The Marathon runners who focus on long-term performance

Photography: Thomas Birkett

Neil Ostrer (L) and Bill Arah (R)

The departing partner was investing legend Jeremy Hosking, whose fame extends far beyond asset management thanks to his collection of steam trains and a shareholding in Crystal Palace FC.

The three founders were very much hands-on managers so Hosking’s exit was an existential threat to the business. With Hosking responsible for global equity portfolios worth 40% of the firm’s assets, Marathon warned in its accounts that year that “it is likely the partnership will experience substantial outflows”. Since his departure, Hosking has accumulated $ 5.9 billion.

Matters were made worse by a legal dispute between the former partners, which has rumbled on since. Hosking staked a claim to claw back a £10.4 million performance payment he reckons he is owed from the year he quit. The court in October, however, found in Marathon’s favour. Hosking has also paid legal costs of £1.3 million. Other cases brought by Marathon have been settled, excluding a theft case relating to 40,000 data files brought against two of Hosking’s managers, who also used to work at Marathon.

Speaking to Financial News in a rare interview, Ostrer does his best to stay composed, and largely pulls it off. He explains: “Jeremy liked to take very big positions, too big for our comfort. We like to own no more than 10%. Beyond that point, it is harder to get in and out of a stock.”

In the event, Hosking’s exit cost Marathon half its assets in global equities, his specialism. According to the firm’s 2013 accounts, assets dropped by about $ 5 billion, to $ 45 billion, by the March of that year, after taking account of market gains and good performance. In the years since, Marathon has rebuilt its book of business to $ 56 billion. Performance has been robust, and consultants have stayed supportive.

Hosking, meanwhile, has founded his own asset management firm where he takes an unconstrained view.

Not a sprint

Over 10 years, Marathon’s six core strategies, excluding a relatively new emerging markets fund, have beaten their index benchmark by an average of 3.4 percentage points per year. Over three years, the excess return is a creditable 2.3 points per year.

It was this long-term performance that led to Ostrer and Arah being nominated for Financial News’ Decade of Investing Excellence Award in August this year. They get numbers like this with an old-school approach, looking to the long term and focusing on the companies. Marathon reckons, for instance, that the millions spent annually by fund managers on macroeconomic research, and profit forecasting, in a bid to squeeze returns out of a grudging stock market, are a waste of money. It believes there are too many strategists trying to analyse too many moving parts. And far too many brokers trying to second-guess corporate profits in the next quarter.

Arah, Marathon’s co-founder with Ostrer, says: “We take 10 or 15-year views and we don’t believe we can overlay this with a macro view. We can go years and years without changing our asset allocation, geographically.”

Arah says interest rates in Europe could be low for a long time given that the European Union finds it hard to change course. But he stresses that he needs to take account of possible rate rises because Marathon takes a 10-year view: “You need to look through policy. Just because the cost of capital is nought, you should not take your balance sheet for granted.”

Ostrer says of profit forecasts: “Companies hate this short-termism. They are bored with the pack. But because markets reward companies for meeting targets it becomes a vicious circle.”

Arah adds: “We don’t think we can add much to that debate. We like to sit down, and take a longer term view. Look at probabilities.” He adds: “It’s all about working out what managements do with their capital.”

He says a bad situation is made worse because chief executives don’t stay in their jobs for long enough. On the other hand, those who stay too long can become insufficiently challenged legends, with no underling brave enough to challenge their decisions.

One core insight is to look at the capital cycle, how investment flows and dries up in repeated patterns. From this Arah, Ostrer and the other Marathon managers form a view on sectors that are starved of investment, backing companies which have strong management teams and a large market share in its chosen niche, or sector. Ostrer started thinking about the capital cycle when he worked with Hosking at GT, the boutique founded by Nick Train and Michael Lindsell that is now owned by Invesco.

Ostrer says: “We were asked to go to the US to sort out a legacy of bust technology stocks. We realised they had attracted too much capital, while sound companies like Quaker Oats and Kellogg’s had not attracted much at all. We realised the supply of capital can change what you earn from it.”

Marathon went on to profit in 2000 by avoiding technology, media and telecom stocks which had driven the market to record levels. In its post-Hosking incarnation, Marathon likes to back ideas across a broad range of niche companies – Marathon’s global strategy, for example, owns 500 stocks. It focuses on small and mid-cap stocks and unlike some rivals doesn’t place big bets on liquid, large cap stocks. It’s not a strategy that will create eye-catching short-term results. But it helps build for the long term.

Arah stresses Marathon is neither a value, nor a growth manager. Instead, it takes its investment stance from the framework of ideas it puts together that run counter to consensus. Stocks populated in regional strategies are also included in international and global portfolios. The newest strategy covers emerging markets.

On pace

The business has stayed highly profitable – management fees totalled £164 million in the year to the end of 2015, producing an operating profit of £122 million. This contributed to a capital distribution of £129 million to members last year, comprising Arah, Ostrer, client manager Wilson Phillips, a Marathon service company and Hosking, who continued to serve as a non-executive.

For a £100 million investment the firm charges an above-average 85 basis points. Alternatively, it charges a base fee of 35bps, plus 25% of outperformance over three years.

Although its approach relies on old-fashioned brainpower, rather than computing wizardry, the duo are intrigued by the most important tech trends.

Ostrer believes the internet can be a great way to develop businesses. Marathon was an early backer of Amazon and online discount service Priceline. One of his favourite stocks has been Rightmove, the property website that evolved into a category killer by taking advantage of the lack of capital being invested in estate agents using the internet.

Arah has lately become interested in big data applications required by the so-called internet of things and self-driving cars. But he isn’t as interested in the applications as the way in which they will be serviced: “You are going to need 100% reliability with these things, and you’ll need big data to service that. And who is going to service that? It has to involve telecom companies.”

He picks out NTT, the Japanese telecom giant, as a potential beneficiary. In Europe, Ostrer thinks the big data accessed by Relx, formerly Reed Elsevier, could become increasingly valuable.

Surprisingly, Arah is also starting to look at the old-established media industry, decimated by the move to online and starved of capital. Old media shares are deeply discounted but the firms still command a large audience and, with some consolidation, this could create a platform for improvement.

Banks are more challenging, Ostrer says: “If you do not have enough capital, you can’t afford to compete. Regulators are heavily involved and achieving a profit in countries with state-owned banks like Germany is difficult.” But he concedes the Nordic model – with a limited number of well-run banks that aren’t trying to be the next Goldman Sachs – is rather better. Insurer Sampo of Finland has delivered him good returns.

Ostrer also finds oil too complicated, given it is pretty hard to tell whether the Organization of Petroleum Exporting Countries is capable of controlling prices, as it did in the 1970s. He is much happier with the brewing sector, taking his cue from AB InBev, currently merging with SAB Miller. The company will control 33% of the world’s beer market, and Ostrer argues that smaller companies will need to work harder to compete.

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