Emerging Themes from Emerging Managers (and some veterans) - 2Q21
Synopsis from reading 117 Investor Letters (and counting)
Dear Readers,
Every quarter there are thousands of investment managers who publish high quality letters that go broadly unread and underutilized. The Buffett, Munger, Ackman, and Dalio’s of the world seem to suck up >90% of the attention – And for good reason, these are still must-read sources of information.
However, the point of this blog is to bring to light sub-institutional investing themes and ideas. As such, every quarter, I push myself to read between 100-200 lesser-known manager letters. Some of these funds are “emerging” and some are seasoned veterans who have already carved out very successful strategies and capital bases.
From these underutilized sources, I am going to publish a synopsis of interesting topics and stock ideas which may be valuable to you.
I thought it would be helpful to breakdown the highlights into three sections…
1) Themes (all my opinion)
2) Quotes/passages that were well written and thought provoking
3) Synopsis of the top “Institutionally Constrained” Stock idea
Part I - Themes (these are just my observations)
Diversity of sub-institutional funds is amazing (and institutional to a lesser degree)!
Reading letters is a taxing, but rewarding exercise
Portugal is seemingly becoming an interesting place to invest
If you are a concentrated manager (cycle agnostic) please stop talking about inflation (macro) - yes, this is just me complaining :)
Investors are starting to sort through the carnage and pickup the pieces of their favorite SPACs
Investing in China is seemingly better executed qualitatively than quantitatively for the foreseeable future
Three Selected Passages from Investment Managers
1) Chinese Investment Climate - The Emperor’s Foie Gras
by Aikya Investment Management
“Most Chinese Billionaires are like geese – they get fat on their political connections and close to party leaders, but at some point the Emperor decides he wants to eat foie gras”
“China usually evokes extreme behaviour from investors. One set of investors, who are overly focused on near term financial metrics ignore [*corporate governance risks] and are happy to buy Chinese companies regardless of who owns them or whether they serve a social purpose. Another set of investors usually get put off by governance risks, a general lack of Western-style institutions, and the lack of easy access to trustworthy information; they simply stay away from investing in the country. We believe a more nuanced approach is needed…We like companies with strong principal owners…emotionally invested in their companies.
We avoid the Fat Geese Businessmen.”
*[Condensing] done by A Man in A Basement
2) The universe of small caps without significant operational or financial risk is shrinking rapidly
by Palm Valley Capital Management
“For Russell 2000 Index constituents with clean balance sheets, or cash exceeding debt, a record percentage of them (62%) are unprofitable. This is not due to the pandemic but is a multiyear trend. Regardless of sky-high prices, it’s hard to find a good business with a clean balance sheet.”
3) Vltava Fund on Risk
“Imagine you drive to work every day. It is a 40 km trip and it takes you 30 minutes at an average speed of 80 kilometres an hour. For your colleague, the same journey takes just 20 minutes because he drives half again faster than you do. Every day, he boasts about how much better driver he is until one day he does not make it to work at all. His faster journeys to work were undertaken at the cost of much greater risk. Various estimates say that from 80 km/hour onwards, every 15 km/hour increase in speed doubles the risk of serious accident. Most drivers probably do not know these figures and do not much take them into account.”
Top Institutionally Constrained Stock Pitch
CTT Correios de Portugal SA (Euronext Lisbon: CTT)
by Greenwood Investment Management and Maran Capital Management
From Maran:
“CTT is the privatized monopoly postal operator in Portugal, distributing over one billion pieces of mail and express parcels each year via its network of 500+ post offices. The company also owns a portfolio of real estate assets as well as a bank, and it has a collection of digital assets in payments and ecommerce. CTT is off the beaten path but has been offered by the market at an extremely attractive valuation (at times, a negative enterprise value, by some calculations). It has a strong moat and numerous hidden assets that I do not believe are priced in.
Conversely, I saw a profitable core business, hidden assets, free options, and a change in management and culture (at least partly driven by Steven’s presence), all at an extremely compelling valuation. Over the course of our investment, CTT has made progress on many fronts, including resetting its postal contract, improving its Spanish operations, and on capital allocation. It repurchased 1% of shares outstanding in just six weeks during Q2.”
From Greenwood:
“Joining the board and working with the management team to transform CTT, a 500-year-old Portuguese company, into a growth company has been the honor of my career thus far. I’ve seen how much an entrepreneurial board partnered with a high-energy & ambitious management team can challenge industry assumptions and customs to create interesting and creative outcomes that many considered impossible just a year or two ago. Almost serendipitously, it also taught me where the over 6% of annual alpha that family and owner-managed businesses comes from: the dichotomy of asking “why?” and “why not?” at the same time.
I discussed a similar juxtaposition in a recent article I wrote called “The Psychology of Value Creation.” The Kennedy quote above also perfectly expresses a crucial value creation element that most board rooms without a founder miss. These “best practice” independent boards are very good at asking “why?” They work at reducing liability, minimizing risks and ensure that their company is following all the proper rules. And that’s an essential function. But what a founder, family, or entrepreneur adds to that dynamic is constantly ask, “why not?” That has been the hallmark of CTT’s strategic discussions. As most buy-side firms spend all waking hours trying to solve for puzzles and problems, that level of focus has been applied at the board level. I have seen the profound difference it has made over the past two years with world-class colleagues. Early transformation efforts from 2019 and 2020 are starting to bear fruit, but we believe the coming years will prove even more transformative.
I am confident the experience has also improved our investment process. As Warren Buffett has long explained, being a businessman makes him a better investor and being an investor makes him a better businessman. While we are clearly not stepping into an executive role, we take a very active role in exploring alternatives and possibilities at CTT.
As I’ve come to find out, this is somewhat unusual for most other board rooms.”
Thank you for reading!
-A Man in A Basement
Links to funds:
1) Aiyka
2) Palm Valley Capital Management
3) Vltava
4) Maran
5) Greenwood