Whether it’s an impulse buy or a pre-planned addition to your wardrobe, all “must-have” purchases have that inexplicable attraction that influences a buying decision - love at first sight! The love of a great pair of shoes or statement necklace often comes with a connection to the brand. Calvin, Michael, Tommy… they just get you, right?
We’ve looked before at how to invest in companies we love, but how do you know if they run their balance sheets as well as they design the must-have bags?
With this in mind, we asked Vivian Lo, Vice President & Portfolio Manager with Aston Hill Asset Management, about assessing our fave brands as investments. Here's what she had to say...
Are brands close to your heart a worthy investment? Vivian explains...
- Q: Many of us have heard (and used) the term “due diligence” before, but what does it really mean?
When it comes to investing, before you can make an informed decision on whether to buy or sell an investment, you need to research - a lot! It’s a good idea to start with what the company does and what the company's business model is (i.e. how the company makes money); then proceed to things like: What are the levers it can pull to generate higher sales and operating margins? How strong is its balance sheet? There are deeper level questions to ask as well: How much leverage does the company have? What is its strategy towards capital deployment (i.e. plans to reinvest back into the business and return capital back to shareholders in the form of dividends or share buybacks)? Are there any near-term catalysts (positive or negative) that would impact the company? And finally, it’s good to also look into the future of the company: What are the longer-term opportunities of the company and within the industry in which it operates?
- Q: There’s a lot to consider when looking at a company for investment, isn’t there?
Yes, and it even goes further from there! It’s important to research and understand what the risks are in that industry. Consider things like: Is the industry consolidating? Is there more industry regulation? Is it declining? And also what the company-specific risks are (such as too much leverage, declining customer base, poor operating performance). It also involves comparison shopping in terms of how the company is valued versus its peers. Just like with any other purchase, you need to know if it is more or less expensive than its peers, and the reasons for a price difference.
Before you invest, it’s also very important to determine what your return objectives are and how much risk you are willing to take on - so that you can set your time horizon for being invested in the company. I generally invest with a time horizon of 12-18 months, meaning once I’ve bought a company I’ll hold it for that period of time in order for my investment thesis to play out.
- Q: Our first instinct, and the reason we do our due diligence, is to avoid a bad investment. Are there obvious warning signs that a company might not be as good of an investment fit as their stilettos?
As with all the above criteria I mentioned, you always need to evaluate investment decisions based on more than one metric. It’s important to look at the opportunity as a whole, and not solely on one positive or negative data point. When conducting my due diligence, it varies in terms of how long it takes to evaluate a company. Sometimes a quick decision needs to be made in order to take advantage of an investment opportunity and I will only have one day or even a few hours; in other instances I have more time, such as a few days or weeks. It really does vary.
In terms of warning signs, characteristics of companies I tend to avoid include: businesses in secular decline, meaning that the industry is in a long-term state of decline (i.e. typewriters, phonebooks); and, companies with limited growth opportunities. I also avoid companies with poor management teams, or those who have a high turnover in leadership; you’ll often see this instability reflected in the share price. Also, there might not be any positive catalysts that will point to an increase in market value. Even though some companies may seem “cheap”, without a catalyst I generally won’t invest. I also look out for “one-trick-pony” companies - companies that rely on only one product for their success.
- Q: One of your areas of investment expertise is the retail sector in North America. Does investing in areas you are passionate about give you an advantage for success?
I would say that covering the retail sector is very interesting and fun - it’s never boring! And it’s definitely easier to relate to sectors you experience on a regular basis, but I don’t think that is the sole determinant of success. I think success is driven by one’s desire to constantly challenge oneself and the desire to learn.
When it comes to success in investing, there is a ‘science’ to it - analyzing a company, understanding the industry it operates in, crunching numbers, etc. But there is also an ‘art’ to it. By that I mean, the qualitative elements such as determining the quality of management, reading in-between the lines of what management teams or analysts say, and even deciding when to pull the trigger to buy and sell. In these moments, there is no exact science; this is definitely an art that comes with experience. You also develop a ‘gut-feel’… sometimes something doesn’t add up in the analysis even though it appears to be a good investment, and when that happens, I don’t invest.
- Q: Your Aston Hill Global Growth & Income Fund was just rated by The Globe & Mail as the best performing “global fixed-income balanced fund” for 2013. Is there a benefit to investing in a portfolio, as opposed to owning a single stock?
Yes, there are absolutely diversification benefits associated with investing in a portfolio - the old saying of “not putting all your eggs in one basket.” There can also be considerable benefits for your time and overall financial goals. Obviously, there is reduced concentration risk by investing in a portfolio rather than just one specific company. You’ll also have much better representation in the portfolio across different sectors and industries, asset classes and individual companies. Essentially, a portfolio reduces volatility. And when managed by an investment professional, you’ll get their expertise in managing money because, well, it’s our job!
- Q: What is the one key piece of advice you would give to new investors?
I would say, even if you think a portfolio strategy would best fit your style, always do your homework before investing. As I originally said, in order to make an informed decision on whether to buy or sell an investment, you need to research. A dress can look great on the hanger, and a company can look great on paper, but the fit does not always translate with the markets or our portfolios. There are a lot of “great ideas” out there, and I’m sure they all sound good. Some of them might even be great, but understand what the risks are and how you could lose money. As with any good sale - shoes or stocks - read the fine print!
- GGF: Thanks Viv! We’ll be checking in with you soon about our due diligence practice.