1 April 2020

Not the time to buy

As the recent period of market volatility kicked in, I was in the fortunate position that all three funds that I manage had a small overweight cash position.

by James Godrich

Fund Manager

This allowed me to incrementally add to some of our existing holdings that we believe have not become bad businesses overnight but have become good value. As Howard Marks recently wrote, this might not necessarily be the time to buy, but it is a time to buy. At the same time, a stock that I have been watching for some time as a high quality business, I believe has now become attractively valued and so I have added a small weighting in Games Workshop to all three portfolios.

Games Workshop are the number one global designer, manufacturer, distributor and retailer of fantasy miniatures – their main brand being Warhammer.

It is difficult to explain the extent to which the Warhammer brand is loved by its millions of collectors and gamers globally. The official chat room had more than 114 million page views last year from its more than 6 million users with Official Warhammer videos viewed more than 50 million times in the last year. There are a number of gaming halls and cafes across the world and anyone that wants to get a better idea of how loyal this customer base only has to visit one of these cafes.

What I think is exciting though is a much smaller part of the business and that is the c£20m of revenues that currently come from licenses and royalties. Games Workshop believe that they have some of the best and strongest intellectual property (IP) in the world with characters, stories, armies and teams dating back 30 years – it is worth almost thinking about this as being like a combination of Disney and the Premier League. Whilst they are incredibly cautious about the brand and how this is used (hence this will not happen overnight), licensing allows them to leverage this IP through board games, apparel, media and entertainment on near 100% margins.

There was a jump in the share price post the last set of results; aside from good underlying core growth this was because of Marvel signing a deal to make a Warhammer comic book series with license fees being paid to Games Workshop. The first comics are due to be published in autumn 2020.

In their most recent report and accounts, the CEO writes: “Whilst our short term goal is to understand how the entertainment and media industry works (it appears somewhat complex and expensive), longer term we believe we can closer integrate our media efforts with our business – to say we are excited would be an understatement”.

With the majority of revenues still coming from high street stores there will clearly be an impact from Coronavirus and to quantify at this stage is incredibly difficult but this is what drove the near 40% fall in the shares in the last month.

I am fortunate that I run funds that generally look to invest for the long term so any short term volatility can hopefully be accommodated so it is worth remembering that buying the market now is only a sensible action if you do not anticipate that you need your capital in the short to medium term.

Please note that my comments relate specifically to the Coleman Street Investment funds and their individual mandates and any investments discussed might not be suitable for others as it won’t take into account their personal circumstances.

It is also worth noting that I am by no means calling the bottom of the market and would never presume to do so, but, as per Howard Marks, this is A time to buy, if not THE time to buy.

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