Where WPP and Capita Went Wrong

JOHCM's Mark Costar tells Emma Wall that misallocation of capital and failure to embrace technology impact companies more than economics

Emma Wall 2 May, 2018 | 1:08PM
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Emma Wall: Hello, and welcome to the Morningstar Investment Conference in London. I'm Emma Wall and here with me today is Mark Costar of J O Hambro Capital Management.

Hello, Mark.

Mark Costar: Hello.

Wall: So, we've just heard from you that the traditional influences on asset prices are perhaps not the ones that investors should be focusing on. If we can just run through the influences that people are currently obsessed with before we move on to the ones that you think are more important?

Costar: Yes. I mean, I think there's a temptation to believe that if you can solve the latest macro conundrum, that will unlock the key to successful investment performance. And of course, at the moment, that's Brexit or trade wars or even the state of the UK economy. And whilst I'd love to offer a good and precise answer to that question, the simple fact is, I don't have the credibility or the skillset to do so. But I think it's very important in investment to focus on not what you would like to be good at, but what you like to think or what evidence suggest that you might have a competitive advantage in.

So, what we try to look at is what we think are much more powerful, much more enduring and actually, probably more significant longer-term trends to get right. And of course, in my belief that is capital allocation policies of companies, are they investing enough in their core franchise to create a sustainable platform for durable growth, because there's a lot of companies in our opinion have been underinvesting and overdistributing and some of those are coming home to roost now as we've seen with Capita (CPI) or WPP (WPP) or Micro Focus (MCRO).

We've seen dramatic changes in stock market ownership and technology driving markets as well. And that can lead to very outsized price moves in both directions which creates threats and opportunities. And of course, we are also in the midst of the most profound technology revolution we're ever likely to see. The pace of change has never been this fast, but it will never be this slow again is what Justin Trudeau was saying at Davos just a few months back and I very much agree with him. That's creating tremendous opportunities for companies that are embracing that or at forefront of that. In some cases, that's the large-scale incumbent, that is the disproportionate beneficiary. And other times, it is the nimble disruptor, that can capture the spoils. And so, it's very important to take a very discriminatory fundamental bottom-up approach to looking at those individual examples.

Wall: And I think you've hinted it there. It's not just about the companies that are embracing these new drivers and benefiting from them. It's also about avoiding those that get it wrong. You mentioned WPP and Capita. Are there any examples where, to your second point, the technology disruption is actually they've fallen foul of?

Costar: Yes, I think WPP, for example, was looking to perhaps overly focus on internal M&A and was distracted by the fact that consumer brands want to go direct to the individual and have that inherent relationship bypassing the media agency or the PR agency and look to invest in the tools and techniques to do that. Capita, a very successful BPO outsourcer back in the day, but technology has changed that industry. In a robotic process automation, bots, as a lot of people call them, can do a lot of the value-add of an outsourcer. So, by not investing in that area they are being competed away and that's why they've been losing contracts. And that's why the business now needs to step up its capital investment programme.

Wall: And what about companies that have got it right, that have embraced these trends and are benefiting from them?

Costar: Well, I think, there's a several interesting examples. I mean, some of them are in the large-cap area and some are in the small. I mean, one of the very exciting ones for us is a company called First Derivatives (FDP) in the internet of things. So, that's when inanimate objects, machines or vehicles connect to the internet and of course, they create a huge swath and plethora of data which is coming at very rapid velocity. That data needs to be controlled, managed and put in a format that can be analysed and acted upon whether it's for predictive maintenance, whether it's for a future product development or efficiencies and enhancements.

Now, if you can crack that, because almost every sector is starting to connect to the internet, the opportunities are profound, and they are huge. First Derivatives via its Kx technology has been investing consistently in R&D, in people and systems. So, we like to call it sort of the 10-year overnight success story. It hasn't just got here by chance. It's been investing consistently which is the type of characteristics we look for taking that long-term approach. And that has left it with the most competitive, most powerful and most interoperable, scalable database solution in the market, even more powerful than Oracle and Amazon, for example, which is a pretty unique place to be for a UK technology company.

Wall: Mark, thank you very much.

Costar: Okay. Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.



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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Capita PLC21.50 GBX8.26
FD Technologies PLC1,436.00 GBX0.14
JOHCM UK Growth GBP A Inc4.48 GBP-0.31Rating
WPP PLC731.40 GBX-0.41Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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