Down to earth
James Hamel of Artisan Partners explains how his agrarian roots have helped shape his growth strategy.
Artisan Partners’ Growth team draws upon the language of the land and soil to help form its approach to growth investing – the US fund manager’s three-stage capital-allocation system is ordered under the labels of ‘Garden’, ‘Crop’ and ‘Harvest’. James Hamel, co-manager of the St. James’s Place Global Managed fund, explains how growing up in a farming community still informs the way he thinks and goes about investing.
Q. What are the origins and advantages of your investment approach?
When managing director Andrew Stephens and I started Artisan Partners’ Growth team in 1997 we were looking for a simple way to explain our capital-allocation process – both internally, for our team, and externally. I come from a small farming community and Andy has a similar background, so perhaps it was natural that we should use our agrarian roots. This approach is a very effective way of communicating how we view our investments and where we believe companies are in a profit cycle – whether they are in the early stages or further along.
Q. What are the key features of a ‘Garden’ investment?
Garden investments are the seeds for growth in the portfolio. The first thing we look for is a high-quality company with solid franchise characteristics that allow it to fight off competitive pressures. We then look for a reasonable valuation – the difference between the market price and what we think an outside buyer would pay. We aim for between 60% and 85% of what we would expect a strategic or private equity buyer to pay to own the entire company and its future cash flows. Then we look for a catalyst that we believe can accelerate profits. We would normally start with a small position, typically accounting for between 0.5% and 1.25% of the total value of the portfolio. There are usually between seven and ten Garden positions at any one time.
Q. When does a Garden investment become a ‘Crop’?
We would normally expect the inflexion point, when profits accelerate, to occur from two to four quarters since the initial investment. Some take longer, but provided we still believe in the franchise quality and the strength of the catalyst for growth, we have the flexibility to be patient. That said, we anticipate we will initiate some garden positions that fail to play out as we expect – about a third or so – and that never become a Crop holding.
Q. How long will the Crop phase last?
It depends on our view of each stock’s franchise strength, profit cycle and valuation. Some Crop investments stay in the portfolio for a long time – we have held some for five to six years.
Q. What is the signal that you should start harvesting an investment?
There are a few factors we look for. Perhaps the product or service we saw as a profit catalyst has begun to mature. It may be that competitive pressure develops, or that the profit cycle begins to deteriorate more quickly than we had anticipated. Occasionally, the profit cycle may be proceeding as we expect but the shares simply become too expensive. If we believe the valuation has become unreasonable, we will trim our holdings.
Q. How long does a harvesting period last?
Sometimes selling will take place over a long period. Sometimes it will be rapid if, for example, a competitor comes along and exerts pricing pressure on the business. Sometimes a company we are harvesting can go back into the Crop phase. Starbucks is one example. We bought it in November 2008 and quickly pushed it into the Crop – we liked its North American restructuring efforts and its expansion plans in Asia.
After a period of solid appreciation we began harvesting in the third quarter of 2012. We felt the profit cycle had matured and there were more interesting opportunities elsewhere. However, we began increasing exposure again in 2013, putting it back into the Crop. Management was reigniting growth with an improved food menu and single-serve coffees. The firm also acquired the tea brand Teavana, providing another runway for growth.
Q. In what proportions do you hold the three stages?
Typically, we will have roughly 15% of the portfolio in the Garden, 70% in the Crop and 15% that we are harvesting. In general, the top 20 to 25 positions will account for between 60% and 70% of the capital.
The opinions expressed are those of James Hamel and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.