The markets tell us what investors are doing. But what, exactly, are they thinking? Edison’s Inside the mind of the investor aims to find out. In this edition, we talk to Andrew Hollingworth of Holland Advisors.
After more than a decade running his own fund, Andrew Hollingworth has developed a distinctive approach to value investing that goes well beyond simple bargain hunting. The Holland Advisors founder, who set up the VT Holland Advisors Equity Fund in 2011, has been enjoying a strong year both in terms of performance and growing investor interest.
‘It’s been pretty good, actually,’ explains Hollingworth. ‘We’ve performed pretty well and quite a lot of new investors have turned up, which is unusual for me because normally we perform quietly on our own and people leave us on our own.’
Buffett foundations
Hollingworth’s investment philosophy is deeply rooted in the teachings of Warren Buffett, although he has evolved his approach over time. When he established his fund, Hollingworth adopted Buffett’s discipline of never paying more than 15 times earnings for a business, focusing on proven companies with durable competitive advantages.
‘I was and still am a massive Buffett fan,’ he says. ‘I was very keen to look at opportunities anywhere in the world rather than tied to one geography.’
However, Hollingworth has observed that the investment landscape has become more sophisticated. The market has become adept at recognising and pricing certain types of competitive advantages, particularly those associated with strong consumer brands.
‘Everyone else has worked out that Coca-Cola and Fever-Tree and Diageo and Heineken are branded businesses that have pricing power,’ he notes. ‘So the price that they change hands for reflects that.’
Beyond the brand moat
This observation led Hollingworth to seek out competitive advantages that the market struggles to value correctly. He has found particular value in the ‘Seven Powers’ framework developed by Hamilton Helmer, which categorises different types of sustainable competitive advantages.
‘It takes the moat idea and splits it into seven different definitions of a moat,’ Hollingworth explains. ‘One is a brand, one is network economics, one is scale economics, and there are others.’
‘The stock market is pretty good at pricing moats with brands. It is not very good at pricing moats in scale economic share businesses that are the lowest cost producers.’
This insight has shaped his portfolio positioning. While the market efficiently prices brand-based advantages, it frequently undervalues businesses with scale economics moats – companies that have achieved such low-cost positions that competitors cannot profitably challenge them. Airlines like Ryanair and Jet2 exemplify this category.
‘What I’m interested in doing is what I think Buffett did in his early years,’ says Hollingworth. ‘Basically saying it isn’t a question of just buying the best business, it’s buying the best quality business model that’s the most underpriced.’
Investment approach
The core of Hollingworth’s strategy – comprising about 80% of his portfolio – focuses on identifying excellent businesses run by capable management teams at moments when something has temporarily gone wrong.
‘Most of what I do is basically great businesses run by great managers at prices where something’s going wrong,’ he explains. ‘So they’re offered at a great price.’
This approach requires patience and conviction, the willingness to buy when others are selling and to wait for the market to recognise the underlying value. It is a classic value investing discipline, but applied with a sophisticated understanding of what makes a business genuinely defensible.
The supernatural compounder
More recently, Hollingworth has added a new dimension to his investment approach, inspired by the legendary investor Nick Sleep. Sleep’s concentrated portfolio of just three stocks – Berkshire Hathaway, Costco and Amazon – compounded at 20% annually for two decades.
‘What struck me is that if I used my Buffett approach of buying a great business when it’s distressed, I wouldn’t have bought Amazon or Costco or probably Berkshire because those businesses hadn’t had periods of distress,’ Hollingworth reflects.
This realisation prompted him to research what he calls ‘supernatural compounders’: exceptional businesses capable of growing at very high rates for extended periods. These companies possess characteristics that enable them to reinvest capital at high returns indefinitely.
‘Is there a special type of company that can grow at a very high rate for a long period of time and what traits do they have?’
For these rare businesses, Hollingworth is willing to pay higher valuations – perhaps 20 or 25 times earnings – recognising that the standard value investing playbook may cause investors to miss extraordinary opportunities.
The valuation trap
Hollingworth is careful to distinguish between paying up for genuine compounders and overpaying for merely good businesses. The critical variables are growth rate and duration.
‘The danger is you say, well, I like this company a lot, I’ll pay 40 times earnings for it, but it’s only going to grow at 12%,’ he cautions. ‘If in five years’ time, when you want to take some profit, it’s trading on 30 times earnings, you haven’t made any money.’
The lesson is clear: for expensive stocks, the growth rate must be high enough and sustainable enough that it, rather than multiple expansion, drives returns. This requires rigorous analysis of a company’s reinvestment opportunities and competitive position.
‘If you’re going to pay up, it’s got to be for a very specific type of company that you are pretty convinced is going to grow at a very high rate because then the growth rate is what drives your return, not the multiple change.’
We would like to thank Andrew Hollingworth for sharing his views in this edition of Inside the mind of the investor. Nothing in this article quoted by Andrew Hollingworth is intended to be a recommendation.
Andrew Hollingworth is the founder and fund manager of Holland Advisors, running the VT Holland Advisors Equity Fund. You can find out more about Holland Advisors by visiting www.hollandadvisors.co.uk
