Eggs and baskets

Tom Stevenson
Tom Stevenson
Fidelity Personal Investing6 December 2018

Ted Baker’s third quarter trading statement this morning was an unremarkable announcement. The fashion retailer unveiled growth in sales through its shops and website, offset by a slowdown in wholesale revenues. Nothing to see, move on.

The reality is that no-one was really looking too hard at the numbers today. That’s because Ted Baker’s share price is not being driven by its trading news flow but by altogether more lurid stories about alleged mis-behaviour by the company’s founder and driving force, Ray Kelvin.

Specifically, a number of employees have complained about a culture of enforced hugs and inappropriate physical contact. Mr Kelvin is now the subject of an internal probe, led by non-executive director Sharon Baylay.

The outcome of the investigation matters to investors because Mr Kelvin is no ordinary chief executive. He is so closely associated with the Ted Baker brand as to be almost inseparable from it. He founded the business and he continues to own about a third of it. It is hard to imagine the company without him at the helm.

In that regard he is comparable to WPP under Sir Martin Sorrell or Sports Direct and Mike Ashley. All three companies are prime examples of key man risk, a surprisingly common problem even in big quoted companies that have long ago stopped being small family-run businesses.

There are two main problems with Mr Kelvin’s dominance of the Ted Baker board-room. First, he is clearly an extremely talented retailer. The company has fared much better than many on the High Street in recent years because it has created a unique and popular brand and developed an effective multi-channel distribution platform encompassing both bricks and mortar shops and an online presence. Investors are rightly worried that Ted Baker without Ray Kelvin would be significantly less able to navigate the storms on the High Street.

Secondly, Mr Kelvin owns 35% of Ted Baker’s shares. On the one hand, it is good to see a chief executive with skin in the game. He has a vested interest in the company remaining successful. But when one person owns such a big slice of a company’s shares the benefit of ownership can quickly turn into a risk. If Mr Kelvin were to be forced out of the company, those shares could potentially find themselves in much looser hands. That would provide a major overhang in the market.

It is a bit like the old adage about overdrafts. If I owe the bank £100 that is my problem. If I owe the bank £1m it is the bank that should be worried.

So there are two clear lessons from the Ted Baker story for investors. The first is that investors should be wary of companies in which the founder holds a disproportionately large stake.

The second is that no single holding should have the potential to inflict too much damage on your overall portfolio. Investing through funds is a simple way to build in the necessary diversification. Even the most concentrated of portfolios (like those managed by well-known managers like Nick Train and Terry Smith) will have at least 25 or so holdings. Even a 25% fall in the share price of a company that represents 4% of your total portfolio will only knock 1% off the value of your investments.

In practice a portfolio can build in a further layer of diversification by investing in a range of funds covering different asset classes and geographical regions. The Select 50 is a list of funds that we consider to be among the best available on the Fidelity platform. But even with these preferred funds we would not recommend anyone investing too high a proportion of their overall assets in any one fund.

No portfolio can be totally immune to the ups and downs of the markets. Volatility is the price that we pay for the outperformance over time of shares and bonds compared with cash. But a well-diversified portfolio can be expected to provide us with a smoother ride.

There’s truth in the old adage: don’t put all your eggs in one basket.


Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.