Active Fund Managers and Fund Manager’s Activity Are Not The Same

 Active fund management has taken something of a battering in recent years. The rise of low cost index investing and the structural underperformance of the average manager suggests that battering may have been deserved.

 Does the scale of the bruising also vindicate the Efficient Markets Hypothesis? As Fama (and others) posit, can markets instantaneously, digest all new information and reflect it in prices? Is it only luck that allows managers to beat the market consistently?

Can it be the case that all information is indeed immediately reflected in process but not all information is relevant? Do prices capture both noise and signal?

Mayar’s investment philosophy is built on the belief in the importance of a long-term investment horizon. We also believe that signal information is scarce and the opportunities to act to buy companies at sufficient discounts to their intrinsic value rare. As a result, our portfolio has a high active share but low share of activity.

This helps in several ways. It's no secret that all costs cut into an investor's total returns and broker commissions are no different. More trades, mores costs, lower returns. Fewer trades, lower costs, higher returns.

While trading on noise can be profitable in the short term, we believe investing on signal is the way to generate sustainable long-term outperformance.

As this paper by De Long, Shleifer Summers and Waldmann states

Noise traders falsely believe that they have special information about the future price of the risky asset. They may get their pseudosignals from technical analysts, stockbrokers, or economic consultants and irrationally believe that these signals carry information. Or in formulating their investment strategies, they may exhibit the fallacy of excessive subjective certainty

 In response to noise traders' actions, it is optimal for sophisticated investors to exploit noise traders' irrational misperceptions.

 So how to differentiate noise from signal? We believe that the best way is to understand an industry and understand a company to derive the most relevant information. This is done with out reference to the biggest source of noise – the market. By fully understanding a business and its competitive environment, we can arrive at the valuation at which we are comfortable owning the stock. Then we can be patient, waiting for the noise to move the price to meet our signal - which happens on rare occasions.

 That’s the time when active managers should be active.

Time to Stop Timing?

Market Timing Is Notoriously Difficult - And Is it Really Worth It?

If you look through some the sage nuggets of wisdom through the ages, one theme consistently shines through. The importance of timing. Whether it be industry, comedy or sport you can normally find someone at the peak of those fields emphasising the role of timing in their success.

Whether it be by luck

Buzz Aldrin - Timing has always been a key element in my life. I have been blessed to have been in the right place at the right time.

Or talent, hard work and judgement

Yogi Berra - You don't have to swing hard to hit a home run. If you got the timing, it'll go.

And what about timing markets? As we know, market timing is notoriously difficult – after all, the definition of a stock that has fallen 90% is one that fell 80% and then halved again.

To be successful at market timing, ‘all’ you have to do is spot something that is obvious to you and no-one else, be able to express that view accurately in accordance with your mandate and be proven right in a timeframe which is acceptable to your clients. Cassandra Capital may be just as correct as Hindsight Capital but with much lower assets under management when vindicated.

Advocates of market timing may argue that ‘yes, it is difficult- that’s why those that can get the big bucks’. But is it really worth paying up for market timers? After all, we tend not to know who the market timers are before they demonstrate their skill and it’s a feat that has proven incredibly difficult to repeat.

Are these incremental gains worth the expense? Evidence from Albert Bridge Capital suggests not. A comparison of returns from a strategy of annually investing $1,000 in the S&P 500 at its low for the year every year, with a strategy of buying the S&P at its high each year since 1989. The results show that, after 20 years the less profitable approach left the investor with assets 80% of the perfect approach. This appears to support the notion that not only is not possible to perfectly time the market, the effort from attempting may not adequately reward an investor.

We believe the best way to invest in stock markets is to understand an industry, understand a company and invest when valuations offer a margin of safety from a company’s intrinsic value.

We think it’s time to stop timing.

Luck, Lego & The Power of Brands: Mayar Capital Quarterly Letter

Welcome to this quarter’s letter from Managing Director Abdulaziz Alnaim. In this edition we cover Fund performance, the power of brands and the role lego plays in the portfolio.

Performance

For the twelve months ending December 31st 2018, Mayar Fund is down 0.35%, net of expenses and management fees, but before performance fees (down 0.56% net for the Initial Series). Over the same period its benchmark, the MSCI World Index, declined by 8.71%.

Since its inception in May 2011, Mayar Fund is up 97.57% net of expenses and management fees, but before performance fees (up 92.02% net) versus a 64.28% increase for the MSCI. That corresponds to an 9.3% annualized rate of return excluding performance fees (8.9% net) for Mayar Fund, compared to 6.7% for the MSCI.

The Power of Brands

The value of brands is a subject that has arisen in many discussions over the past few years. Whether they are weakening as a moat, and what the future holds for them, is frequently debated. Let us start by venturing back in time to look at why brands exist, why they have prospered, and the effect they have had on the companies that own them. Each industry had different drivers for the emergence, persistence, and success of brands. Some, like jewelry and other luxury goods, had to do with quality, heritage, aspiration, and signaling. Those, we believe, will continue to be relevant and have arguably increased in importance in a globalized world. Others had drivers that are now more under threat. An example of that is the packed goods (CPG) industry.

Brands became popular in the industry because they signaled safety and consistency. When buying a box of Kellogg’s cornflakes a hundred years ago, purchasers could rest assured it would be safe to consume and uncontaminated by bugs, unlike some of the un-packaged stuff that sat in open bins. Consumers of this era also knew that a bottle of Coca-Cola would taste the same wherever they bought it.

That gave brands an advantage over traditional competitors, which translated into higher volumes, then to economies of scale in manufacturing, distribution, and advertising, and to further volume increase on and on in a virtuous cycle of growth. National and international expansion and widening these companies’ brand portfolios further deepened that advantage.

As retailers consolidated in the latter part of the 20th century and controlled an increasing portion of the end market they were able to start selling their private labels and because they didn’t need to advertise as much, they were able to sell somewhat similar products for a lower price.

Two factors, I believe, contributed more than others to the disruption we’ve been observing in the CPG industry over the past 10-15 years. The first is the internet. The second is a prolonged period of low interest rates

The branded companies reacted by investing in more innovation, wider variety, better packaging and marketing, and seemed to have weathered that storm reasonably well. Then in the mid- to late-2000s, several smaller brands started to pop up and capture significant shares from the incumbents.

Two factors, I believe, contributed more than others to the disruption we’ve been observing in the CPG industry over the past 10-15 years. The first is the internet. The second is a prolonged period of low interest rates.

The internet did two powerful things for smaller brands. First, it substantially reduced the scale needed to acquire new customers. You no longer had to spend millions on TV and magazine advertising. Instead, you could buy advertisements by the click on Google and Facebook.

Second, it enabled small and sometimes single-brand companies to sell directly to consumers online, removing the advantage that big CPG companies had in controlling shelf space at major retailers.

The second factor is the low interest-rate environment of the past decade. That encouraged entrepreneurs to start companies and, with access to cheap funding, build volume and the infrastructure that supports it without the conventional ”old-fashioned burden” of having to provide a decent return on capital to their investors. Start-ups started to engage in what were arguably uneconomical activities such as shipping small batches of low-priced personal care products to consumers’ homes.

Consumers loved that. Established companies with the need to make a profit simply couldn’t compete.

Some of these new start-ups eventually figured out how to make money, often by moving into traditional retailers after they had gained enough scale. While that brought them into an arena where the major CPG companies still had home field advantage, the two factors mentioned above have already decimated the historical barriers to entry in this industry, allowing a lot more competition than would have emerged otherwise. Time will tell if future higher interest rates will change things or not. As you are aware, we’ve invested a lot in the past and continue to invest in CPG companies, so the above situation has direct implications on our investments.

We have seen companies react to the current status of the marketplace in different ways. Initially, they all started trimming their portfolios and refocusing on a handful of “super brands.” This, I would argue, was a way for them to focus on their strengths and play more to their edge. It is not, however, a good long-term strategy because the forces mentioned above, possibly with the exception of interest rates, are not going away. In a world with many smaller, specialized brands emerging you want to have many niche brands, not a few super brands, at least not exclusively.

Luckily, a few of the incumbents have also started a three-prong approach to the problem by developing some in-house niche brands, investing in some emerging brands, and acquiring successful brands and helping them scale. We believe that some of the major CPG companies will be able to navigate this environment successfully. They will need to combine their scale advantage in existing areas of strength with the more nimble approach of smaller brands. A change of culture will be required. It will be hard, but not impossible.

We also believe that higher interest rates and higher inflation—should they come— could help the big guys through their better access to capital, in-house manufacturing, distribution capabilities, and experience in dealing with procurement on a global scale. Brand alone was never the sole advantage or source of moat for major CPG companies, and it was never enough for us to make an investment case. Its importance and how it interacts with other factors will undoubtedly change in the future.

Our job over the next few years will be to continue to observe and learn. We will find evidence in comparable sales figures, the stability, or lack thereof, in market share data, and in whether the current efforts of the major CPG companies will bear fruit. In a sense, brands are not actually dying in the CPG industry. Older brands are being replaced by younger ones that are doing a better job satisfying their customers’ needs and desires.

The brand is dead, long live the brand!

Oh, Mr. Market, What Have You Done?

We wrote in late December regarding our excitement about current market conditions. We’ve been complaining about the lack of attractive opportunities for more than two years and are now finding many avenues to deploy the capital we’ve patiently protected.

Luck & Lego - Our Portfolio

We believe in the importance of serendipity in investing. Luck, however, is not enough.

It must be combined with curiosity and experience to yield to good results. That means reading outside the Financial Times, asking the right questions, and making the necessary connections about the world.

Examples we’ve mentioned in the past include me first hearing about WGSN (now part of Ascential PLC) from a podcast about design and architecture. A recent example further illustrates this principle, and it comes via the route of Lego sets.

A couple of months ago Aubrey was looking for a new Lego set to buy for his five-year-old daughter. (she’s too young to start building financial models, so he’s starting her on Lego models for the time being!)

Vestas Lego Model

Vestas Lego Model

While flipping through the upcoming Lego sets catalog, he came across the Vestas Wind Turbine (pictured below). Aubrey, with many analyst years under his belt, quickly recognized the name and knew that it is publicly-listed in Denmark. The analyst’s naturally curious mind took care of the rest. Aubrey then came across a piece of information that got us excited. For the first time, there are now many places in the world where the cheapest source of incremental power generation is wind, even without government subsidies. If this persists, we believe it will be a gamer changer not only for the economics of power generation and wind turbine companies but for the environment and world energy markets overall.

Recent changes in how wind turbines are purchased (namely, the increased use of auctions) have had a negative impact on turbine manufacturers’ margins. However, we believe that a combination of growing demand and Vestas’s position as the lowest-cost producer, position it well to not only survive but also thrive in the next few years.

Vestas’ scale also gives it a competitive advantage in the growing services side of the business, and that deepens the moat around the company. While short-term uncertainties remain, we believe that the price we’re paying for the shares will reward patient investors.

Vestas scale gives it a competitive advantage in services

Vestas scale gives it a competitive advantage in services

Recently volatility and declines presented us with several opportunities this quarter. We were lucky (and disciplined) to have so much cash on hand and ready to deploy. As we’ve said before, our investment style produces long periods of no activity punctuated by short bursts of hyperactivity. This period was one, as you should expect from us in such a market environment.


And Finally…

In response to growing interest in Mayar Capital, especially on the institutional side, we added a new member to our team during the quarter. Marc Cox joined us in mid-November as Head of Investor Relations. Marc has over ten years’ experience as an investment sales professional, previously serving as a Product Specialist for the Global Equity platform at Insight Investment. He also spent six years as a Product Specialist in the Emerging Market equities team at BlackRock. Marc began his career in Financial Services at BNY Mellon in 2001 and has a BSc in International Relations from the London School of Economics.

Also during the quarter, we promoted Aubrey Brocklebank to the position of director, and he joined the Mayar Capital Advisors board. Aubrey has been doing amazing work over the past three years, improving our investment process and developing our Mayar Research Process System (RPS). Having him by my side to bounce ideas off and to play devil’s advocate has improved our decision-making capability significantly. He also has a great sense of humor, which always helps!

I would also like to remind you all that we have switched our reporting year to the more conventional calendar year basis versus our previous practice of reporting on a fiscal year basis. Starting this month when you see us referring to “year-to-date” or “YTD” we mean the period beginning January 1st.

We ended the year with $38.3 million of assets in Mayar Fund and $52.0 million of Assets Under Management (AUM) by Mayar Capital. The Fund remains open to patient investors who share our values. If you know any, please send them our way. Please do not hesitate to reach out to me if you have any questions. Thank you for entrusting us with your capital. We take this responsibility very seriously.

Best regards,

Abdulaziz A. Alnaim, CFA

Managing Director

January, 2019



This document is prepared by Mayar Capital Advisors Limited (“MCA”), an Appointed Representative of Privium Fund Management (UK) Limited (“Privium”), which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom. It is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Within the EEA Mayar Fund (“the Fund”) is only available to Professional Investors as defined by local Member State law and regulation. Outside the EEA, the Fund is only available to Professional Clients or Eligible Counterparties as defined by the FCA, and in compliance with local law. This document is not intended for distribution in the United States (“US”) or for the account of US persons, as defined in the Securities Act of 1933, as amended, except to persons who are “Accredited Investors”, as defined in that Act and “Qualified Purchasers” as defined in the Investment Company Act of 1940, as amended.

It is not intended for distribution to retail clients. This document is qualified in its entirety by reference to the Private Placement Memorandum (together with any supplements thereto, “the PPM”) of Mayar Fund. Please see the section of the PPM on information required by Securities Laws of certain jurisdictions.

This document is provided for information purposes only and should not be regarded as an offer to buy or a solicitation of an offer to buy shares in the fund. The prospectus and supplement of the fund are the only authorised documents for offering of shares of the fund and may only be distributed in accordance with the laws and regulations of each appropriate jurisdiction in which any potential investor resides. Investment in the fund managed by Privium carries significant risk of loss of capital and investors should carefully review the terms of the fund’s offering documents for details of these risks. Mayar Fund follows a long-term investment strategy. Short-term returns will vary considerably and will not be indicative of the strategy’s merits. This document does not consider the specific investment objectives, financial situation or particular needs of any investor and an investment in the fund is not suitable for all investors.

Investors are reminded that past performance should not be seen as an indication of future performance and that they might not get back the amount that they originally invested.

This document is confidential and solely for the use of MCA and the existing and potential clients of MCA to whom it has been delivered, where permitted. By accepting delivery of this presentation, each recipient undertakes not to reproduce or distribute this presentation in whole or in part, nor to disclose any

of its contents (except to its professional advisors), without the prior written consent of MCA. Comparison to the index where shown is for information only and should not be interpreted to mean that there is a correlation between the portfolio and the index. The views expressed in this document are the views of MCA and Privium at time of publication and may change over time. Where information provided in this document contains “forward-looking” information including estimates, projections and subjective judgment and analysis, no representation is made as to the accuracy of such estimates or projections or that such projections will be realised. Nothing in this document constitutes investment, legal tax or other advice nor is it to be relied upon in making an investment decision.

These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction (s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange,

redemption or disposal of any investments. Each prospective investor is urged to discuss any prospective investment in the Fund with its legal, tax and regulatory advisors in order to make an independent determination of the suitability and consequences of such an investment.

No recommendation is made positive or otherwise regarding individual securities mentioned herein. No guarantee is made as to the accuracy of the information provided which has been obtained from sources believed to be reliable. The information contained in this document is strictly confidential and is Intended only for use of the person to whom MCA or Privium has provided the material. No part of this document may be divulged to any other person, distributed, and/or reproduced without the prior written permission of MCA.

Santa Claus not coming to Town…yet.

As investors in London, New York and beyond prepare for the short Festive break, one character is conspicuous by his absence – Santa Claus and his feted end of year market rally. While there is still time for bruised investors to hope for some end of year relief, the numbers suggest that hope – and belief in the existence Santa Claus (and his rally) is not a strategy that Mayar can recommend.

Bah Humbug as Ebenezer Scrooge might say. However, we think that the fundamentals of the market and select businesses do give reason for optimism over the medium-term. As we identify great businesses and great companies we are also prepared for the opportunity to buy at points which offer great value. The market seems set to provide such an opportunity.

While we never make specific forecasts of where overall equity markets are heading over the short term (and we don’t believe anyone can do that consistently), valuation is usually a good place to get a general steer on expected returns. Looking at the MSCI World Index, we observe the following:

  • Valuations have come down substantially during the past 12 months with earnings increasing and stock prices falling. The MSCI World Index now trades at a trailing PE ratio of 16x, a 14% discount to its historical 20-year average of 18x (orange line in chart below). For comparison, in 2017 it was trading at more than 20x, well above average.

  • More importantly, it is now very close to a one standard deviation level below the historical average (green line in below chart), which has been a good place to be buying in the past.

Source: Bloomberg, December 2018

Source: Bloomberg, December 2018

  • Different geographies have fared differently and so have different industries and stocks. This is why the Mayar Global Equity Strategy has been able to generate positive returns in 2018 in a down market. Furthermore, we have found many more attractive opportunities over the past 6-8 weeks than we have over the past two years. We expect these to perform strongly over the next 3-5 years, even if markets are volatile.

 In our own valuation framework, we always think about the next 5 years starting from today. In a sense, we think like a private equity investor making a purchase today and trying to estimate an exit value in 5 years’ time to calculate an expected IRR. We perform this exercise on a real-time basis and it helps us determine when and what to purchase. Looking at our portfolio today, we estimate that it is trading at a 23% discount to our conservatively-estimated intrinsic value. This would translate into an expected IRR of 10-12% over the next 5 years.

 While we have been conservative during the past 2 years, we believe that opportunities are now getting more interesting. Over the past few weeks, we have deployed a significant proportion of portfolio cash holdings into what we believe are attractive opportunities.

 As a result, we are not listening out for sleigh bells or leaving carrots for reindeer. Instead, we are confident that our decisions will help drive investor returns over the next 5 years.

  

Mayar Fund Performance

 

*Fund Inception 16 May 2011 Source: Apex, Mayar Capital, 30 November 2018

*Fund Inception 16 May 2011 Source: Apex, Mayar Capital, 30 November 2018

Disclaimer
This document is prepared by Mayar Capital Advisors Limited (“MCA”), an Appointed Representative of Privium Fund Management (UK) Limited (“Privium”) which is authorised and regulated by the Financial Conduct Authority ("FCA") in the United Kingdom. It is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Within the EEA Mayar Fund (“the Fund”) is only available to Professional Investors as defined by local Member State law and regulation. Outside the EEA, the Fund is only available to Professional Clients or Eligible Counterparties as defined by the FCA, and in compliance with local law. This document is not intended for distribution in the United States (“US”) or for the account of US persons, as defined in the Securities Act of 1933, as amended, except to persons who are "Accredited Investors", as defined in that Act and "Qualified Purchasers" as defined in the Investment Company Act of 1940, as amended. It is not intended for distribution to retail clients. This document is qualified in its entirety by reference to the Private Placement Memorandum (together with any supplements thereto, “the PPM”) of Mayar Fund. Please see the section of the PPM on information required by Securities Laws of certain jurisdictions. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the PPM.

This document is provided for information purposes only and should not be regarded as an offer to buy or a solicitation of an offer to buy shares in the fund.  The prospectus and supplement of the fund are the only authorised documents for offering of shares of the fund and may only be distributed in accordance with the laws and regulations of each appropriate jurisdiction in which any potential investor resides. Investment in the fund managed by Privium carries significant risk of loss of capital and investors should carefully review the terms of the fund’s offering documents for details of these risks. Mayar Fund follows a long-term investment strategy. Short-term returns will vary considerably and will not be indicative of the strategy’s merits. This document does not consider the specific investment objectives, financial situation or particular needs of any investor and an investment in the fund is not suitable for all investors. Investors are reminded that past performance should not be seen as an indication of future performance and that they might not get back the amount that they originally invested.

This document is confidential and solely for the use of MCA and the existing and potential clients of MCA to whom it has been delivered, where permitted. By accepting delivery of this presentation, each recipient undertakes not to reproduce or distribute this presentation in whole or in part, nor to disclose any of its contents (except to its professional advisors), without the prior written consent of MCA.

Comparison to the index where shown is for information only and should not be interpreted to mean that there is a correlation between the portfolio and the index. The views expressed in this document are the views of MCA and Privium at time of publication and may change over time. Where information provided in this document contains “forward-looking” information including estimates, projections and subjective judgment and analysis, no representation is made as to the accuracy of such estimates or projections or that such projections will be realised. Nothing in this document constitutes investment, legal tax or other advice nor is it to be relied upon in making an investment decision. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. Each prospective investor is urged to discuss any prospective investment in the Fund with its legal, tax and regulatory advisors in order to make an independent determination of the suitability and consequences of such an investment.

No recommendation is made positive or otherwise regarding individual securities mentioned herein. No guarantee is made as to the accuracy of the information provided which has been obtained from sources believed to be reliable. The information contained in this document is strictly confidential and is Intended only for use of the person to whom MCA or Privium has provided the material. No part of this document may be divulged to any other person, distributed, and/or reproduced without the prior written permission of MCA.

©2018 Mayar Capital Advisors Limited. All rights reserved.