The world’s greatest investors, This week: Katie Potts

Who was she?

Katie Potts studied engineering at Oxford University, before working at the engineering firm GKN. Realising that British manufacturing was in decline, she moved into the City, getting a job at Baring Asset Management. In 1988 she became a research analyst at SG Warburg. In 1994 she left to found Herald Investment Management, and started the Herald Investment Trust, which she still runs. She is also lead manager for Herald’s Worldwide Fund, which launched in 1998.

What was her strategy?

Potts’s focus has been on small-cap British and American technology companies. Her portfolio for the Herald Investment Trust is mostly UK-focused, while the Worldwide Fund has a much larger exposure to the US. In both cases she looks for technology firms with enough market power to keep ahead of the opposition, thus ensuring substantial profit margins. Unlike many other tech investors, she believes valuation is important, so she invests in smaller, cheaper firms that have the potential to grow, rather than buying expensive tech giants that trade on sky-high valuations and hence have a long way to fall.

Did this work?

Over the last 23 years the Herald Investment Trust has out-performed the market, with £10,000 invested in the trust in 1994 now worth more than £90,000, compared with just £52,000 for the FTSE 100. This equates to an annual outperformance of around 3% a year. Potts’s performance has been particularly strong over the last decade, beating the market by around 5% a year.

What were her biggest successes?

Potts’s most profitable moment was the decision to put money into chipmaker ARM when it was still a very small company. Overall, she has identified more than 60 companies that have made Herald Investment Trust more than £4m in profit. She points out that her profits would have been considerably higher had many of the companies she invested in not been taken over. For her Herald Worldwide Trust, her best decision was buying Apple in November 2003 for less than $1.50. Fifteen years later the share price is $139, nearly 100 times more.

What lessons are there for investors?

Potts attributes her success to patience and persistence. Many fund companies quit the tech sector after the bubble burst in 2000 and 2001; she carried on. Her biggest winners came from companies that she held for up to 15 years – if you want to invest in technology, you need to be prepared for long periods where your investments underperform, or even fall in price.