Alex Savvides, high performing manager of the JO Hambro UK Dynamic fund, has revealed the reasons why he thinks it is no longer prudent to own Anglo American shares, and has been selling them since December.
He commented that during the past year the ‘penalties for underperformance’ from companies have been severe, that is, that the market reaction has been severe if any bad news emerges.
Savvides continued that Anglo American was his highest conviction investment at the start of 2015. ‘The 75 per cent fall in its share price over the 12 months resulted in a punishing negative contribution. When the Anglo American shares were first bought for the Fund in late 2013, net debt:ebitda was less than 1.5x, with clear targets from the new management team to improve productivity, free cash and return on capital. However, as events transpired, the commodity market did not give management the time needed to get their house in order, and, as prices slumped, the balance sheet position worsened materially. By yearend 2015, on spot pricing, net debt:ebitda had ballooned to around 5 times. This was a painful reminder of the sometimes incredibly damaging effects of marrying both financial and operational gearing together at the wrong time in one investment. With hindsight it is clear that continuing to back the shares on any through-cycle or long-term valuation basis in the face of such balance sheet uncertainty, and in the face of an extremely momentum-focused stock market, was just wrong. Whilst the major damage had already been done, by the middle of Q3 we had stopped buying the shares as they fell and had switched to selling into any share price strength. By the end of Q4, we had reduced our position to a +1.3 per cent active position, with the majority of these share sales made at prices between 550-600p. This was a painful decision given our previous high conviction, the low long-term valuation and also given the crystallisation (for now) of the prior losses that had been suffered.’
The fund has returned 49 per cent over the past five years, compared to 38 per cent for the average fund in the IA UK All Companies sector in the same time period.