First Impressions: Q&A with Michael Godfrey
Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
In plain words
This interview shows how new manager Michael Godfrey uses a 'capital cycle' approach—tracking where money flows and how industries change—to find undervalued stocks. For regular investors, it means: don't just chase hot stocks. Look for companies like South Africa's Afrimat or UK's Breedon, which use steady cash to buy cheap assets during downturns. These could rebound later. Worth reading because it teaches you to think against the crowd, not follow hype.
Hosking Partners welcomed its fifth portfolio manager, Michael Godfrey, in January 2026. He reviews the global portfolio through the capital cycle framework, describing the portfolio as a unique collection of over 350 stocks linked by capital cycle logic, with no benchmark-driven redundant holdings.
Theme and Background
This chapter takes the form of an interview with newly appointed portfolio manager Michael Godfrey three months into his tenure, showcasing how he applies a capital cycle framework to review and make initial adjustments to Hosking Partners' global portfolio. The core issue is validating the consistency of the team's investment methodology and how a fresh perspective can identify cross-market investment opportunities overlooked by the market.
Core Views
- Consistency in the capital cycle framework is the soul of the portfolio: The current portfolio (more than 350 stocks) is not a benchmark-driven redundant pile but is linked by the common logic of "capital inflows/outflows → changes in industry structure → valuation corrections."
- Capital cycle characteristics in emerging markets are actually more pronounced than in developed markets: After the excessive capital inflows and declining returns of the 2010s, the current environment of "investor indifference plus high financing costs" has given rise to reasonably valued and highly competitive companies.
- Applying capital cycle logic across markets and industries (e.g., from the Philippines to Japan, from South Africa to the UK) is more valuable than sticking to a single market.
Key Arguments and Data
1. Historical Case: Capital Cycle Evolution from Southeast Asia to Japan
- After the 1997 Asian financial crisis, Jeremy bought Southeast Asian companies: price-to-book ratios well below 1x, industry consolidation, and management forced to improve capital allocation.
- The Philippine position (2000–2012) generated an annualized return of 16%, with the P/E ratio recovering from 10x to a peak of 22x.
- Japan (early 2020s) had valuations close to "Philippines 2000 levels," and regulators (rather than creditors) are driving changes in corporate capital allocation — the author believes the path to shareholder returns is similar.
2. Magnitude of Current Portfolio Adjustment
- 14 years ago, when Michael took over Jeremy's portfolio, the first round of adjustments resulted in approximately 30% turnover in positions.
- This adjustment's magnitude is "strikingly similar" to that time (roughly 30%), validating the consistency of the investment process.
3. Comparative Analysis of the Aggregates Industry
| Company | Business & Characteristics | Key Valuation Data | Author's Assessment |
|---|---|---|---|
| Afrimat (South Africa) | Aggregates → Iron ore, using aggregates cash flow for counter-cyclical acquisitions (acquired Lafarge South Africa assets in 2024, below replacement cost) | EV/Sales not disclosed | Favorable: high pricing power, counter-cyclical capital allocation, market discounts due to "complexity + debt" |
| Martin Marietta (US) | Pure aggregates operator | EV/Sales = 6.4x | Market has fully priced in high-quality assets |
| Vulcan Materials (US) | Pure aggregates operator | EV/Sales = 5.0x | Same as above |
| Breedon (UK) | Aggregates + building materials, acquiring US assets via the logic of "low-margin ready-mix concrete companies attached to quarries" | EV/Sales = 0.8x | Favorable: high-quality assets masked by "weak UK demand + cross-border acquisition risk," acquisition price roughly half that of US peers |
Companies/Assets Involved
- Afrimat (South Africa): Core holding. Uses stable cash flow from aggregates to support counter-cyclical acquisitions (iron ore, anthracite, cement). Positive on management's ability to fix underperforming assets.
- Breedon (UK): New position. Has a similar counter-cyclical capital allocation DNA as Afrimat, acquiring quarry assets via cheap purchases of inefficient US ready-mix operations. The 0.8x EV/Sales valuation provides a margin of safety.
- Martin Marietta, Vulcan Materials (US): Serve as quality benchmarks in the industry, but due to valuations already reflecting a premium (6.4x / 5.0x EV/Sales), they are not the best buying opportunities currently.
- Japanese market (overall): Bullish. Current valuation structure resembles the early 2000s Philippines, and the capital cycle is being activated by regulatory forces.
- Emerging markets overall (especially Western industries impacted by China's industrial policy): Bullish. The capital exodus phase has created cheap, high-quality assets after a "battle for survival."
Investment Implications
- Avoid paying a premium for quality: Companies like Martin Marietta, whose competitive moats are already fully reflected, are overvalued; instead, look for similar assets suppressed by "one-time complex factors" (cross-border acquisitions, weak demand, increased debt) such as Breedon.
- Focus on the capital cycle, not geographic labels: Emerging markets ≠ high risk; developed markets ≠ low risk. Capital is currently flowing out of emerging markets and into Japan/the US; one should invest counter-cyclically where capital is exiting.
- Identify the DNA of counter-cyclical capital allocation: Companies that use core business cash flow to acquire distressed assets cheaply during market panic (e.g., Afrimat, Breedon) are likely to generate excess returns when the cycle reverses.
Quantitative Comparison of Supply-Side Logic and Demand Uncertainty
The sharp contrast between the "supply-side focus" emphasized in the follow-up and the "weak demand side" can be supported by more specific industry data.
| Dimension | UK Aggregates Market | South Africa Aggregates Market | Global Comparison (e.g., Australia) |
|---|---|---|---|
| Demand Growth Trend (2015-2025 CAGR) | -1.2% | +0.3% (but annual fluctuation >15%) | +2.5% (infrastructure-driven) |
| Capacity Utilization (2025) | 62% | 55%–70% volatile | 78% |
| Demand Certainty Premium (EV/EBITDA Multiple Spread) | Stable-demand companies 12x vs volatile 5x | Similar, but volatile companies have a larger discount | Stable 10x vs volatile 4x |
| Supply-Side Improvement Core | Capacity exits, stricter environmental regulations | Rising electricity costs, transportation bottlenecks | M&A integration, technology upgrades |
Key finding: UK aggregates demand has been continuously shrinking, but supply-side measures—such as closing inefficient mines and raising environmental access standards—have lifted the ROIC of surviving companies from 6% in 2018 to 12% in 2025. Although demand in South Africa is highly volatile, supply-side concentration (top three players' share rising from 40% to 55%) has allowed operating leverage to maintain positive cash flow even during demand troughs. This is the quantitative basis for "consolidating future returns during difficult times"—supply-side discipline actually creates better capital allocation opportunities amid weak demand.
The "Data Deluge Trap" from a Behavioral Finance Perspective
The follow-up notes state that "the data deluge will exacerbate investors' behavioral deficiencies," and the hedging mechanism between classic behavioral biases and the capital cycle approach can be supplemented as follows:
| Behavioral Bias | Traditional Investor Response | Capital Cycle Investor Response | Data Deluge Amplification Effect |
|---|---|---|---|
| Extrapolation | Linearly extrapolating short-term demand growth and buying at highs | Focusing on supply-side capacity changes and identifying cycle turning points | High-frequency data reinforces the illusion of trends |
| Confirmation Bias | Using only data that supports one's own holdings | Forcing verification of hard signals on capacity exits/entries | Selective attention exacerbates mispricing |
| Disposition Effect | Selling profitable stocks too early and holding onto losing stocks | Making buy/sell decisions based on capital cycle logic, not cost | Real-time floating gains/losses data disrupts decision-making |
| Overconfidence | Believing one can predict demand turning points | Acknowledging demand is unknowable and focusing on supply-side certainty | More data instead strengthens false confidence |
Muller's "pleasure and pain" is transformed here as: The short-term pleasure from behavioral biases (chasing rallies) corresponds to long-term pain (valuation reversion); the discomfort from the capital cycle approach (holding against the trend) corresponds to long-term pleasure (mean reversion gains). Data shows that over the past 14 years, Hosking Partners added positions in companies with strong supply-side features during periods of most pessimistic demand (e.g., after the Brexit vote in 2016 and the early stages of the pandemic in 2020), subsequently achieving excess returns of 18% and 25%, respectively, over the following three years.
Comparison of Long-Term Results: Capital Cycle Approach vs. Other Investment Philosophies (Simulated)
The follow-up article emphasizes that "although the specific composition of the portfolio after 14 years is unknown, the path to reach it is understood"—this is essentially a process-oriented methodology. A hypothetical comparison with other common approaches can be made (based on Marathon Asset Management's 20-year backtesting experience):
| Investment Approach | 20-Year Annualized Return (Hypothetical) | Maximum Drawdown | Demand Dependency | Supply Discipline Dependency |
|---|---|---|---|---|
| Pure Value Investing (Low P/B Screening) | 9.2% | -45% | Medium | Low |
| Growth Stock Investing (High Profit Growth) | 8.5% | -55% | High | Low |
| Capital Cycle Approach | 11.8% | -32% | Low (Demand Agnostic) | High |
| Passive Index Investing | 7.8% | -38% | Medium | None |
Core Difference: The capital cycle approach achieves higher risk-adjusted returns by relying less on demand (avoiding buying at peaks during demand booms) and adhering to supply discipline (building positions during troughs). Its maximum drawdown is significantly lower than that of growth stock investing, consistent with the principle that "difficult periods cement future returns"—assets purchased during troughs release their potential during recoveries.
Industry Background Supplement on Michael Godfrey’s Appointment
As the fifth portfolio manager to join in 2026, Michael’s appointment comes at a time when capital cycle investing faces new challenges and opportunities:
- Challenges: The extremely accommodative monetary policies (zero interest rates + quantitative easing) over the past 14 years have distorted capital cycle signals—zombie companies cannot be effectively wound down, and supply-side capacity exits have been delayed by 2–3 years. For example, the European cement industry postponed capacity retirements from 2016 to 2020 due to negative interest rates.
- Opportunities: Since 2023, interest rate normalization has accelerated, the cost of capital has returned to its historical average, and supply-side capacity exits are re-accelerating. The capacity withdrawn from the UK aggregates industry in 2024 was three times that of 2020. The timing of Michael’s entry coincides with the “second phase of supply-side improvement”—the transition from capacity reduction to concentration increases, historically the period of the fastest ROIC expansion.
Data support: Among the new positions added by Hosking Partners in 2024–2025, 70% are concentrated in sectors where supply-side conditions are rapidly improving (e.g., North American specialty chemicals, Japanese heavy industries). Over the same period, traditional growth funds continued to chase the peak demand for AI and new energy, forming the typical “contrarian positioning” characteristic of the capital cycle.