market folly

Today we're pleased to present notes from the London Value Investor Conference 2014 that just took place benefiting School Aid to improve the quality of education in Africa.  Enjoy! 


Mason Morfit – ValueAct

Mason Morfit is a partner with activist manager ValueAct Capital.  ValueAct has held 75 core investments since inception in 2000.  Roughly half of these core investments (37) have resulted in a board seat. Unusually in the activist world, 36 of the 37 board positions have come via invitation rather than a proxy contest.  Mason Morfit has recently resigned his seat on the board at Valeant Pharmaceuticals.  Valeant was the highest returning investment in ValueAct’s history. 

Morfit is now focusing his energy on Microsoft where he took up a board seat earlier this year. The networks that ValueAct has built up over the years by sitting on boards has been a major contributor to their success.  Morfit said that gaining the Microsoft board seat while owning a relatively small amount of the company’s equity was the culmination of this work.  He mentioned that their contacts with people at Seagate and AT&T were particularly important in landing the seat. Interestingly, Morfit talked about ValueAct’s investment in Adobe which they started in 2011. Morfit seemed to suggest that there were similarities between the Adobe and Microsoft cases.  ValueAct has had success at Adobe partly due to the introduction of annual subscription charges for its leading software, Photoshop.  Is it possible that the subscription model could be pursued at Microsoft with, for example, Microsoft Office?

Executive compensation is a very important lever for ValueAct. Morfit said that their research shows that executive pay is not well connected to company performance. One of the key strategies they pursue is to put pressure on companies to directly tie CEO pay to shareholder returns. ValueAct are happy for CEO’s to receive high levels of compensation for high shareholder returns but they should only receive small sums for average and poor shareholder returns. ValueAct prefer CEO’s to own a significant amount of the company’s stock and in the Valeant case they succeeded in getting CEO, Michael Pearson, to borrow money to buy Valeant shares.

Another interesting fact that came out of Morfit’s presentation was that whilst he thinks the activist space is getting very crowed at present they have only bumped into another activist once and that was recently with Carl Icahn at Ebay.  ValueAct subsequently sold their stock quickly and moved on.

Morfit said that the UK offers a very good environment for activists to operate in as there are no regulations against large investors talking to one another. In the past, ValueAct has been involved with Misys and Invensys in the UK.  He admitted that they find mainland Europe a harder nut to crack but that he expects them to do more work there during the next ten years.

For more from ValueAct, we've previously posted Morfit's lectures on activist investing.


Mason Hawkins – Southeastern Asset Management 

Mason Hawkins said that if you want to outperform you must invest in companies with good leadership.  Finding high quality partners is even more important now that there is less value in the market.  He finds it relatively easy to identify investments at a good price but picking great business leaders is harder. Getting the people right is the hardest part.  He recommended William Thorndike’s book the “The Outsiders” as an excellent guide to how to identify successful CEOs. 

He pointed out that Southeastern has sometimes misjudged managements and in those cases they are prepared to get involved to put things right.  Southeastern has taken an activist stance many times over the years, filing twenty four 13Ds.  In the last year alone it has been involved in activist campaigns with four companies in the US: Level 3, ACS Group, Texas Instruments and Chesapeake Energy. In the previous year they were involved in gruelling battles with Dell and Olympus in Japan. 


Donald Yacktman – Yacktman Asset Management 

Perhaps the biggest piece of news from Don Yacktman was that during the Q&A he said they had recently been out buying Samsung Electronics.  He said the stock is currently very cheap. Yacktman talked about valuing stocks as bonds, a subject he has covered before. He sees value as a function of future cash flows. His funds like to invest in predictable businesses as this allow them to more accurately project cash flows into the future.  They like high returns on tangible assets at a reasonable price. Another interesting snippet from Yacktman was that they always vote against stock options as remuneration for management. 


David Samra – Artisan Partners 

Samra said that it is hard to find good ideas at the moment and that his best idea and largest holding was cash. Long Compass Group (LON:CPG). The company has a dominant position in the contract food and support services market. Great management, good growth, potential margin upside. They bought in 2009 at 11x earnings. Compass now trades at 19x earnings.

Long Samsung Electronics.  Samra said that he thought that Samsung was cheap compared to US companies like Apple.  Samsung is trading on a PE of 6.6 with a strong balance sheet and lots of cash. He likes the management team and is not worried that the company is family controlled.

Long Aker Solutions (OSL:AKVER). An oil services company which is going through restructuring. Sells for 0.6 of 2013 revenues and 11.6x 2013 operating income. The company is protected by entry barriers.

Long Chubb Corporation (NYQ:CB). A property and casualty insurer with low leverage, disciplined underwriting and a good track record over time.  It trades at 1.5 book value and 2013 10.7x PE.  It should trade at x2 book value. 


Aled Smith – M&G Investments 

Long: Ingredion (NYSE:INGR) Ex-quant, Aled Smith argued that the secret sauce for stock picking is not to be found in numbers and spreadsheets but in the qualitative aspects of today’s complex businesses.   He pitched Ingredion, formerly Corn Products International, a global manufacturer and supplier of starch and sweetener ingredients to food and beverage producers. Smith particularly rates the CEO, Ilene Gordon who he argues has increased innovation, cut waste, reduced injuries and introduced a continuous improvement culture. Ingredion is moving away from sugar to higher value added products.  Smith also likes the oligopolistic qualities of the business.  M&G own 1m shares which they purchased in March this year. 


Tim Hartch – Brown Brothers Harriman 

Tim Hartch focuses on high quality and resilient businesses with a durable competitive advantage. He requires a margin of safety in the region of 75% of intrinsic value.

Long: Zoetis (NYSE:ZTS) Zoetis was spun out of Pfizer in early 2013. Hartch purchased shares in Q1 2014 between $28-30. He values the company in the low $40s.  Zoetis is the world’s leading animal health company. They sell products to poultry farmers, ranchers, vets and cat and dog owners.  Sales relating to livestock account for 65% of the business whilst the animal companion market accounts for 35%. The pet and livestock market is growing driven by global population growth and growing global wealth. Unlike human health care, governments are not exerting downward pressure on costs. The customer base is loyal. Zoetis has the largest R&D budget in animal health. The company is diversified with over 300 different medicines, vaccines and services and is not dependent on a few big drugs. 

Long: Svenska Handlesbanken (Sweden).  This is a Swedish based bank that provides services for private and corporate customers.  The bank has been run conservatively and had a good financial crisis. Hartch likes the simplicity of the way they do business.  They make money from traditional banking. Local managers operate what they refer to as the 2church tower model “ where  local managers get to know their local clients.  Most Swedish towns have a church with a tower and the idea is the bank only serves the local community that can be seen by climbing to the top of the tower. Despite the traditional approach, Svenska Handlesbanken has the highest return on capital amongst banks in Sweden. Unusually, the bank does not pay bonuses but instead staff are rewarded via promotion. Capital ratios are good. The bank has entered the UK market over the last 12 years, opening 25-30 branches per year and now has 170 branches in total. Many customers in the UK are dissatisfied with the performance of British banks and Hartch thinks that the UK could become Svenska Handlesbanken’s most profitable market.


Andrew Cormie – Eastspring Investments 

Andrew Cormie argued that Asia Pacific region (excluding Japan) is currently cheap at 1.6x price/book.  He noted that historically when Asian markets have been priced this way returns have been positive over a one, three and five year time horizon.  Long: Bank of China (BoC) and Noble Group (Singapore) 


Philip Best & Marc Saint John Webb – Argos Investment Managers 

Best and Webb are deep value, Graham and Dodd style managers that specialise in buying things that most fund managers would not touch. Since inception in Dec 2007 they have returned 331% compared to the Euromoney European Smaller Companies index return of 192%  They like small, illiquid stocks, family owed stocks, orphan stocks, failed IPOs, fallen angels (once high flying growth companies that have fallen to earth and become hated).  They are not necessarily afraid of value traps and actively look for situations that make other investors fearful. Long: Donegal  Investment Group (Ireland); Camellia (LON:CAM); Les Nouveaux Constructeurs (France); Biesse (Italy); Hochdorf (Switzerland). 


Jonathan Mills – Metropolis Capital 

Jonathan Mills said that he agrees with Warren Buffett that it is better to buy a great business at a reasonable price but in the current market he is finding it a challenge to identify wide moat businesses with a margin of safety. Mills' answer to the problem is to consider a narrow moat business if it is what he calls “owner occupied”.

An owner occupied company is one where the founder has a significant ownership stake. Mills said that public markets do not distinguish between companies that are owner occupied and those that are not.  Yet a study by Bain & Co has shown that between 2002 and 2012 companies with founder traits outperformed the S&P 500 by three times. Mills says that founders tend to have long time horizons, be good capital allocators, are customer focused, restless innovators and keep costs down.

Long: Admiral Group (LON:ADM).  Admiral floated in 2004 and the founders Henry Engelhardt and David Stevens are still there. Since the IPO it has paid out dividends of over £1.4bn (current dividend yield 7%).  Admiral uses a capital light model and therefore should not be valued on book.  It is trading at 2013 13x PE – at the lower end of range for Admiral historically. 


Andrew Hollingworth – HollAnd Advisors 

Long: Buckle( NAS:BKE). Buckle is a retailer of casual apparel, footwear, and accessories. Return on Net Tangible Assets, last ten years avg 47%. Sales per share growth last 10 years 10.2% compounded. Management shareholding approx. 40%. Around 90% of net income has been returned to shareholders in the last 4 years. All growth has been organic (no acquisitions). 2013 13.4x PE. EV/EBIT 7.8x.  Eleven analysts cover the stock but there are no buy ratings at the moment. 


Charles Heenan – Kennox Strategic Value 

Long: Fujikon Industrial Holdings (Hong Kong).  Founded in 1983.  Heenan likes to see a long-term track record. Fujikon is primarily a manufacturer of headphones and headsets. Historic yield of 10%.  Strong balance sheet, 50% cash holding and no debt. In terms of historic PE values Fujikon has a 5 year average PE 11x and 10 yr average of 9x.  2014 10.13x PE. 


This concludes the notes from the London Value Investor Conference 2014.  If you missed it, we've also posted up notes from the Sohn Conference, that took place recently as well as the Next Wave Sohn Conference.