13 questions to James Harries of Securities Trust of Scotland

Which sector shows the greatest promise in 2022?

We are long-term investors in consumer staples companies and believe they could be very well placed in the months ahead. At Troy, we seek to invest in companies that have sustainably high returns on capital supported by sustainable competitive advantages. Good examples are consumer staples companies. Established, beloved but hard-to-replicate brands engender high customer loyalty and allow businesses to charge a premium.

This, combined with strong market positions and depth and breadth of distribution, allows these companies to generate significant free cash flow. This can then be used to reinvest in the business ensuring brands remain relevant and reward shareholders. This is a valuable combination for funds seeking to balance a return between income and growth.

The reason we think they are in a good position today is that companies have suffered margin compression as inflation has increased input costs. As we transition from this inflationary shock into a likely downturn, these input costs may stop rising at the same rate – after all, it would appear that commodity prices have already peaked.

That said, today’s margin compression will become tomorrow’s margin expansion. This, combined with the inherent predictability and sustainability of these companies, positions them well for what could be tougher times in the economy and markets.

What is the greatest economic risk today?

A recession.

Describe your investment strategy

We manage a global equity income strategy. We seek to produce above average returns with below average volatility from a concentrated portfolio of high quality companies. Both parties to this question. As an income fund, we are very aware that our client base very often has irreplaceable capital and needs income. These tend to coincide with retirement. When you’re young, volatility is your friend because it allows you to buy assets cheaply and you have plenty of time for prices to recover.

As you get older, that changes, so it’s important to avoid steep losses. If we can provide 2.5-3% income for people to pay their daily bills without having to dip into capital (which can be expensive if done in times of market stress) and compound capital at a decent rate, this should be a very sensible place for people to allocate their capital.

Which famous investor do you admire?

Phil Fisher. Warren Buffett described himself as 85% Ben Graham and 15% Phil Fisher. I would put my personal weighting much more in favor of Fisher. In his famous book Common shares and uncommon profits, Fisher presents an investment approach very similar to ours. Focused on quality and advocating long-term holding periods, Phil would fit right in with Troy. Although written in 1958, the book is surprisingly resonant today, a reminder that sound investment principles often don’t change much.

Name your favorite “Forever Stock”

Pepsi. Truly a snack company rather than a beverage company as its name suggests, Pepsi is dominant in its core US market and has plenty of room for growth overseas. Snacks are a quintessential affordable treat and usually an impulse buy. As such, consumers are brand loyal and relatively insensitive to price. This gives this company the ability to raise prices without driving down demand – the mark of a wonderful company.

What would you never invest in?

We would never invest in what we consider to be highly speculative areas of the market where it is impossible to have a clear view of the long-term evolution of cash flows. Examples would include exploration mining companies or biotechnology.

Growth or value?

As income-oriented investors, we are value buyers and long-term holders. We strongly believe that a high quality, undisturbed portfolio that is allowed to accumulate over the long term is the way to earn real money.

House or Pension?

Pensions are much more advantageous from a tax point of view, which allows for more efficient capital funding.

Crypto: Brilliant or bad?

Brilliant technology that would be a bad investment in an income fund.

How can we increase diversity in fund management?

The most important thing is to increase the diversity of recruitment to provide role models. “If you can see it, you will be” is a powerful idea.

Have you ever engaged with a company and been particularly proud (or disappointed) of the result?

We spoke with Hershey about their use of water. We were the first and water management became a specific part of their sustainability report afterwards.

What’s the best advice you’ve ever received?

Make an active effort to have a positive mental attitude. You can go through life happy or unhappy. The only person it really matters to is you (and maybe your partner or immediate family!), so might as well try to be happy.

What would you be if you weren’t a fund manager?

As an avid scuba diver and fisherman, I wish I had been a marine biologist.