Lessons learned from investment mistakes

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Thorsten Becker, portfolio manager of JO Hambro’s US Small Mid Cap Equity Fund

The portfolio had a long-standing position in the Bank of the Ozarks, a cross-regional bank that does well on the real estate side, Becker explained.

Over the long term, the bank has had steady management and grew significantly over recent years, he said.

“The stock started to underperform because people were worried about real estate exposure. The Fed is looking at banks saying they should not have too much real estate in their portfolios.

“We looked at the risk profile and couldn’t find any issues, so we thought the market was overreacting. We met management again in September at the end of Q3 [2018] and it sounded fine.”

The following month the bank suddenly had two big losses in its legacy portfolio.

“I had looked at new underwritings, which were fine. But they had investments from seven years ago that they suddenly disclosed had turned sour. I felt like I couldn’t trust management anymore.

“There was never any discussion that some of the bank’s older portfolio could sour. We lost a good bit of money and it was the worst contributor to the portfolio.”

The position was sold out completely the same month. (The stock has since rebounded, but Becker said there are other better investment ideas).

“Our portfolio nonetheless had a strong year last year. That tells you this bank doing poorly had nothing to do with other companies in portfolio. If five companies do poorly based on the one investment, then that’s a bad mess.”

He said the more risky sleeve of the portfolio is invested in very different companies for clear diversification.

“So if an individual company has poor results, it won’t impact rest of portfolio. It takes very little for a company to disappoint, especially with small caps you get big movements.”

The Bank of the Ozarks investment underscores the idea that “you have to stick to your strategy, consider risk factors and diversify positions accordingly”, he said.

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