Market commentators like to pigeonhole equity investors with simple terms such as active, passive, contrarian, value, growth or momentum. This makes things unnecessarily complicated as most people are investing for either value or growth.
Our approach is different. We are business-transformation investors focused on management and strategic change within good companies. We back strategies to make firms more relevant, profitable, cash-generative, consistent and more highly valued.
Business transformation could be described as a value or turnaround style, but in practice it is so much more. It starts with value recovery, but thrives on value creation. When executed well, the process begins with the most contrarian of value mindsets and ends with the most sought-after stock market characteristics of them all: momentum and quality growth. The trick is judging which value stocks offer the right characteristics and when to hold on for both.
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Successful historic examples of this approach from our Fund include 3i Group, which we backed over a full transformation for 15 years between 2009 and 2024, and Rolls-Royce between 2021 and 2024. Here are three more recent examples.
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Convatec (LSE: CTEC) is a medical device and products company with a market value of £5 billion. It boasts large market shares in global ostomy, incontinence, diabetes and advanced wound care. After years of underinvestment and short-termism, new managers have restructured the business in the past five years and put customers and products at its heart.
Research and development (R&D) expenditure rose from 2% to 6% of revenue. The new product pipeline has never been better and has helped drive revenue growth from 2% in 2019 to 8% this year. The growth rates appear sustainable and are underpinning a margin recovery towards 25%.
Babcock International (LSE: BAB) is a £2.5 billion defence and engineering services business. Prior management for many years pursued an acquisition-led growth strategy that lacked capital and financial discipline, leading to cash-flow problems and balance sheet constraints. David Lockwood and David Mellors were appointed CEO and CFO respectively in 2020; both had backgrounds involving transforming firms in the defence and engineering industries. They undertook a systematic restructuring to focus on core services and businesses, the sale of non-core assets and an internal cost-saving and cash-flow management strategy. This repaired the balance sheet by reducing debt and improving working capital. It also provided money for reinvestment in core assets, leading to more focused growth. Sales expanded more quickly at higher margins and the long-term order book grew.
Team17 (Aim: TM17) is an Aim-listed independent games developer and publisher, with an established record and a strong brand. The shares have declined since Covid as the boom in gaming attracted capital into the sector and fuelled high valuations.
Again, there is new management with strong industry skills executing a more focused strategy around the deep and valuable back catalogue and first-party independent games growth. The balance sheet has a net cash balance of £50 million and the stock is on ten times earnings, with growth now recovering.
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