John Armitage of Egerton Capital is featured at StreetStories
October 08, 2005
Market Wizards Index: +27%
Compound annual over 6 years
Fund or affiliation
Egerton Capital
Methodology
Trading undervalued equities concentrating in the European markets.
Research/ Stock Selection Techniques Employed
Depending on industry groups, but mostly he would pick one of the best (qualitatively) companies in a sector.
Pays absolutely no attention to country or industry weightings.
Avoids companies which cannot grow through their own free cashflow on a sustainable basis. Management shouldn’t tolerate dilution of capital. (shareholder value)
Preferably, one finds good management and good business; but good management can sometimes make money out of bad businesses.
Not every company can be number one in its market, but a nice niche will do. This is a proxy for sustainable growth.
Cashflow is king.
The cornerstone is meeting and discussing the business and industry with management. Armitage is like an archer... with a quiver full of questions. Every answer generates another question. He also treats all answers with an instinctive scepticism.
Armitage source ideas by "working with the most talented stockbroking firms and using their really bright analysts... Why hire someone if you can pay commissions and work with the best? There are many creative thinkers out there who spend their lives visiting comapnies. You should know them."
Trading Techniques Employed
He cuts back market exposure when he is underperforming in rising markets since this shows that he is not doing his job properly. The net long/ short position is a result of being tactical about markets, but strategic about stocks.
He shorts to make money, not for hedging. If you need to hedge an individual position, perhaps you shouldn’t be in it. Actively looking for shorts is a good discipline.
Review and rebalance the portfolio each month as if starting from scratch. Aim is to have a combination of stocks which will move in the s-t and sleepers which will pay off substantially. "...think of it as a bakery... sell bread everyday but make extra profit from selling wedding cakes every so often."
Buy at multiples below the underlying earnings growth rate.
Risk Control Techniques Employed
Portfolio concentration is limited to 10% of book cost at Egerton. This is a higher risk strategy, therefore, it is important that the businesses are not correlated.
He doesn’t short companies with rising earnings, even if their multiples are very high. Fundamentals are easier to understand than valuations...valuation is market psychology and what cause the next buyer or seller to emerge. Who knows?
Armitage explains the high portfolio turnover: You shouldn’t hold position in things which you can’t justify quite well. ‘We own X because we want something in Germany’ is not a good reason.
Philosophy and beliefs
If you take a position in a security, underlying that must be an assumption that there is an inefficiency in the pricing. So you have to ask yourself, ‘What do I know that the market does not know, and am I really sure about what I know?’
"The only I know about is Europe and stocks... not interested in trying to compete with people in other areas..."
"Everytime you short when there is a bad earnings release, you are making a sale which someone else would like to have made." Said Bollinger.
It’s critical that what he knows about must be worth knowing. He tries to focus on market inefficiencies, rather than companies which are correctly valued.
Shorting markets is for hedging only, anything else is speculation.
History and other facts
Egerton was started in May 1994 with partner William Bolinger.
"Some brands can travel well around the world. In Europe Heineken has such a franchise and has grown its exports."
Performance Record
27% over 6 years: Armitage spent the last 6 years at Morgan Grenfell managing the European Growth Trust. The fund ranked first on a cumulative basis since inception.
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