There may be an impression that it's sort of just me working on my own in an ivory tower somewhere, but it's not. It's the three of us and actually a much, much bigger team behind us as well. When we're making decisions, they are considered, they're challenged, there's different perspectives brought to bear.
As much as we might be very passionate about ideas we like, or very passionate about ones we don't sometimes, it's degrees of comfort with different types of uncertainty.
Hello and welcome to a Value View from the Merchants Trust. I'm John Cronin, and in this episode we're going to do things a little differently. Usually we spend our time talking about markets, companies, and investment ideas. But today we're going behind the scenes to explore something that's just as important, namely how those investment decisions are actually made. Joining me are Simon Gergel, lead fund manager with the Merchants Trust, together with Richard Knight and Andrew Kosh, who work alongside Simon as part of the investment team. We're going to lift the lid on how the team works together, how ideas are challenged, and why different perspectives can actually lead to better investment decisions. So, Simon, Andrew, Richard, great to have you in the studio. Thanks for your time.
Great to see you, John. Good afternoon, good to be here.
Well, look, we've got lots to chat through and the opportunity of speaking to you all as well, which I think is really exciting, really different for us. We've brought the whole team together, and Simon, you and I have spoken many times over the years now on a Value View, and this is the first time that we've brought the full team together. So, why do you think it's important to have this conversation?
I think it's really great because there may be an impression that it's sort of just me working on my own in an ivory tower somewhere, but it's not. It's the three of us and actually a much, much bigger team behind us as well. And it's really important people understand that when we're making decisions, they are considered, they're challenged. There's different perspectives brought to bear, and it's not just me. And you know, if I fell under a bus tomorrow, there's other people there as well. So there's all sorts of reasons why it's important to understand that there's a team behind it.
Hopefully you're not going to fall under a bus at any point soon. But that sense of the team is, I suppose, it's exactly as you say, it's more than the sum total of one person.
Yes. I mean, any person, any individual is subject to biases, to errors of judgment, or just missing stuff. So it's great to have other people looking for ideas, challenging, discussing, and that makes everyone more effective, I think.
The other thing I'd say about that is quite a number of fund management companies, they are based on a star, one person. That can work well, but often one person will have times when they're out of favor, or their style goes adrift, or they lose focus, and it's not like that at all here. There's a very strong team behind Simon.
Okay, Andrew. Thank you. So, well, let me stick with you on this. What actually happens then when someone has an investment idea around you?
What we're trying to do is use the experience of all of us, our different knowledge, our different strengths, to pull it all together to challenge the idea, see where we could be getting something wrong, look for the weaknesses, probe everything, and just get to the truth of will this make a good investment or not, irrespective of whose idea it is, whether it gets in the portfolio or not, is this the right idea?
Okay. Challenging each other, Richard, is what Andrew is saying there. Looking for the weaknesses in the ideas. Is that your experience too? Is that what you bring to the table?
Absolutely. And first of all, I just want to say it's a pleasure to be here. I'm a longtime listener and first-time guest.
And, yeah, Andrew and Simon are absolutely right. It's very important. We're all quite strong-willed people and we have our own views and ideas, and we're, you know, we're not shy about challenging each other's views. But what's really important is we think similarly enough, have that shared philosophy, a value-based philosophy, meaning that we can sort of debate robustly but still be speaking the same language, and I think that's really important.
Right, so more of you means not just more scrutiny, but more ideas.
It can, yes. I think there's a balance. Too many people in a team and perhaps processes can kind of grind to a fairly slow pace. Three is actually a really excellent number because you can mediate between disagreements much more easily with a third party that maybe doesn't feel quite as strongly on the issue as two of the others. So I think three is an excellent dynamic.
And what we try to do, even with three people, if somebody is passionate about an idea and the others don't find a fatal flaw in it, then we may well, even if the other two people don't think it's such a great idea, we may still have a small position in that company, a small investment based on the passion and the conviction of that one individual, because I believe that everyone should have some influence individually. But I think where we do agree, we tend to have the biggest positions.
Well, let's expand on that a little bit more, Simon. You're sort of talking about the various different positions that you might take. What are the different roles then that you might assign or see each other as having? I mean, indeed, if you do.
Yeah. Well, I think we all have different areas of expertise. I mean, Andrew's got a lot of expertise on the pharmaceutical sector, for example, healthcare. Richard's got a huge amount of experience on energy and banking. So we have areas, sectors that we're stronger on or closer to than others. But we're all generalists at heart. So each of us can look at each other's investment case, which we have a written investment case we'll present. Each of us is capable of looking at an investment case and having our own view on it. So we're all sufficiently general to do that. But there are definitely areas that we've got more experience of individually.
So kind of areas of sector specialism, as you say, and that just means that you can dig a little deeper as an individual and advise the rest of the team. Richard?
It means that often the person who might have a little bit more experience, a bit more familiarity with a sector, might take the lead on an investment idea. But that generalism is core to all of us. And we shouldn't be too humble or shy about it, because although it means that, you know, we're not spending all of our time, you know, building up a very deep expertise just in one area, we are all responsible for all the ideas in the portfolio. We're confident to talk about them. We're not delegating our decision-making, you know, our judgment or our ability to make a decision. And I think that's really, really important because it means we can all take a whole portfolio view.
Right, so a bit of collective responsibility, perhaps.
Yes. I mean, there have been occasions where someone has been the champion for an idea, say the tobacco sector, and it's worked poorly for us for a while. It's super helpful to be able to go to a colleague and say, 'Am I getting emotional about this? Will you come in and do a review for me? I know you're not the expert, but a fresh pair of eyes.' And that's what we did a couple of years ago, and absolutely the right decision to make. If anything, increased our position, and that came home in spades over the next two years. But it's very helpful to increase your conviction if you can have a fresh pair of eyes and say, 'Yes, I completely agree with the initial diagnosis, the initial analysis. Keep going.' I think that's possibly even more important with our sort of value-based style, because we quite often find ourselves in reasonably contrarian positions where there is always an argument, or often an argument, as to why something's gone wrong as we're thinking about putting it in the portfolio, or even keeping it in the portfolio if we're perhaps a little bit too early. So that sort of challenge and someone taking the other view to sort of say, 'Well, actually, this is, you know, cheap for a reason,' as they say, is really, really important.
So, this all sounds very healthy and harmonious, but what about disagreements? You know, you're three experienced professionals. You're not always going to agree. How do you deal with disagreement? It sounds like you encourage it, but, you know, if it's strong, if there are very strong views, I mean, Simon, that must be something that you have to think about.
Absolutely. And I think the first thing is we all respect each other. So we can disagree, you know, quite passionately sometimes about an investment idea or whether a company — it's less about the company, it's usually more about whether it's a good investment than whether it's a good company. But we can disagree about that, but we respect each other's views and opinions. I think if there's a lead person who's really pushing something, and as I sort of tried to say earlier, and the others are okay with it but maybe not really in agreement, but I try and encourage people to have some individual situations which they push and they monitor, because otherwise one of the problems of being contrarian is often your colleagues don't agree with you either.
Yeah. But that can still be right, you know, if there's an idea that's been well thought through, to have a small position there because it may well be the right call. But more often than that, I'd say we either all three of us agree or at least two of us do. So it's important to have that right environment.
