How do you describe your investment style?
We are value investors. We conduct intensive fundamental research and invest in a concentrated portfolio of 10 to 20 great businesses.
What distinguishes you from traditional portfolio managers?
(a) Concentration instead of (over)diversification: Conventional investors cut the portfolio “cake” into many – often hundreds – of pieces of direct investments. Such (over)diversification is not necessary at all. Moreover, reducing the idiosyncratic risk also reduces the opportunity that might arise from a good individual investment. We think differently. We only invest in our best ideas. With 10 to 20 individual positions, we are still sufficiently diversified. Moreover, most of our investors will only invest a part of their portfolio with us, so their overall portfolio is adequately diversified in any case. (Personally, we have invested most of our wealth in our fund and can sleep very well with this decision.)
(b) Price vs. value: Many portfolio managers try to improve performance by tactical reallocation between asset classes (i.e. market timing). However, there is no convincing evidence that jumping-in-and-out-of-the-market can be successful. Therefore, we don’t attempt it. Instead, we analyse selected companies intensively and assess their intrinsic value. By comparing the market price of a company with its value, we can patiently wait until Mr. Market offers a sufficient margin of safety. If this happens, we can buy with less risk and at the same time achieve a higher return.
(c) The right attitude toward the stock market: Traditional portfolio managers spend a lot of time observing and analysing stock price movements and assessing market sentiments. We focus instead on the company and its valuation. You will find us much more often in the reading chair than in front of a bloomberg screen. We accept short-term price fluctuations because we know that Mr. Market is sometimes euphoric and sometimes pessimistic. But as long as we know the intrinsic value of a company, we can remain calm and do not need to lose any sleep over stock price fluctuations.
Do you buy quality stocks such as Nestlé or Coca Cola?
The term “quality stocks” is dangerous because it suggests that investors can expect stable, reasonable returns with large, popular stocks irrespective of the price they pay. This reminds us of the “Nifty Fifty” in the early 1970s, which were then considered “quality investments”. In the subsequent bear market, the previously highly praised shares fell precipitously – especially those that traded at high multiples. What most investors did not consider at the time was the “price vs. value” principle. We, too, look for outstanding quality companies, but we only buy when the price is right. This is often not the case with popular names, and therefore you will find less well-known companies in our portfolio. Successful investing is not a popularity game.
Understood, but what do you consider a “quality company”?
By far the best long-term investment results are achieved with those companies that generate high returns on invested capital, and that can, moreover, reinvest a lot of capital at high incremental returns. The result is a beautiful exponential function of compound interest, which can push up the share price ten- or even hundredfold. For us, a great business (quality company) has all those elements that result in an ability to reinvest free cash flows at high returns on incremental capital over a long period of time. We call them “young elephants”.
Against the background of the debt crisis: Why do you invest in shares and not in tangible real assets?
History shows that the application of value-investing principles offers the best long-term protection against money depreciation. Real assets, such as commodities do not (or hardly) yield any returns, making a valuation impossible. A purchase is a “greater-fool” speculation on higher prices and hence highly uncertain. We regard gold as a currency, but not as an investment. We hold a portion of our cash in gold because unlike all other currencies it cannot be printed. In addition, gold will likely become more expensive relative to shares in businesses in periods of deep pessimism. It creates a portfolio insurance, allowing us then to exchange expensive gold for inexpensive, great businesses.
Your portfolio is very concentrated. How do you construct it, and how do you deal with stock-specific risk?
We create a ranking of our investments based on the ratio of price and value. The best ideas get more capital than others. Good investments are rare, and if we find a really good idea, we can invest up to 20 percent of the capital in them. Since we only consider a few titles, we can deal with a company intensively, better understand its risks, and fix the hurdle for the required security margin at a higher level. In short, we like to put it as Warren Buffett has said: “If you have a harem of 40 women, you never get to know any of them very well.”
Who is doing what at Polleit & Riechert and what is the added value you are offering?
Matthias Riechert is responsible for research and portfolio management. Thorsten Polleit supports investment decisions with his political-economic insights. The different perspectives lead to better investment decisions because future cash flows of most businesses will increasingly be influenced by central bank and government interventions. Value investors who solely concentrate on bottom-up analysis were completely surprised by the magnitude of the financial crisis in 2008.
You are a small team. What about people risk?
If something happens to one of the partners, this will not affect the value of our investments. All necessary functions, most importantly risk controlling, are carried out by our manager and administrator IPConcept S.A. (Luxembourg). In such an event we will consider all options and decide if we have the best team in order to allocate our investor’s capital going forward.
Why do you believe that you will outperform a passive ETF in the long-term?
For three reasons: through (1) better information obtained through intensive independent research, (2) by concentrating on our circle of competence, and (3) focusing on the long-term.
Let us explain: Most analysts focus on forecasting revenues and earnings for the next coming quarters. They are less interested in assessing the companies likely performance in the period after that because most of their clients will have sold the position before. The average holding period at most stock exchanges is less than one year. We, on the other hand, focus on the long-term development of the company and particularly on assessing the durability of its barriers to entry. We have little competition because only few funds have such a long time horizon.
Who is the fund suitable for, and how can I invest in the fund?
Our fund is an Alternative Investment Fund (AIF) and may only be promoted to semi-professional and professional investors. There is no minimum investment for the fund. Our investment style is generally suitable for institutional and wealthy private investors who are long-term oriented and can accept market price fluctuations.
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