Fund manager profile: SWMC’s Cullen on avoiding the market darlings

Brian Cullen SWMC

SW Mitchell Capital’s Brian Cullen, manager of the SWMC UK fund, is a value investor. But he does not want to be labelled as one.

Cullen says all of the managers at SWMC are value managers in that “they have a view of where companies fit in buckets,” but they themselves “don’t want to be put in a value bucket”.

Moreover Cullen claims that all fund managers worth their salt are value investors. “Any investor who says they are not a value investor is in the wrong job,” he says.

The UK fund was launched 18 months ago as a vehicle for Cullen to demonstrate his capabilities in UK equities and hone his analytical skills. Cullen joined the firm almost six years ago, straight from the London School of Economics where he did a Masters in economic history. Fresh from his studies, Cullen knew he wanted to go into the buy side, describing it as “the epicentre of finance”.

In a case of serendipity, Cullen got in touch with the firm’s founder Stuart Mitchell, who he had met as a teenager when he was working as an intern on a behavioural finance programme, when Mitchell was looking to hire a UK analyst.

“When I joined SW Mitchell Capital there were just four full-time people on the investment side so they were keen to get someone UK specific. The UK guy [the firm had recruited] dropped out at the last minute so I was very much thrown in at the deep end.”

Cullen, who hadn’t had any financial or investment training, was instructed to go and look at a large-cap stock and gradually got to know UK companies, taking part in conference calls and attending meetings.

“Stuart didn’t give me a crib sheet and I literally had no idea,” Cullen says. “I had a bit of proper training and there was a bit of learning on the job. I did my CFA in the first two years at the company as well as a huge amount of reading.”

Within a year Mitchell had asked Cullen to assist him with the UK portion of his portfolio, with an eye on launching a UK fund for Cullen.

“Stuart thinks it is important for analysts to run money, which he did as an analyst at Morgan Grenfell, as he thinks it makes better analysts. Since the UK fund launched 18 months ago I have got a sharper eye for the bits in Stuart’s portfolio.”

Cullen is a contrarian investor and likes businesses that are “difficult to analyse”. He says he looks for companies with solid fundamentals but which are having a tough time and are therefore disliked by analysts, and avoids what he calls the “market darlings”.

“We like companies that create growth but that are underestimated by analysts. We don’t like companies that are growing but their valuation doesn’t matter; there has to be scepticism.”

Cullen gives office rental group Regus – which has filed for bankruptcy in the past – as one such example: a company that has seen “great growth” despite analysts’ disbelief.

“Regus CEO Mark Dixon said he plans to open 20,000 sites. There are 2,500 at the moment and analysts don’t think he can do that,” Cullen says. “But the high growth and investment required hide the substantial returns being earned by mature centres. The business looks cheap based on the earnings of the mature portfolio. While the lease liabilities within the business are a concern, we believe they are more flexible than many give credit for.”

Cullen adds: “It is always good to have a contrarian view. If people hate a company it makes our ears prick up. We hold Indivior, a pharmaceutical company spun out of Reckitt Benckiser. Everyone said there was a competitor to Indivior’s main product, and it was seen as a god ugly beast, which was like music to our ears.”

SWMC

Regus, a 4.1 per cent holding, and Indivior, a 3.6 per cent allocation, are both up over 20 per cent year to date, while another holding, housebuilder Taylor Wimpey at 3.7 per cent, is up 60 per cent since Cullen bought into the group at the fund’s launch. Cullen says in general he favours cyclical companies with exposure to domestic demand as a means of playing the consumer recovery story.

The SWMC UK fund is benchmarked to the FTSE All Share, but with the ability to go both long and short. Cullen says he is “benchmark agnostic” and runs a concentrated portfolio that aims to hold between 35 and 55 long and short positions.

“We run a pretty concentrated portfolio. We try to keep the discipline of one in, one out. At the moment we have 45 holdings including nine shorts, which is a little high.”

Of the nine short positions, Cullen says the vast majority are companies with significant issues but that he is “not averse to pair trades”.

“Last year we were long BP and short on Shell as when the oil price fell we couldn’t call what would happen. The strategy Shell assumed was a rapid recovery in the oil price, but BP had very much prepared for it to be lower for longer. But everyone wanted to own Shell. We closed the position after Shell announced its acquisition of BG Group and made 20 per cent.”

Cullen says that he doesn’t short stocks “for the sake of it” but where he thinks the position can generate alpha.

“Shorts can be dangerous, as there is a natural upward pressure; companies prices will drift up. The characteristics we look out for are companies with accounting and balance sheet issues and working capital that indicates problems in the business.”

A current short position is TalkTalk, at 2.5 per cent, which Cullen says used to be a market darling and “a Goldman Sachs favourite”.

“Interestingly the market doesn’t look good for TalkTalk. The broadband market is competitive, and TalkTalk’s accounts are not transparent. It appears to us that the quality of the product is poor and they will have to invest a lot to stand still.”

Despite an inauspicious start with the fund down 10 per cent in its first six months, performance has picked up and the fund is now up 20 per cent since launch and 28 per cent over one year, Cullen says.

FE Data shows that year to date the fund is up 19 per cent against the 2.3 per cent rise in the Offshore Equity UK sector average.

In terms of asset gathering the group is biding its time. The fund is now £1m and has largely been internally funded, with over 75 per cent internal money. Cullen says the fund has not yet been marketed, as they are happy to keep it small until they have a three-year track record, although he adds that they hope to get to £10m by that point. But with some solid performance under their belt Cullen is now keen to start spreading the word. 

“Now we are 18 months in and performance has been decent so we may go and talk to people.”

CV: 2009: Completes Masters at LSE, 2010: Begins career at SW Mitchell Capital, 2014: Launches the SWMC UK fund