September turned gradually uglier as the month wore on, leaving global markets in a troublesome mood.
The FTSE 100 took a small hit, down 0.9% from the start of September to 5th October (the day of writing), but the real pain was felt further down the spectrum, with the FTSE 250 -5.4%, FTSE Small Cap -3.1% and FTSE AIM -5.6%. Before we all run for the hills, remember that the last few weeks have been a glitch in an otherwise cheerful year for UK mid and small caps – even after this sell-off the FTSE 250 is still +11.2% and FTSE Small Cap +18.7% in 2021.
Investors are starting to get jittery for a variety of reasons, but it is that word inflation that really strikes fear in the heart of all markets. It was not long ago that central bankers all decided that using ‘transitory' when in doubt was the best way of reassuring us that the spike in inflation seen in 2021 was not here to stay. There must have been something in the water at Jackson Hole, because the bankers all seem to have changed their tone pretty sharpish since their Symposium at the end of August, leading to an increase in volatility and plenty of conjecture about tapering and rising rates.
In uncertain times, there is no warmer blanket to wrap around you than a Berkshire Hathaway annual report. In his 1980 Chairman’s Letter, Warren Buffett stated that:
High rates of inflation create a tax on capital that makes much corporate investment unwise
He goes on to argue that in periods of high inflation businesses earning returns on their capital that are anything below excellent (he uses 20% as the hurdle) are running the wrong way up a speedy escalator when it comes to creating value for shareholders.
So, I am afraid to say that I have neatly manufactured this comment to end at one of our most consistently reached conclusions – investing in high quality businesses that earn excellent returns on capital thanks to a combination of consistent pricing power and organic growth is the best way to protect and grow our savings. This is far easier said than done and requires businesses with that little something special and management teams that are always looking to innovate to expand their reach and fortify those all-important barriers to entry. To cherry-pick a few examples from recent weeks of companies adding genuine value from within our UK Fund:
- AstraZeneca: announced in September that their breast cancer treatment Enhertu showed a reduction of disease progression or death by 72% compared to current treatments in phase III trials. There are more regulatory hurdles ahead but, if successful, this is likely to be Astra’s largest cancer treatment ever.
- Greggs: sales were +3.5% vs pre-COVID levels in their third quarter and they have set themselves the target to DOUBLE their revenue over the next five years – they are looking to open more bakeries, increase their delivery options and … (wait for it) … expand their supper offering.
- Fevertree: are going from strength-to-strength in the USA, growing sales by 32% in the first six months of the year despite many bars being closed. Over this period they also launched two new mixers, specifically designed for US tastes, and opened their new production plant on the West Coast.
We see all three of these as encouraging examples of already successful businesses innovating and investing in the future. In my opinion, this is the best tonic for inflation.