Taking the longer view
It was not the best of beginnings. Peter Boyle was being interviewed at James Capel in Hong Kong for his first job in investment management and one by one the five panelists left the room.
They were being called away to attend to “unusual” equity movements in the stocks they managed. This was Black Monday, October 1987, the day of the global stock market crash.
“I just thought, this isn’t going well!” says Boyle, now able to laugh off one of the worst days for investors in modern times.
Thirty years on and Boyle is now managing director of a boutique investment management business based in the markedly calmer environment of Drumsheugh Gardens in Edinburgh where he and three colleagues set up Kennox Asset Management ten years ago.
The climate is also hugely different to that which brought the markets to the brink in the late 1980s.
“We are in a nine year bull market, which typically runs for seven, so we are on extended time,” he says.
So does he expect a correction some time soon?
He smiles nervously and clearly doesn’t wish to forecast bad tidings. “I suppose the answer is yes, but I’m not going to predict when,” he says. “There is great divergence in the markets. It is black and white, some are forecasting a sharp downturn and others saying the market will continue rising.
“We are now seeing stretched valuations and market darlings, and they are typically the worst hit when it does go down.”
Boyle trained as a lawyer in Glasgow and worked in Asia before making the switch to managing money. He worked in Madrid and London before heading back to Scotland to sow the seeds of Kennox. He was introduced to fellow asset managers Charles Heenan and Geoff Legg by Michael Adam who became chairman and lent the name of his home to the new venture funded out of their own resources.
“Edinburgh has a great investment management community,” says Boyle, explaining why they chose the capital. “It is very collegiate and it is away from the noise [of the bigger financial centres]. Costs are also significantly lower.”
Fate seemed to intervene a second time when they launched the business in 2007, just as the banking crash was beckoning.
‘We take advantage of market short-termism’
“We were pretty excited by the crash because the market was at its low point and there were some great companies at excellent valuations. It was a happy hunting ground for us.”
Kennox has just one fund – the Strategic Value Fund – and the investment philosophy is built around buying stocks which have fallen out of favour but remain good businesses.
“We take advantage of market short-termism. The market generally cannot see beyond a year. If it cannot see the immediate outlook then companies tend to get over-sold.”
He says this short-termism has become more prevalent as markets have become increasingly influenced by fast-flowing global communications, including the media, and investor expectations have shortened the time span expected to achieve the desired returns. Quarterly reporting has not helped, as it means companies are constantly updating and forecasting for each three month period.
“It is a distraction, but we try to look at the underlying quality and sustainability of earnings,” says Boyle.
“This time last year we bought Next. It had been a market darling for years, with growth on growth. They came out with figures showing a small decline in growth and the price came off by 60%.
“It has an excellent management team with one of the most robust businesses around and it was oversold by a short term reaction. The share price has since come back.”
The company does not buy banks because they are highly leveraged, or hi-technology which, he says, are “priced to win” but carry too much risk.
“We are contrarian. We do not like debt and most of our companies have cash on the balance sheet,” he says.
Although he believes Edinburgh is a good environment for fund management he admits that it is becoming less easy to start up, partly because of tougher regulations. There have been few new entrants while a number have succumbed to takeover. Aberdeen Asset Management has merged with Standard Life and Edinburgh Partners last week announced its acquisition by US firm Franklin Templeton.
“We are seeing more consolidation. It is reducing choice,” says Boyle. “We have received a number of offers for this business over the years, but we love what we do and have no desire to sell.”
PERSONAL CHECKLIST
Birthplace: Glasgow
Age: 55
Education: Hutchesons’ Grammar School, Strathclyde University (law)
Career: Lawyer at Dorman Jeffrey, moved into investment management with James Capel, founding partner in two specialist emerging markets investment banks following which he was head of equity capital markets at Banco Santander in London
What do you find frustrating in business?
It is becoming harder for small companies in the finance sector to succeed because of increasing regulation and higher costs
What makes a good business?
A happy cohesive team
What gets under your skin?
Laziness, lack of attention to detail
Any other interests or activities?
I ran the Macau Marathon in 1992. That was it for me. I also speak Spanish
If you could meet three people, past of present, who would you choose?
Warren Buffet, to tap into his considerable expertise
Barack Obama, to hear more about his view on life
Mick Jagger and Keith Richards [almost inseparable] to get the story on their life experiences and what they have learned on the way
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