Reading Michael Mackenzie’s editorial in the FT today gave me deja vu. They were the editorials of the journalist who preceded him, John Authers. The top down, macro view, with no clear idea of what a company is and how to evaluate it. A broken clock calling for disaster. With no fear of being disregarded. Far from saying the wrong thing, he makes a bundle out of every grass, drowning in simplism, without grasping the details. If the market goes up so much? It will have to go down. Is the market generally expensive? It will have to go down. Are there clear examples of mispricing? It will have to go down. Cassandras who will be right sooner or later. Like broken watches, twice a day.
In the late 1990s I left auditing to go to work for a promising asset management company that had not long before started managing mutual funds. There, among the various professionals, were two particular equity managers. One overly positive and one strangely negative. Always. I remember their different ways of expressing sadness and joy. The former oscillating between explosive and dramatic; the latter between modest restrained joy and depressed. The former is no longer in the business, while the latter has remained in it. However, my perception as an equity manager was always one of some sadness for the latter. The loneliness of secretly rejoicing when the market went down and being away from the party when the market went up must have been profound. Certainly, evenings out were more fun with the former.
I learned a few lessons over those years:
1) Negatives will never make money, which in the long run is the same as saying they will make you lose it. This is the powerful and historical model of the big Swiss houses, always cautious because if you make the client lose money, even temporarily (called volatility), you risk losing him. So, there is an asymmetry that has gradually been corrected over the centuries by generations of Swiss bankers. No one will reproach you too harshly for being too careful with their money. Moreover, with every market blunder, you will emerge as a winner, and that will be remembered. Ray Dalio on this simple asymmetry (doing better when everyone else is doing poorly is easier, less risky, and more rewarding in terms of AUM, than doing better when everyone else is also doing well) has gained popularity and built an empire. Roubini became famous for predicting an unprecedented financial crisis, even before there were any preconditions. His skill was to never change his mind. In just a few months he went from a nutcase to an enlightened mind. Albert Edward, macro analyst at SocGen, earns his soup by always finding new reasons to predict a secular collapse of the markets (his readings are ideal for horror lovers, risk managers, bond managers and equity managers who want to justify positions that, in retrospect, turned out to be too prudent).
2) Positive managers who buy without knowing exactly what they are buying, based on conceptual elements (normally creatively stimulated by momentum) lose money in the long run. A lot. The problem is that first they make you earn money. Often a lot. A bond of trust is then created that statistically leads to greater AUM and greater losses. This species that you need to worry about during bubbles was part of my super positive colleague above. Their careers usually last one market cycle, but they can create significant portfolio damage.
3) Those who make you a lot of money can also make you lose a lot of money. So, it needs to be properly understood how they made it for you. The same applies to those who make you lose a lot of money (always mark to market, so if it is realized). Several times it is the case not to sell, but to buy again.
4) Most market operators, in any role and at any level, are nothing but technical analysts in disguise. Usually behind great narrative skills related to the market and their tactics/strategy, lies the need to follow a trend and then motivate it. Risk management is built around these strategies. Because no one knows for sure where the market will go in the short term. And in the long run we will all be dead. So, the political attitude prevails (in Rome they call them paraculo). This makes the stock market a highly momentum driven and speculative place. At the same time, it makes it extremely attractive for those who have time, some lucidity and are able to exploit these characteristics.
5) A concentrated portfolio is definitely more challenging and macho. It gives the idea of someone who knows what he is doing. However, one must be wary of those who do not properly diversify their portfolio. They look for shortcuts to get rich using your money. Be even more wary of those who do not diversify significantly and claim to be doing fundamental analysis. He is probably lying without knowing he is lying. Those who do fundamental analysis, like any entrepreneur, know that everything can change in a very short time. Very little.
6) If you are emotional, it is better to invest in bonds. Today, when buying bonds is no longer an investment, it is better to buy apartments.
7) In general, being positive on the stock market always pays off if you have the patience to wait and the wisdom to diversify. It is better to have a portfolio in which you know what you are buying and on which there is a solid margin of safety (tangible assets, franchises, patents, brands, etc.). A little cash (bonds at other times in history) doesn’t hurt for any risk profile. Although it doesn’t necessarily help performance, on the contrary, having cash to reinvest in stressful phases helps you focus on future opportunities (greed) rather than on lost money (fear), thus avoiding screw-ups.
Bali x 10!
Almost 50% of the tourists who travel to Indonesia go to Bali. About 80% go to either Bali or Java, or both. The two islands correspond to 7% of Indonesia’s land area. Hence in 2017, the 10 Bali project was born. A project that aims to create the infrastructure to stimulate tourism to 10 more locations outside of Bali, The 10 New Bali’s (Authentic Indonesia Blog (authentic-indonesia.com)). These beautiful locations are simply not reachable, or reachable with extreme difficulty. They also lack reception facilities. The project that started in 2018 stalled in 2019 and then stalled in 2020. Today it seems to rest in a drawer. But this is not the case. As a result of Covid, investment in infrastructure in Indonesia is set to accelerate and the beautiful project to take off. Roads, airports, hotels, houses will be built. That’s along with port projects (Indonesia is a strategic trade hub), infrastructure needed to move the capital to Kalimantan, and infrastructure to handle the commodities and agricultural products boom. Today, however, the mood is not good. Which is why a company like WIJAYA KARYA BETON, a cement producer, trades at depressed valuations (P/E ’22 5x, EV/EBITDA ’22 3.5x P/TBV ’20 0.8X). The company is controlled by WIJAYA KARYA, one of Indonesia’s largest construction companies, which in turn is controlled by the state. This gives the company stability and visibility. After the recent exit of Holcim, the cement market in Indonesia is highly concentrated (over 2/3 of the market in the hands of Semen and Indocement). Following the entry of Thai and Chinese cement companies into the country, the government in 2016 put limits on further entry into this sector by foreign groups. We believe that after many false starts in the infrastructure plan, supply has become less aggressive (warehouses unloaded and plants to be maintained) and a real restart of it could lead to bottlenecks. Indocement, the big cap subsidiary of Heiderbergcement, well incorporates future growth, trading at P/E ’22 21x, EV/EBITDA ’22 10.5x, P/TBV ’20 2.2X, 3 to 5 times our Karya Beton. The Asian Niches fund has 0.9% exposure to WIJAYA KARYA BETON, within the Indonesia Small Caps Niche.
A prestigious Luxembourg association asked us to write a piece for a book on responsible investing. The piece is about our ESG experience as a boutique value. Clearly the request honored us and we wrote the piece. In summary, we told about our processes, our goals, our struggles and our results. We then told how we see the evolution of this confusing world. In short, we would like to bring this last point back here as we believe it is important to understand where we are and where we are going in the ESG arena. Today there are several companies (providers) that analyze an annual report (Sustainability Report) published by many companies (publication is not compulsory and there is not even a shared way to draw up such a document) in order to give a score on ESG risk. Each provider has a different approach and therefore the same portfolio will have a high or low sustainability depending on the provider used. Clearly this makes no sense and is not acceptable. European legislation has already begun to regulate the matter, identifying a series of quantitative indicators to be used from 2022 for the managed portfolio. The qualitative component, on the other hand, is composed of internal ESG analysis (as opposed to using an external provider) and engagement activity, which is the management of ESG issues directly with the company being analyzed. This last part we believe should be adopted by every asset manager. Adherence to the PRI, a body that defines a series of minimum activities in this area, we believe will represent an indispensable certification. The PRI itself will verify, directly and/or indirectly, that the activities indicated have really been undertaken in accordance with its guidelines.
The above defines an important watershed. ESG portfolios can no longer be managed in the same way as portfolios that are not ESG, with the only difference being that they select securities from a more limited ESG investable universe, defined by the individual provider used (an approach that is today dominant for both small and large managers). It will be necessary to publish quantitative data and use resources for proprietary ESG corporate analysis and interaction (engagement) with the company on the issues encountered. This is simple for companies like ours that are engaged in fundamental analysis. In fact, sustainability analysis becomes a part of fundamental analysis (integrated analysis). It is different for the many companies that use more quantitative approaches. Here, ad hoc divisions will have to be created to follow this part. While on the one hand this entails a significant cost burden, on the other it offers the opportunity for these companies to develop divisions more focused on fundamental analysis, diversifying their approach. Perhaps reversing the trend that has seen the number of passive and quantitative managers approach 90% of the assets under management, a figure that in our opinion is alarming and very much linked to the many excesses and eccentricities that we see in the market today.
This week we report the good results of Harley-Davidson (in the Pharus Asian Niches fund, Niche Neglected Luxury), whose brand is far from dead as many thought. Knoll (part of the Pharus Asian Niches fund, Niche Neglected Luxury) was bought by Hermann Miller, thus consolidating the luxury office furniture segment. Firstgroup (featured in the NEF SDG fund, Infrastructure Theme, TrendSDG Transportation), one of the largest bus operators in the U.S. and UK, sold its U.S. school transportation business at the same multiples discussed before Covid, confirming that the market is waking up. Intel (featured in the NEF SDG fund, Communication Theme, TrendSDG 5G), reported solid results. The stock fell after a nice rally despite the results. The company is investing to strengthen its chip manufacturing presence in the US, limiting its dangerous dependence on Taiwan. We remain positive on the stock, the backbone of 5G and many other technologies. Orange (featured in NEF SDG fund, Communication Theme, 5G trendSDG, and Pharus Asian Niches fund, 5G niche) reported tepid data. Spain still needs a few more quarters to improve, but the finish line is starting to show. While we wait for triggers for an upside close to 50%, we are being paid fat dividends. How to complain. Netflix has disappointed. With the current competition and end of lockdown it takes faith in the product and clear vision of the evolving competitive environment to stay on the stock. In contrast, competitor HBO MAX reported above-expected figures along with parent company AT&T. The latter has twice the EV of Netflix with 10 times the EBITDA, reflecting the huge growth the market still sees in Netflix. Credit Suisse (present in the NEF SDG fund, Tema Finanza, trendSDG La Buona Banca and the Pharus Asian Niches fund, Niche Internet Victims) raises 1.9 bln usd after the Archegos debacle. This makes it safe even in case of (probable) significant losses on the Greesill part. The results of the traditional business have been excellent. New president Horta Osorio arrives in days and we can expect the start of a new cycle for the company. At less than 0.6x tangible equity the value is there.
This week among the stocks we follow closely, we highlight incoming data from Korean steelmaker Posco (Pharus EMN fund, Niche Anodes), an indirect and cheap player in electric mobility, sexy electric vehicle leader Tesla, Hitachi (NEF SDG, Tema Infrastructure, TrendSDG Infrastructure of Labor), a leader in IoT software for professional applications; Canon (NEF SDG, Health Theme, TrendSDG Genetics&Diagnostics), the conglomerate active in diagnostics, digital printing and semiconductor equipment; Sony ((NEF SDG, Mobility Theme, TrenSDG Smart Mobility), the leading conglomerate in sensors, electronics and content; LG Chem (Pharus EMN fund, Lithium Cells niche), one of the global leaders in lithium batteries, the European pharmaceutical giants Glaxo, Sanofi and Novartis (present in the NEF SDG fund, in the Health Theme, in the 2 TrenSDG Vaccines and Global Aging-CardioVascolar), the giant Samsung Electronics (NEF SDG fund, Communication Theme, TrendSDG 5G – Pharus Asian Niches fund, 5G niche), the mobile operator in emerging countries Millicom, the Japanese trade company owned by Buffet Sumitomo (included in the NEF SDG fund, Infrastructure Theme, TrendSDG Renewables), Natixis which is under bidding by its parent BPCE, one of the two leaders in wind turbines Siemens Gamesa controlled by Siemens Energy (included in the NEF SDG fund, Infrastructure Theme, TrendSDG Renewables), one of the two 5G leaders Nokia (NEF SDG fund, Communication Theme, trendSDG 5G – Pharus Asian Niches fund, 5G niche), green aluminium producer Norsk Hydro (NEF SDG fund, Materials Theme, TrendSDG Plastic and Steel Replacement), UBS (NEF SDG fund, Finance Theme, TrendSDG The Good Bank) from which a lot is expected after Credit Suisse’s good data (before extraordinary losses).