Gary Channon: the three things I look for when buying a company
Merryn Somerset Webb talks to Phoenix Asset Management's Gary Channon about what he looks for in an investment, and how he's made a return of over 12% a year for the last 18 years.
If you missed any of Merryn's past interviews, you can see them all here.
Merryn: Hi, I'm Merryn Somerset Webb. Welcome to another MoneyWeek video. I am here today with Gary Channon, who was one of the co-founders of Phoenix Asset Management in 1998, and has been the manager of the Phoenix UK Fund ever since.
Now, this is a fund that most of you won't have heard of, because it's really only open to very large investors, but it has a phenomenal performance record, an average of just over... I think just over 12% a year since launch.
Gary: Yes, 12.5%.
Merryn: Which, relative to the FTSE as a whole, is rather good, so we're going to talk a little bit to Gary about how he's done this, what his investment principles are, and then we're going to talk a little bit about a new vehicle that he has, that the likes of us may be able to invest in. So, Gary, tell us a little bit about how you invest, and how you've come to this rather impressive performance record.
Gary: Well, I suppose we spend a lot of time finding the right sort of companies, and we separate finding the right companies from when we invest, so our process, very simply, is: business, management, price. We try to find double A, so the right business and the right management, and then we wait for the right price.
Merryn: OK, what makes the right management?
Gary: OK, integrity, first and foremost. That's what we look for. Competence, so we're not looking for great managers, we just buy great businesses. We want them to not mess them up, be competent at running them, but we need them to be allocating capital in ways aligned with our interest. Those are the three key things.
Merryn: So you want them to be owners and invest in capital for the long term?
Gary: Yes, or thinking like owners. The way that they're incentivised is in line with us either they own a stake, or they're founders, or the way that their remuneration is set up, aligns them with shareholders.
Merryn: So they don't hold a whole pile of options that vest after two years of super-high short-term profits?
Gary: Yes, that type of thing.
Merryn: That would be bad.
Gary: Yes, that would be bad.
Merryn: OK, good, so that's management. The right kind of business?
Gary: We have a whole manual for how we do this, but the key things are high return on capital, and pricing power. Most of the businesses we look at, we throw away, so we can't value them. So in order to be able to value them, there needs to be some sort of predictability in the future cash generation, and the way that might come near some form of pricing power, so some sort of franchise.
It might be that they've got a consumer franchise, or brands, or some form of oligopoly or strong market position, but we need that, and we need the high return on capital. The high return on capital is, sort of, in some ways, a proof of how strong the franchise is, how predictable it is, how defendable it is, and also the economics of high returns on capital work very well for us.
But the other key ingredient, which is probably slightly different for us, is the transparency, so we view all our businesses through the eyes of their customers. We mystery shop, so we only invest in things that we can put someone in the field to see the business in action, so that's our real risk management. Most of what we do in the office, two thirds of the work, is testing our businesses in the field.
Merryn: So you can't really invest in something that you couldn't mystery shop for.
Gary: Yes. So, we can't buy Rolls-Royce, because even Rolls-Royce doesn't tell you what they sell the engines for, and their customers don't tell you what they sell the engines for, so we wouldn't be able to see whether they were doing well until we had the profit warning.
Merryn: OK, and you're not prepared to go out there and pretend you're in the market for ten jet engines.
Gary: We've tried. We've been to conferences, we've been to trade shows, because it has a lot of other characteristics that we like, but we can't monitor it, and if we can't monitor it independently from management, we don't invest. So, yes, there are a lot of businesses that are like that, especially in the business-to-business space, where we can't put ourselves in for a business to earn a high return on capital. The customer's doing something. Why can't they go to an alternative? Why? And if we can see why that is, and we model it, and then we go and test it, and test it, if it changes, hopefully we'll spot it early.
Merryn: OK, but is this a process that suggests that you might find yourself heavily invested in consumer-facing industries at the expense of others?
Businesses are quite rational in their spending, humans are much more emotional. So a lot of the best franchises are consumer-facing, because the purchase reason has got something to do with human behaviour
Gary: Yes, and that's true, but there are business-to-business ones where you can monitor it, or where there's enough in the public domain that you can see. We test the transparency in saying what can we see . Can we see sales, can we see profitability, and can we see market share shift? So there are business-to-business companies where that's the case, but also, when you supply in a business-to-business space, quite often you shouldn't earn an excess return on capital. Businesses are quite rational in their spending, humans are much more emotional, so a lot of the best franchises are consumer-facing because the purchase reason has got something to do with human behaviour, and so I don't think we miss much in that sense.
Merryn: So there's business, and management, and how do we look at price?
Gary: So price we want to pay a price where on our downside scenario, on a stress test, we get our money back, so we don't want to lose our money, that's the bottom price, and then we take a central expectation, we model cash, we don't model earnings discount and we want to discount it at 50%, and essentially we don't want to pay any more than half of what we think it's worth. So 50 pence in the pound is, sort of, the highest price we'll pay, so we take out all gearing.
We don't want a risk of ruin, so we assume that we pay off the debt, and we pay off the pension liability up front, but we wouldn't buy a business where cyclicality or some sort of swing would take it out, because we make a very focused portfolio, so we can't have any zeros.
Merryn: And do you specifically look for low-debt businesses?
Gary: I mean, low-risk gearing, so it doesn't have to be low debt, it's just the debt shouldn't imperil the business, so some businesses with small amounts of debt are imperilled, and other businesses can take decent amounts of debt and not be imperilled, and sometimes there's an illusion that things look imperilled, like house builders, say
Merryn: I remember, actually, you were very early to house builders, weren't you, in this cycle? I remember having a conversation with you about it, and thinking, gee, I don't know, it sounds a little dangerous going into house builders now. This must have been when?
Merryn: 2008, yes, and I was very uncertain about this, and you were very firm on it, and brilliant; you made a killing.
Gary: Yes, we did well, because we've been investing in house building now for 17 years, and we look at it in a very different way. The way we look at it, it doesn't look so risky. Through accounted earnings it looks horrific, but, I mean, we invested in Barratt.
They came into the credit crunch with £1.2bn of debt, but they were spending a billion a year on land, so the moment you stop buying land, you generate loads of cash. They came in with £1bn of work in progress, so already half-built house, that, then again, turn into cash.
And then we were mystery shopping at that point, about 250 of their sites, so we knew they were selling 200 houses a week, so we could see the money was coming. We talked to management.
Merryn: It's you who are the agents' worst nightmare, going to visit show home after show home, after show home, and never actually coming up with the money to buy a house.
Gary: That's why we have to cycle people. So we use lots of relatives, and because eventually, yes, it wears thin, when you haven't bought, so we rotate and cycle people, so in terms of sites we'll visit now, it's about 50, but we strip the rest off the website.
If you go to the website, and every four weeks you take the data off, you can see how many plots are sold, and so we monitor them, Barratt and Bellway, in that way, and we have a pretty good estimate of their sales rate, just by every time you go back, you can see how properties have shifted.
Merryn: So which house builders are you holding at the moment?
Gary: Barratt and Bellway.
Merryn: Yes, and you're confident with that now... even now?
This is just a wonderful time to be a house builder. It's not because they can sell houses. They've always been able to sell houses. There's an under-supply. The returns on house building have become much higher than you'd expect them to be at this point in the cycle
Gary: This is just a wonderful time to be a house builder. It's not because they can sell houses. They've always been able to sell houses. There's an under-supply, so they build the right product. We've got two national house builders, so they're not making any in London, or any kind of regional bias. So in a market that's under-supplied, you build the houses, you can sell them.
You have to take whatever price the market happens to be at that time, but you saw what happened in 2008, you don't get a much worse shock than that, but there was no overhang by the end of December 2008. It clears in an undersupplied market. The thing that's very interesting at the moment is you've got a lot of government schemes, a long of government behind, so it's making it very easy for them, and the planning system's eased up enough that there's an excess of land, so the returns on house building have become much higher than you'd expect them to be at this point in the cycle. They're still getting deferred terms. Yes, if anything, the margins they're buying land at now are higher than they were four years ago, and you would have thought, after this much run up, that that wouldn't be the case, and that's really the government's effort to free up land, and the absence of competitors. There aren't any middle-sized...
Merryn: Yes, that's an interesting point, isn't it? A lot of the middle-sized and the smaller builders disappeared in 2008, so the competition has rather disappeared, or the local competition.
Gary: Every cycle's done that, so since the war, you've gone from 20,000 house builders down to whatever that are registered now. It might be 11,000, but in reality the top ten are now more than half the market. It's extraordinarily concentrated. It's very hard to be a mid-sized house builder. The small guys tend to work on local knowledge and planning gain, but the scale economies that you need, the environmental standards, all of these things, so when a middle-sized house builder's bidding against a big house builder, its cost of build is so much higher, so they can't afford to bid the same level for the land, you know, financing's harder but I don't think that's the issue now holding back the middle-sized house builders, it's those scale costs. Labour costs you more, because you don't have the same regular amount of work that a Barratt or Bellway can give, so, yes, that has happened. Each cycle we've been through in the last 40 years has increased the concentration at the top end. It's not straightforward building practices
Merryn: Now this is quite a focused portfolio, at 15, 20 stocks? How many at the moment?
Gary: 17, and the top five are usually more than half the portfolio.
Merryn: OK, and what's in the top five at the moment?
Gary: So Barratt's our biggest holding, Lloyds Bank. We hold something called CPP which is something we bought about a year ago, and we didn't put such a big weight on it.
Merryn: And what does it do, CPP?
Gary: Card Protection Plan. So this is an unusual situation where we've effectively provided capital for a business coming out of a regulatory situation. It got stopped from selling its card protection plan it was sold with. When you activate your credit card, it protects you against losing your credit cards, and replaces them, but they were selling it on the basis of all the other protections, which, actually, you got from the bank anyway, if you lost the card, and so they had a mis-selling scandal. They had to then pay back all of that money, which damaged the business. But at the end of that, that was all finished and we gave them some capital to re-emerge on the other side.
Merryn: And you're happy with the integrity of the management?
Gary: Yes, well our chairman is now their chairman, and so the prior management was all gone; the management changed during the regulatory process, and the regulator had to be happy with those changes. And we've emerged with a 40% holding in that company.
We valued it in two ways: one is, we could close it down and make a good return, or it performed well and we'd make a really good return. And that was the basis, and we like to think that when we do something, we don't go in with any expectation that we're going to lose money, and that was the case earlier and, sort of, more protected by having a big stake and nominating a director.
Merryn: OK, so that's the top three.
Gary: So what shall I talk about, JD Wetherspoons and Sports Direct?
Merryn: OK, so those complete the...
Merryn: How much mystery shopping do you do at Sports Direct?
We're drawn to industries where the Competition Commission has looked at them and found that competition doesn't work property, and the operators earn excess returns
Gary: So we have been involved in Sports Direct since 2007, so in those last eight years we probably do 50 a year, and we do UK, and we do Europe. It's changed, so at the beginning we were judging Sports Direct versus JJB. They weren't the number one, so we had to go and see how... well, that competitive dynamic, that's what we look for in the mystery shopping. So we go to a cluster, like when we do supermarkets... sorry, I didn't mention Tesco, so... but we have Tesco and Morrisons also, in the portfolio. So we tend to look at an area, say, if I'm a customer these are my choices. So, I can go to JJB. I can go to Sports Direct. What's going on? What product can I buy? And how do they compare on price, or how are the staff, and all of these other issues, how they shop, so at the beginning we were testing Sports Direct versus JJB, and then JJB disappeared, and so now we're testing Sports Direct versus any other competitors that emerge.
We mystery shop them online, so we basket test against Amazon and eBay, and any of the other competitors, and then we go and visit parts of their European operation. But having made that original investment in 2007 into 2008, I mean, they floated at £3 and then we were buying at a £1.50 within six months of the float, so it halved. It went down to 30p. I think we paid about a pound for our first investment. It then ran to £8. We trimmed it in, sort of, 2011 to 2013. We took most of that money off the table, left it about a 3% weight and then... and now we're buying it for 60% lower. It's £3.60 or something, and it's the same business all the way through. This is just the beauty of the market. They hated it. They loved it on the float. They hated it afterwards, and then they loved it, and it went into the FTSE and stuff, and now they hate it and it will be coming out of the FTSE, but all the way through it's an absolutely brilliant team. They're a fantastic retailer and when you dig a bit deeper it isn't how it seems on the surface. I suppose a lot of our investments are like that. The time we make them, they look ugly, but actually when you dig a bit deeper they're not as ugly as they seem.
Merryn: OK, interesting. Well, I'm sure that, at this point, viewers are beginning to say, well how do I invest with this genius?
Gary: Well, we've made plenty of mistakes so we should talk about HBOS.
Merryn: You'd better tell us about one of your mistakes before we move on.
Gary: OK, yes. The probably worst thing we've ever done was invest in HBOS, which is now our Lloyds holding, so we'd be better off if we never went anywhere near banks, but we're drawn to industries where the Competition Commission has looked at them and found that competition doesn't work property, and the operators earn excess returns, so UK retail banking's one of those, and so...
Merryn: Shouldn't that be a danger signal? And that if competition isn't going to work properly you can expect waves of regulation endlessly.
Gary: Yes, but what's good, in all those studies what was interesting is the problem's effectively humans... that people wouldn't switch. So, initially, they thought well, it was hard to switch, so they made it easier to switch.
Merryn: We still won't switch, will we?
Gary: And then they did it for businesses, and they said, look, businesses think that they benefit by staying with the same bank, and look we can show you the switching companies pay less, so they had to force banks to pay interest to companies, so even companies doing their own purchasing couldn't switch banks. So, at the core of the problem with banking, or the excess returns, is this lack of switching. And retail banking... I mean it's got a bad press, but mortgage lending in the UK has never had a loss-making year, so if you owned all the mortgages in the UK, you've never had a down year, whereas you can get into trouble because you've focused in a particular area, or you've had the wrong capital structure, but the worst loss was a 90 basis loss... point loss in 89 or... it was 40 in the credit crunch, that they're making a 2% spread on mortgages, so the mortgage business is a very nice place to be. Lloyds is right in the centre of it and so we had Lloyds, HBOS as potential alternatives. We invested in HBOS way too early, made a series of mistakes. I suppose pre-credit crunch I used to think that we were like Colombo. We were getting facts and there was a fixed truth, and once we'd established the truth, we could make our judgements, and the market was fluctuating here, and we would take advantage of that discrepancy versus the fixed truth, and I suppose I learned something...
Merryn: Yes, no fixed truth.
Gary: So, the perception can change the reality, and in HBOS there was a perception there was an issue, and that the mortgages were part of the issue, and it became, also, the corporate book, and that became self-fulfilling, but, actually, there was a problem in the corporate book, and we hadn't seen that, and we should have seen that, so a whole series of mistakes that we made, and...
Merryn: But now we've made readers less keen, onto the new vehicle, which is an investment trust that Phoenix has taken over the management of, right?
Merryn: Tell us about that.
Gary: So, it's been a problem over there. So we opened the fund again in 2009 and went out to try and find investors, and we found investors for the offshore fund. It's easier to find institutional investors, but there were lots of people who would like to invest with us, who can't because of the...
Merryn: Because they have smaller amounts of money?
Gary: Or, because it's offshore, it's unregulated, so we can't deal with them. We can't deal directly with a retail investor and promote an offshore fund or... people need daily dealing, or they need something that means that the offshore fund's not suitable. Then someone approached me about doing an investment trust, said why don't you do one? There aren't enough stock-picking investment trusts in the UK, or they've all gone, so we looked at doing a new launch and that's quite a lot of...
Merryn: A lot of work.
Gary: Not a lot of work, but it's trying to get everybody interested at the same time, and what's always appealed to me is, sort of, the Ian Rushbrook way of doing things. You set up your stall in certain way that... you do it this way, and then gradually attract the right, sort of, investor to you, and...
Merryn: Ian Rushbrook, for readers who don't know, was the Personal Assets Trust manager for a long time.
Gary: Yes, and I'd come across him a long time ago, even before we started Phoenix... just a very eccentric character who didn't bend to any kind of investor demands, and just said, this is what I do, and you're welcome to join, and I suppose...
Merryn: And they did.
Gary: And they did.
Merryn: People did, yes.
Gary: Because ultimately he did a good job, and he explained what he was doing, and they, and I suppose that's what we found in Phoenix, that over the years we've attracted the right sort of investor. It's really important to have the right, sort of investor. So, in the credit crunch, at the very peak to trough worst time, we had a 50% draw down in the UK fund, and we didn't get £1 of redemption. Not £1 of redemption, I didn't get any complaint letters or...
Merryn: Very loyal investors who understood what you were trying to do, and didn't mind when things went wrong because they figured it would come back.
Gary: Yes, and we said, look, we're buying lots of cheap stuff. This is going to be wonderful. And ultimately it was wonderful, but it was painful first, and, I suppose, that's what goes. And we want the same type of investors, people who understand it's bumpy and...
Merryn: OK, so you decided not to launch a new investment trust, so...
Merryn: You've bought somebody else's failing investment trust... not bought, but taken over somebody else's failing investment trust.
Gary: Yes, so I said on the way, if there was a trust that was already set up and available, and Aurora is a trust that... where, effectively it was going to get wound up, where a long period of under-performance meant that people were throwing in the towel, and that it was going to be wound up, and we've effectively been appointed the manager of that. It was a UK-only listed UK investment trust. So we sold that portfolio, and we've been replacing it with a UK fund portfolio that we have.
Merryn: This is the same portfolio as...
Gary: Same portfolio.
Merryn: The Phoenix Fund.
Gary: Yes. There are some things that we can't put in, because we... if we own 40% of CPP, we can't buy another share of it.
Merryn: Of course.
Gary: We'll have to bid for it, but... so there are some differences, but yes, it's the same portfolio, same stocks.
Merryn: And it's called Aurora.
Gary: Still called Aurora.
Merryn: No temptation to change the name, to get rid of its horrible track record?
Gary: No. I mean there has been talk about that, but I think, hopefully, we'll get it associated with a good track record.
Merryn: And how big is that trust, at the moment?
Gary: So it's £17 million.
Merryn: Yes, so that's a small trust.
We will not take a pound out of the investment trust, so, yes, it will cost us to run it. But the fee structure is that we will get paid one third of the outperformance
Gary: It's a small trust, so we are doing a new capital raise. We'll sell the Treasury shares, and we're going to raise £50 million. I mean, at £17 million we're not going to operate a trust that small.
Merryn: You're not going to be getting money from it, for starters.
Gary: Well, the structure we have, we don't make any money anyway, unless we outperform. We've always known it needs to be £100 million to be effective.
Merryn: Let's go back to that fee structure, then. You don't make any money unless you outperform. How does that work?
Gary: OK, so we're earning not a penny. There's no management fee. There...
Merryn: There's not even an admin fee to cover the costs?
Merryn: So it's going to cost you to run this thing...
Gary: It's going to cost us to run it.
Merryn: Unless you outperform.
Gary: And we have a director nominated, and he won't get paid, so... Somebody from Phoenix is going on the board, not myself, but another member of the investment team, another director, and, yes, he won't be getting paid. So we will not take a pound to Phoenix out of the investment trust, so, yes, it will cost us to run it, but the fee structure is, we will get paid one third of the outperformance, so... and we'll get paid in shares of the trust, and for three years we... they'll be restricted, and if we give back any of that performance, there's a full clawback. So if after the end of the fourth year we don't have that outperformance, then we lose the fee, and... so, yes. So we can only make money if we generate genuine Alpha, and that hopefully is the most aligned that we could get the fee structure.
Merryn: The rest of the fund management industry are not going to like you for this.
Gary: No, but it won't catch on. I'm pretty sure it won't...
Merryn: Why do you think it won't catch on?
Gary: It won't catch on.
Merryn: Well, Neil Woodford's structure with Patient Capital is, sort of, vaguely...
Merryn: It's similar, isn't it? Although I think there's an admin charge in that.
Gary: He covers his costs. But he's raised loads of money, so that's not going to be a lot of...
Gary: But I think it's an absolute performance fee so...
Merryn: Right, so it's slightly different.
Gary: So he would get... so he could potentially earn money, even if he underperformed the market, but yes
Merryn: Can you earn even if you have negative relative performance? I mean, ie, you know, someone else loses 20%, you lose 10%, you still get paid, do you still get paid?
Gary: We get capped, so we can only earn... even on a boom year we can earn four, we can only earn 2% in a down year. So we can. So, yes, if we lose five, and the market's down 15, we will get paid for that outperformance, and that caused a lot of issues in...
Merryn: I mean, that's a big conversation, because that's difficult for an investor, isn't it? He lost me money, but he still technically outperformed, and, you know, it's that kind of relativity that very often the retail investor... the ordinary investor, can find confusing.
Gary: And that... obviously, again, that's held for another three years, so if it's not genuine outperformance then we won't get it, but our view is, protecting your money on the downside ought to be as valuable as outperforming on the upside. And we're not going to continue to be employed if we're losing money every single year for ten years, even if that's an outperformance. I mean, we're all finished...
Merryn: And that's going to make you very poor because an investment trust still costs to run.
Gary: So we'll have to pay tax on those fees, even though we don't get them. We'll have to pay our tax in advance, and so it will cost us, and it's four years before we can sell any shares and earn any money, so... we've drafted it, so that we think it's designed to be fully aligned. We can do very well by delivering genuine outperformance. I mean, my view is, if I'm an investor and I decide to invest in equities, that's one decision. I should probably just buy an index fund, and that's the lowest cost, most simple way to make that allocation decision, and I'll get the returns of equities, index fund, or an ETF. So if I decide to make a further step and say, you know, I want to pick a manager. I want to pick a stock picker, what do I want from him or her? I want something in excess of that, what I could otherwise get for nothing, or for very low cost, which is the outperformance. So we're only going to get paid if we've delivered that.
And anyone can deliver it in one year, because it's random, so the clawback...
Merryn: OK, so... but three years, you think, is not random?
Gary: Four years.
Merryn: Four years.
Gary: There's correlation when you do the study. So there's correlation between fundamentals and share prices over... but it turns positive at three years.
Gary: But we've... you know, we've outperformed in the past by 8%, so if we do 8% per year, it will cost 2.4%, which seems like a very big fee...
Merryn: I think...
Gary: But investors will have got 5% per year.
Merryn: Yes, if you outperform by 8% every year, over the long term, I don't think anybody will mind at all.
Gary: Yes. No, we've had no...
Merryn: You've been taking a third of that, I wouldn't mind. I'm sure you've had no complaints at all on the Phoenix Fund.
Gary: No, we've not had, so...
Merryn: What are the fees on that, just out of interest?
Gary: So we have a 1% management fee. That's because we went with the performance fee only structure to... what used.... the regulator used to be IMRO, and they sent it back because we had no income in our business plan, so we had performance fees only, so we've had 1% management fee, and we have a 20% performance fee above an inflation hurdle. So that has... that... you can get bad outcomes there. We get paid in a downturn. We get our management fee anyway, even on down years.
Merryn: So that actually the fee structure on Aurora is better.
Gary: Yes, I think. You're more aligned.
Merryn: You think so. We... I would agree, yes.
Gary: If we delivered what we had delivered, it comes out roughly the same, but if we were average, or below average, we don't get paid a penny, which is not the case with Phoenix, we get paid just for turning up. Aurora... that won't happen. We will have no incentive just to continue on running the Aurora Trust, like in the past, because we won't be earning anything, we'll be better off wrapping out the...
Merryn: What was the fee on the Aurora Trust before, out of interest?
Gary: Yes, it was a percent, but it was of the gross assets, and it had gearing, and it was a performance...
Merryn: It was a percentage of the gross assets, a percentage of the borrowed. And a performance fee?
Gary: And a performance... a 10% performance fee.
Merryn: Can you remember... do you know what the percentage was?
Gary: Was it 10% of relative?
Merryn: 10%, but what the management fee was, of the gross assets?
Gary: So 1%.
Merryn: So 1% of gross assets plus...
Gary: So it worked out about one and a half percent, 1.4 plus a performance fee for outperformance. I can't exactly remember the performance fee...
Merryn: But as they never outperformed, I guess they never got that. That's really shocking, isn't it? I mean, that's a very old-fashioned style of charging.
Merryn: And charging on gross assets is not really acceptable in investment trust world anymore, I don't think.
Gary: No, that, to me, that was misaligned, because you could see what would happen... even when you perform badly you're still getting well paid. That was a different style of management. That was someone who had a big top-down view. When you have a top-down view of the world, if it goes wrong it goes wrong on the whole portfolio, and you only do two or three of those in a decade, maybe. What we do, is we do a lot of the same thing again and again, so our errors get filtered out, and we can learn from them much quicker, so we've made 100 investments in those 18 years, so it's much easier to progress and learn if you were just doing stock-picking rather than...
Merryn: What's the average holding period for a stock that you have?
Gary: I don't know, actually.
Merryn: That was supposed to be an easy question.
Gary: I know the average turnover's 7%.
Merryn: So quite long-term holdings.
Gary: Yes, quite long term, and because what happens is, some of the transactions in the portfolio are to do with money-flow rather than... but, yes, so things get taken over. Ideally we try to buy things that you don't need to sell, things like house building, unfortunately, you may need to sell. We we owned a house builder and we had to sell it, because it's cyclical and they can get into the wrong capital structures, and you time your investment value time. We bought Diageo in 1999 and we still own it, so... yes. Our view is that we only buy businesses where the clear return on capital... cash return is over 15%. So, if we've allocated our money to a business where they're earning that, and we're confident with the management, they're redeploying like that, then our job's done, all we need to do is monitor it, and leave it alone. Unfortunately, things change, but ideally that's what we try and do, just plant acorns and leave them to compound over the long run, so, you know, the holding period, the longer we go on, the longer it goes up, so things like Diageo are still in there.
Merryn: OK, brilliant. I think we'd better leave it there, but that's fantastic. Thank you so much, and we'll all look out for the Aurora Trust from here.
Gary: Thank you very much Merryn.
Merryn: Gary Channon, thank you very much.