We were delighted to welcome Michael Godfrey to Hosking Partners in January 2026 as fifth portfolio manager within our multi-counsellor structure. A true capital cycle investor and inherent contrarian, Michael shares our investing DNA and is a natural fit with how we see and do things at Hosking Partners.

Three months into his time with us, we caught up with Michael to discuss how he has approached the process of shaping his own sleeve within the Hosking Partners global portfolio.

Catch up on the key takeaways below:

You've spent your first few months going through the Hosking global portfolio line by line. What was that process like?

The process was a blessed relief. It is a well-known failing of our impressionable industry that participants converge towards prevailing wisdom, even at the expense of their own investment principles. The urge to comply is the enemy of independent thought. It was, therefore, reassuring to find that my fellow multi-counsellors have explicitly avoided such capitulation. The capital cycle is at the fore.

As a result, going through the portfolio was engrossing. The portfolio is an idiosyncratic collection of more than shares of 350 businesses tied together by the capital cycle framework. There are no superfluous positions included merely to provide comfort relative to the benchmark.

The process would not have worked, indeed I would not be answering these questions, unless I shared an investment framework with the other PMs. It was pleasing to see many holdings in common with my previous portfolio, as well as many familiar broader capital cycle opportunities. This made the whole exercise highly efficient.

Without going into agonising detail, the practicalities were as you would expect – methodically going through a first principals’ assessment of all holdings and portfolio ’clusters’. The learning curve was steep, but the institutional memory on the holdings is very long indeed, and having ready access to the other PMs was beyond helpful. I would like to take this opportunity to apologise to them for the constant badgering!

This is not the first time you have inherited a portfolio from Jeremy and made it your own. Do any large parallels or differences in the portfolio from today stand out to you versus 2012?

For those who are unaware, I joined Marathon Asset Management in 2012 and took on a portfolio of companies previously run by Jeremy and other members of the global team.

It feels very much as though I have simply picked up a novel where I last left off – the consistency in application of the capital cycle approach is notable. Without being too paradoxical, it is the portfolio changes that best demonstrate the retained faith in the investment process. The world is a different place from 14 years ago – investor proclivities change, as does the flow of capital. The inherent flexibility of the capital cycle to profit from these changes should not be squandered.

One example is the winding path from Southeast Asia to North Asia (i.e. Japan), showing how a common thread can tie together two significant portfolio positions, decades apart. By way of background, Jeremy initially built a basket of Southeast Asian positions shortly after the Asian Financial Crisis, predicated on capital exodus and market rationalisation. Acquired companies were trading at fractions of book value, in market structures that were consolidating, run by management teams forced to change their approach to capital allocation. By 2012 corporate performance had significantly improved as a result of this action, and the market had caught up. The Philippines, a large portfolio exposure at the time, generated a 16% per annum return for investors between 2000 and 2012, and re-rated from 10x earnings to a peak of 22x.

A consistently applied process followed that same thread across the Philippines Sea to Japan which, in the early 2020’s, was trading at Philippines-circa-2000 valuations at a time when companies were being compelled to radically change their approach to capital allocation. That the capital cycle is being spurred by regulators rather than creditors is of little consequence – the evolving outcomes for shareholders should be largely the same, and hopefully as persistent given the sizeable position we continue to maintain in the Hosking Partners portfolio.

Very roughly, the process of reshaping the portfolio when I joined Marathon 14 years ago resulted in around 30% sleeve turnover. Recent turnover has been remarkably similar, indicating consistency of investment approach yet hopefully demonstrating enough impact on the wider portfolio.

How has your emerging markets background shaped the turnover you have driven in the global portfolio?

Adding a number of emerging markets companies to the global portfolio is probably the most predictable source of turnover. Emerging markets deserve some plaudits for their capital cycle credentials over the past decade. The starting point in the early 2010’s was inauspicious – years of heavy capital inflows, excessive competition and questionable capital allocation resulted in declining aggregate returns on capital at a time when valuations were high. A prolonged period of underperformance was deserved.

Yet it was the continued forces of capitalism and creative destruction during this dismal period that marked emerging markets as being a bastion of the capital cycle – more so than many developed markets. Investor apathy and an ever-present cost of capital have led to a compelling set of attractively valued, ‘fighting fit’ companies and industries.

Emerging markets will be of interest for as long as they remain exposed to capital flows and fickle investors, but a broader global mandate offers the most compelling way to follow interesting capital cycles, business models, and industries to their logical conclusion. Why stop at a border?

It certainly does no harm that I have had a front row seat to the industrialisation of emerging markets, led, of course, by China’s industrial policy, and the damage this has inflicted on many Western industries. The nature of this destruction is often illuminating when considering whether poor returns are intractable or capable of redemption. It is remarkable how many industries this process has touched because, at one time or another, China has sought to build capacity in almost all of them.

Are there any holdings or themes in particular that stand out to you at the moment?

One of the most liberating factors has been the ability to move beyond emerging markets and leverage knowledge of business models and capital cycles globally.

Afrimat, a South African aggregates-to-iron ore company leading to an investment in Breedon, based in the UK, is a case in point. Afrimat has significant market shares in South African aggregates. Moving low-value rock around is costly, making aggregate quarries hyper-localised, quasi-monopolies. This affords substantial pricing power and strong cash flow. Afrimat have used the cash flow from their aggregates operation to fund counter-cyclical investments in other assets, such as iron ore, anthracite and building materials. Their 2024 acquisition of Lafarge’s operations in South Africa bought them a collection of under-managed cement plants and aggregates quarries at a fraction of replacement cost. It also added complexity, debt and reasons for investors to worry, allowing us the opportunity to buy an attractively valued, high-quality business with a strong track record of improving undermanaged assets.

The process of benchmarking the economics of Afrimat to other established aggregates companies revealed the usual suspects, many of which confirm the attractions of the aggregates-first business model. The market rarely looks such gift horses in the mouth so valuations are at a premium – Martin Marietta and Vulcan Materials, both US operators, for example, trade at 6.4 and 5.0x EV to sales respectively. Breedon stood out in this exercise, not for its overt quality characteristics but because, like Afrimat, an inherently high-quality asset base is being hidden by factors that would appear to be more transitory in nature. The UK operations could reasonably be argued to suffer from lacklustre growth in structural demand, but while volumes remain depressed, and have been for some time, the benefits of a well-structured market have allowed companies operating in the sector, Breedon included, to largely offset such volume weakness with price. Volume growth would be very welcome indeed, but in respect of the valuation (0.8x EV to sales) it is not a requirement.

The value in understanding Afrimat and Breedon together comes not only from their similar operating models, but also from understanding their shared counter-cyclical approach to capital allocation, and the market’s response to it. While Afrimat have bought distressed assets across commodities, Breedon have stuck to building materials, but have been on a shopping spree in the US. The “eeeek” response is understandable, and is why an otherwise highly attractive, asset-backed business is trading at such a discount. Yet the nature of the acquisitions should offer some comfort, if not complete reassurance – Breedon are acquiring low margin ready-mix businesses that happen to have quarries. Their intention is to re-engineer them into quarry businesses that happen to do ready-mix. This approach allows them to buy quarry assets at ready-mix multiples – around half the valuation paid for tuck-in quarry assets by some of their larger US competitors. While this approach carries operational risk, it mitigates financial risk, placing the onus on operational ability over financial engineering. As with Afrimat, this sits comfortably in Breedon’s wheelhouse.

Focussing on the supply-side takes us in directions that often feel uncomfortable. The demand for aggregates in the UK is, frankly, depressing, and in South Africa, at best, erratic. This is why investors are willing to pay seven times more for businesses with some demand certainty. Demand, however, is nebulous, which makes building an investment case disproportionately on it particularly dangerous. While a return of volumes would do wonderful things to the Breedon and Afrimat operating models, it is the continually improving supply-side dynamics that underpin the investment case today, as well as offering substantial upside when volumes do return. As with so many of our investments, it is during the difficult periods that future returns are cemented.

What does all of this tell you about where the portfolio goes from here?

The great benefit of the capital cycle approach is that, if I looked out another 14 years, I would have no idea what the portfolio would look like, but I would know exactly how we got there.

My immersion in the portfolio over the last few months has shown that, through good times and bad, HP has preserved its discipline and independent thought, avoiding what would have been the most human of responses: succumbing to the investing orthodoxies of the past decade.

Looking forward, what is clear is that capital cycle opportunities appear as plentiful as ever. The always-increasing torrent of data will serve only to accentuate investor behavioural flaws, which for us creates opportunities if we remain alert and disciplined.

We have an intuitive, rational, flexible investment approach that is simple to articulate but brutally hard to implement. It can be an uncomfortable experience at times, but “the worth of a state of things is measured by the pleasure and pain which it involves”. John Stuart Mill gets it. And pleasingly, so does HP.

Michael joined Hosking Partners in January 2026 as the firm's fifth portfolio manager. We will be sharing more from Michael in the weeks, months and years to come.