Luke Chappell of BlackRock likes companies with transparency in management and in the accounts – and with a readiness to change.
“The investing process starts with [looking at] management,” says Luke Chappell of BlackRock. “For me, that means demonstrating the right behaviour in bad times as well as good. It’s about how a good management team learns its lessons and takes the business forwards.”
Chappell gives the example of Next, the UK high street retailer that on 4 January reported dismal pre-Christmas sales figures and forecast a difficult year ahead – its share price sank in response. Aside of the broader retail slowdown late in 2016, Next suffered from the focus of its online business, Next Directory. It chose to target desktop customers, yet 70% of online shopping now begins on a mobile device.1 Yet it was the company’s reaction that differentiated it from lesser businesses.
“Next put their hands up and acknowledged their mistake, which had been to focus all their IT resources on making their platform international,” says Chappell. “That is what I mean by good management – the honesty to say where they’ve gone wrong, and what they’re doing to change it.”
He looks for a similar level of transparency on the balance sheet.
“Are the accounts clear and understandable? If I don’t understand the accounts – and I’m not a chartered accountant but colleagues of mine are – if, between us, we don’t understand the accounts of a business: we don’t invest in it,” says Chappell. “It’s really, really straightforward. We’ve got plenty of businesses that we can own on your behalf. Why go for the ones where there are question marks about the accounting?”
Breaking new ground
If there is a keynote that crops up in Chappell’s approach to investing, it is the importance of companies managing change effectively – whether it is thrust upon them, or whether they are already driving that change themselves. Dynamism appeals.
“We look for businesses going through structural change,” says Chappell. “Auto Trader was a print magazine with four lines of grubby newsprint and a black-and-white photograph selling a used car. Most similar businesses, like Yellow Pages or a lot of the classified newspapers, have closed.”
Auto Trader, however, was on early alert. More than ten years ago, the company saw what was coming and switched the business to an entirely online format.
“Now 80% of the visits that consumers make to look at used cars online are to Auto Trader,” says Chappell. “In the same way that Rightmove dominates the property portal market, Auto Trader dominates the online car market. We like that structural change.”
Another company that has successfully embraced change is British consumer goods giant Reckitt Benckiser, whose share price has doubled since mid-2012.2 Chappell has held the company for around 15 years (albeit across different portfolios).
The share price has struggled in recent months due to issues in Korea and Russia, but Reckitt’s long-standing culture of adaptability and business innovation remains appealing. In 2007, Business Week noted that 40% of the company’s $10.5 billion in annual revenues had come from products launched within the previous three years.3 A key acquisition was the over-the-counter drugs business of Boots Group in 2005, through which Reckitt gained Nurofen, Strepsils and Clearasil.
“It is a market leader in key brands and its acquisitions have been really good at giving it faster growth and a higher margin,” says Chappell. “The company has a strong history of product innovation.”
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1 Periscope, McKinsey & Company, accessed 24 January 2017
2 Bloomberg, accessed 24 January 2017
3 Bloomberg article, accessed 21 January 2017