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.
This piece explains why Hosking Partners is warming to the defense sector after years of avoiding it, especially liking Babcock International. The fund was cautious on defense because US giants seemed overpriced, but the Ukraine war made it rethink. Babcock's new management turned around the company by renegotiating a nuclear submarine maintenance contract to a cost-plus model (costs plus a fixed profit), giving it a 20-year steady income. The fund also highlights Babcock's partial ownership of Devonport and Rosyth shipyards as irreplaceable UK strategic assets.
One-sentence summary: Hosking Partners is shifting its stance on the defense sector from a long-term underweight to a reassessment, and is optimistic about Babcock International's restructuring and strategic asset value, with a 【cautiously optimistic】 position.
Hosking Partners has long underweighted the defense and aerospace sector but began reassessing this stance after the Ukraine war. As of Q3, the Hosking representative portfolio held a 94-basis-point position in the aerospace and defense sector, compared to the MSCI ACWI benchmark's 179 basis points. Explaining the rationale for the underweight, the author states: "Valuations amongst the large US Defence companies have been high, while we have been cautious that they are overearning as beneficiaries of inefficient state procurement systems." Additionally, the U.S. defense industry is difficult to penetrate due to complex lobbying relationships, and the technology behind major equipment (e.g., aircraft carriers) is facing challenges from non-traditional military competitors. However, the author argues that if the world enters a period of geopolitical multipolarity, "opportunities should exist at the right price."
After new management took over in 2020, Babcock International achieved a turnaround through operational streamlining and contract model restructuring. The new team focused on operational simplification, including cleaning up the balance sheet and addressing pension burdens, both of which have exceeded targets. The most critical change: the nuclear submarine maintenance contract was renegotiated to a near-cost-plus model. The author states: "As Babcock's largest contract, accounting for 20-30% of sales, one could now think of the new cost-plus model as providing a fixed 20-year annuity stream, which significantly de-risks the group and should justify a rerating." Previously, maintaining submarines with a 20-year service life caused significant trouble for Babcock due to the difficulty of pricing in advance.
Babcock partially owns the Devonport and Rosyth dockyards, making it the only company in the UK capable of surface fleet refits and nuclear submarine maintenance. With the UK government facing fiscal constraints, spending on new submarine hardware may be delayed, prioritizing the extension of existing capabilities. Babcock further solidifies this "essentially irreplaceable strategic asset for the UK" by investing £750 million to build Dock 10 at Devonport (an additional nuclear submarine dry dock). The author believes that companies working closely with democratic Western governments, such as Babcock, represent the most responsible and long-term investment approach, as their procurement strategies are backed by democratic mandates, and the governance structures of publicly listed companies provide stronger oversight and ethical accountability.
Hosking Partners argues that defense investment requires consideration of the target company's role in the military-industrial complex but rejects oversimplification, advocating for "embracing complexity." Institutional perspective bias: As a position holder, the author uses phrases such as "20-year annuity stream" and "irreplaceable strategic asset" to reinforce Babcock's certainty. Readers should be aware that this narrative may downplay the inherent policy and conflict risks of the defense sector.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Babcock International | Hold & Watch | Restructuring successful; nuclear submarine maintenance contract shifts to cost-plus model, providing a 20-year annuity cash flow that should support valuation re-rating | Contract accounts for 20-30% of sales; £750 million investment in building Dock 10 dry dock |