – he may have just sold it, I don’t know – why he kept Capita for a long time. What I can say is Capita, Serco, Carillion: these kind of companies had declining quality of current assets. There was a trend and that trend can be your friend. There was more and more subjectivity in the valuation of its current assets. And we know what current assets do when they are not current assets: they are meant to turn into cash. That’s important particularly for levered companies: Capita and Carillion are, or were. Looking at the quality of those current assets and seeing them deteriorating for me was a big sell sign.
DL: The title of your Carillion chapter was…
TS:…busy fool. Carillion was a busy company because it made lots of acquisitions and it was growing its turnover, quite slowly actually, 3% or 4% over the last five or six years before it went bust. It was busy in that it was busy building things but it wasn’t very busy in terms of generating cash. And cash is king: cash is the most important thing and it wasn’t generating cash. And that was also very obvious from the financial statements.
DL: What about contrarian investing because if everyone followed your golden rules, markets would be very, very efficient. What about looking for that value opportunity, meeting company management and seeing that this guy has really impressed me?
TS: This book is written about fairly mature companies, which have been around for a while, and there are subtle changes in their financial statements which I was able to see. There were warning signs.
Sure, when you see a new company or an entrepreneur going into an old company and there’s a turnaround situation then you park these kinds of rules, or you pay less attention to them and you talk to a manager about his vision, his growth and his strategy. If a new guy goes into an existing company, it’s pretty certain usually that he gets refinanced and so there isn’t a problem about cash which there was related to these sorts of companies.
DL: So what about meeting management?
TS: It’s a very important part of the process. At Artemis you’d see sometimes six or seven different companies a day. And sometimes the lesson I’d say to any young fund manager is see as many chief executives and finance officers of public companies as you can, because you learn so much. And listen to what they have to say and be prepared for those meetings.
It’s a combination of skills and you need to know your debits and credits, you need to understand cashflow, you need to have a rapport with management, you need to listen, you need to be able to talk to competitors. If you do all that, you’ve got a chance of being a fund manager who is going to outperform the index.
DL: You also say that the system is broken. To quote from the book you say the great and the good of the world blame the auditors and increasingly regulators. What’s going on there, why are they doing this?
TS: With the examples in this book, The Signs Were There, it’s important that you understand the title. Many of these companies, or investors, or parliamentarians, have blamed auditors and pointed the finger a little bit at regulators. And you’re right, certainly they are partially to blame and management are to blame for some of the problems that have existed in these companies. But actually I think investors should ask themselves a question as well. Because, frankly, if one had looked at the accounts, you could have seen the problems that were going to come with all 22 companies in this book.
DL: What was the best investment, the best business, you ever invested in Tim?
TS: I would like to mention six, half a dozen off the top of my head because I don’t think you can point at one. I’ll list off maybe six companies that I think are great, that have done really, really well, in spite of all the traumas that the economy has thrown at it.
I would say Ashtead, which since Geoff Drabble has arrived, has been phenomenal. That company was virtually bust before Geoff took it on, and it’s been a sensational stock and is now in the FTSe 100.
I would take my hat off to Paul Pindar at Capita as well. When he started that company, it was worth nothing. He was a young qualified accountant and he built that up to a FTSE 100 company.
I would look at Games Workshop, Tom Kirby. I had a bit of a go at him a long time ago but he’s built an incredible business that is scalable.
I look at Howden Joinery with David [sic] Ingle. These are great companies, there are probably a few more. Those are the kind of companies that I’d be happy to own and I would own now if I was still a fund manager.