Legendary investor Jeremy Hosking preaches the power of ideas


Newton used the apple to gain an insight into the force of gravity and Hosking wants his $ 5 billion boutique, Hosking Partners, to seek inspiration the same way.

“You can’t be lazy about it. But inspiration comes from those light-bulb moments when everything falls in place.” To boost returns, the efforts of his five-man team are funnelled into a single long-term global equity strategy. Hosking’s charges are based on a 30 basis point fee, which falls as scale increases, plus a 20% rolling five-year performance charge.

Talking to Hosking is like boarding a roller coaster, as his interest in topics of discussion waxes and wanes.

His passions are equally varied. In recent years, he has backed Brexit: “We need our sovereignty back”; one of Britain’s largest collection of steam engines; and Crystal Palace FC, where he is intrigued at the possibility of acquiring transfer target Christian Benteke who plays for Liverpool.

Piling research on research is pointless when it fails to generate a spark, says Hosking. He quotes former British Prime Minister Arthur Balfour: “Nothing matters very much and most things don’t matter at all.” It is ideas that really matter to him, plus the passion to put them to good use.

Research can also generate false trails. It gets downright misleading when people use it for their own ends. Hosking cites the “dodgy” dossier which backed up Prime Minister Tony Blair’s decision to go to war in Iraq, slammed by the Chilcot Report.

Hosking has been developing his investment philosophy since 1986, when he started Marathon Asset Management with Neil Ostrer and Bill Arah.

The three of them developed an abiding interest in the capital cycle, arguing that the best time to invest in companies was when they were out of fashion and starved of capital.

Hosking points out you can buy cheaply near a cyclical low and put yourself in a position to benefit further as sentiment improves. The time to avoid companies is when they are highly priced, attracting a flood of capital and riding for a fall.

This philosophy, accompanied by a long-term approach and insight into the behaviour of corporate managements led to sustained outperformance for Marathon. Its global equity strategy, started by Hosking, has produced 11.5% a year, against 7.5% from its MSCI benchmark since launch to March 2016.

Over time, Hosking has broadened his investment approach to capture as many light-bulb moments at possible. In 2007, he even asked his clients to let him invest in bonds, rather to their surprise.

Going global

Since starting his boutique, Hosking has told his managers to drop their specialisms and go global: “I have always found that fund managers have done better by being set free.

“It is often hard to see much difference between companies if you are working in one sector.” It can also produce too much research.

After the credit crisis, there was a row between Marathon’s partners over whether their investment strategy would prove a risk to their business following a growth in their assets under management to $ 22 billion.

Hosking wanted to retain his long-standing strategy by letting his share stakes continue to rise in size, while continuing to diversify across the smaller-cap universe. Arah and Ostrer were keener to put more money to work in mega-caps.

Hosking was not impressed: “A 10% stake in Manchester United did us a power of good – far more than 2% in Vodafone.”

Hosking Partners invests in more than 400 stocks – an unusually high number for an active manager with an equally high active share of 85%. This is roughly similar to the size of his portfolio at Marathon, whose positions have shrunk in number.

“Ideas are scarce but valuable – you need to spread your search as broadly as possible.” He is quietly convinced his collection of bets will increase his proportion of winners from 50% to 60% over time.

He often invests in relatively illiquid opportunities, noting that this can result from an absence of sellers, as well as buyers. Hosking quit Marathon in 2012 and a court case to divide the spoils rumbles on.

He retained a third of the business.

He refuses to discuss the case, but says: “These things are always about power and money.”

Over the years, Hosking has learnt that managements use such motivations to profit from corporate restructurings. This suggests it is a good idea to back companies where managements are incentivised to do the right thing by owning a decent chunk of equity.

Hosking is big backer of online retailer Amazon because chief executive Jeff Bezos owns a large stake and keeps profits down to build market share. “He’s sowing addiction,” says Hosking, approvingly. He likes Tim Martin’s UK pub chain JD Wetherspoon for similar reasons.

Hosking is more cynical about the way managements can benefit from corporate transactions.

“That was why the courts in Delaware found that Michael Dell should have paid an extra $ 4 a share to buy out his company,” he said, referring to the 2013 buyout of the computer company.

The judge ruled that the deal short-changed shareholders by more than $ 6 billion, vindicating critics who argued that the deal favoured Mr Dell and his partners. The deal went through at $ 13.75.

Over the years, Hosking has objected to the buyout of diamond company De Beers, US cable specialist Cablevision Systems Corporation and South African conglomerate HCI.

He has found that opportunities can lie in dark, overlooked parts of the stock markets, out of the spotlight, where the worlds of private and public equity mix with family ownership.

Corporate spin-offs interest Hosking because they can involve the sale of companies by their owners willing to accept a discount to finalise their deals.

Hosking cites online payments system PayPal, spun off by eBay; Synchrony Financial, sold by General Electric; and Hanesbrands, previously owned by Sara Lee, as golden opportunities.

No rewards yet

Hosking Partners has yet to reap rewards from its strategy. Since inception in October 2014, it has produced a negative performance of -1.55% against -0.85% from its MSCI benchmark.

Hosking’s performance has been held back by market uncertainty, which has punished small cap stocks and financials, which figure strongly in Hosking’s portfolio. Banco Popolare, Lloyds Banking Group and Lazard have been among his poorest performers in the past 12 months.

But Hosking insists bank shares have never been cheaper relative to the market, following consolidation that will encourage survival of the fittest. He also concedes Brexit was always going to produce short-term volatility.

Hosking has been buying listed Russian stocks such as Aeroflot, which are not only starved of capital but spurned by mainstream investors. This is a classic combination that helps Hosking sleep well at night, but gives the rest of us nightmares.

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