Castelnau has stakes in Hornby, Dignity and other troubled firms which could be reborn
Thursday 09 Jun 2022 Author: Daniel Coatsworth

The idea of owning a portfolio of companies that have gone off track may not appeal to every investor. There are high risks because the underlying companies need to be fixed before they can grow. Yet the rewards could be equally high if this repair and revive strategy works, and that’s where Castelnau (CGL) sits in the investment trust universe.

It’s more of a corporation than a traditional investment trust, argues manager Gary Channon, who is also the chief investment officer of Phoenix Asset Management and one of the brains behind Aurora Investment Trust (ARR).

Castelnau holds large stakes in six companies including model trains and toys expert Hornby (HRN:AIM) and funeral services group Dignity (DTY). It has a hands-on role with driving strategy at each business.

Two portfolio holdings called Rawnet and Ocula specialise in marketing and technology and their services are used to support the other companies backed by Castelnau. Channon and his team take winning ideas from each investee company, and they apply them to other companies in the portfolio if appropriate, effectively cross-fertilising best practice.

This is very different to the approach of a general investment trust investing in stocks and shares which is to take small stakes in companies on the stock market and sit back and hope these businesses generate value.


Channon is heavily influenced by the practices of legendary investor Warren Buffett who uses his Berkshire Hathaway (BRK.B:NYSE) investment vehicle to typically buy controlling stakes in companies, making it more of a conglomerate than a passive investor.

Channon co-founded Phoenix Asset Management in 1998 with the intention of having a long-term, value-based focus, taking stakes in companies at attractive prices. Since then, he has also bought businesses with his own money to learn about the process of growing them.

In 2002 he invested in wedding gift list company TWS and sold it in 2013. ‘TWS was sold to someone who did a very bad job, and it went bust after 15 months. I bought it back, so no-one’s wedding was ruined,’ explains Channon.

‘Warren Buffett said “I’m a better investor for being a businessman and I’m a better businessman for being an investor”. I thought why don’t we apply all the things we’ve learned to a company with £1.2 million turnover and 19 people? Now it is a £50 million turnover business with 160 people under the name of Cambium and is more popular than John Lewis for wedding gift lists.’


Castlenau now owns 19.2% of Cambium’s parent company, WLS, and may float it on the UK stock market next year, albeit retaining a large stake as its strategy is to own its investee businesses forever.

‘Previously, a customer had to go to its showroom rather than use a website to build a wedding gift list. We’ve taken it into the modern era and business has exploded,’ says Channon.

If Cambium is Castelnau’s most advanced holding in terms of strategic repositioning, then Dignity is at the other end of the spectrum. The company saw its share price collapse in 2018 after announcing a dramatic change to its funeral pricing to deal with competitive pressures.

Channon ended up temporarily becoming chief executive as an extreme measure after finding considerable problems in the business and the board being ‘deaf’ to offers of help.

‘I’m undoing 10 years’ worth of mis-management and under-investment,’ he says, in preparation for passing the CEO baton to a new appointee in early June.

‘On average, per branch volume had halved at Dignity. By raising prices so high each year, it would accept a market share loss because it was getting extra money from customers who didn’t pay attention to price or they were so loyal, but the business was basically dying on its feet.

‘Dignity topped up its loss of share each year through acquisitions. By the end it was having to find 2,500 extra funerals a year and the acquisition quality just went down and down and down. The market share stayed the same for a decade, but only because it spent over £200 million on acquisitions.’

Channon is now trying to drive cultural change within Dignity, something he says is fundamental to the Castelnau investment process. It starts with building principals and applying them. In Dignity’s case, it involves lowering prices to become more competitive and making investment in staff.

‘Its profits will go down to begin with, but market share should grow. Dignity’s market share hasn’t grown in 15 years but proof the new strategy is working will be watching market share improve,’ he says. ‘When you get volume growth off the back of a highly operationally-levered business then the unit cost comes down. As volumes increase Dignity’s costs won’t grow so the profitability will go back up.’

The Castelnau boss has great respect for Tim Martin from JD Wetherspoon (JDW) and Mike Ashley from Frasers (FRAS), saying one can learn a lot from the way they do business.

Tim Martin’s greatest attribute is having his ear to the ground, implies Channon. He is plugged into customer needs because he listens to his staff. Both Martin and Ashley are big believers in experimentation, trying out ideas and eventually they stumble upon ones that work which can then be rolled out across the business.

‘All the problems with Dignity we learned by talking to staff in branches. The head office didn’t know what was going on. Across all the Castelnau investee companies, we need a willingness to try things and study the data.’


Castelnau is listed on the specialist fund segment of the London Stock Exchange which has restrictions on who is permitted to trade the shares.

This part of the market is aimed at more sophisticated investors and anyone seeking to buy the shares may have to fill out a questionnaire with their investment platform provider before being allowed to trade. They must prove their suitability and understand there may be limited liquidity in the underlying investments in the trust’s portfolio.


Castelnau owns 49.7% of Hornby but Channon’s involvement with the business via Phoenix Asset Management goes back a decade. He’s gone from being a passive to an active investor.

It’s fair to say Hornby has failed to listen to its customers over the years. Every January it announces forthcoming product launches, and these are determined by head office, not in response to what customers want. This might change, implies the fund manager, recognising it’s better to have a good relationship with the customer and to engage with them more.

Hornby has strong brands including Scalextric and Airfix yet lacks scale as a business. Plans are afoot to make changes.

Manufacturing is mainly done in China but bringing it closer to home might enable the company to turn new ideas into products quicker. A retail outlet is being planned, which would see Hornby showcase its products to the public inside of a third-party retailer’s store in a city outside of London. If that drives sales, further outlets might be rolled out.

‘We see this showcase as an experience, enabling people to play Scalextric and trains and do model making. If we think about the market that Lego fulfils when it goes beyond children, some of the things we have in Airfix tap into that. We also want to update products such as putting cameras inside trains and Scalextric cars, bringing these hobbies into the modern era.

‘We also want to learn through social media, not selling things but building a hobby base. We have a big fanbase who want to be engaged with, talking about products they want. People don’t all want Second World War British planes, so we need to get the right product line.

‘Our vision is to use modern tools and techniques to build up a greater base of customers. We see a long and glorious future for Hornby.’


The core premise of Castlenau is to take positions in companies which could be worth a lot more in the future once problems have been fixed and growth accelerates. Just over a year ago, three of its investee companies were loss-making, now none of them are in this situation. While that’s promising, investors should not expect a quick fix and a rapid uptick in value.

The real rewards from Castelnau could be years in the making. That hasn’t stopped fans of Phoenix Asset Management’s style from bidding up the investment trust’s shares so they trade at an 8% premium to the value of the underlying assets.

‘Castelnau is only about businesses we think we can transform and own forever. With cultural transformation you get the real payback in five to 10 years, not in the early years,’ says Channon.

He says investing in Castelnau is not about making two or three times your money. It could be a lot more if the strategy is successful. ‘For example, we estimate Dignity is worth more than 20 times the current share price. It’s not about quick wins, the highest value will come from running it right.’

Bringing Stanley Gibbons into the modern world

Castelnau owns 31% of Phoenix SG whose principal asset is a 58.1% stake in stamp collector Stanley Gibbons (SGI:AIM), a business well versed in profit warnings over the years. The investment trust also owns the company’s debt, some receivables from a subsidiary and some rare and collectible stamps directly.

‘The business went through a scandalous period where it let a lot of customers down by selling investment contracts which it could not honour. It also lost sight of the single most important part of any business – the customer,’ says Castelnau.

The trust has helped Stanley Gibbons to rebuild its store in London and the business is now ‘washing its face’. The opportunity for growth lies in using modern marketing and technology to generate more interest and widen the customer base.


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