The travails of high-profile Fund Managers who find their stars falling tend to garner many column inches in the press. Often, the ramifications, both commercial and regulatory can have a profound impact on the asset management industry for many years to come.
Whatever the short and long-term impact of these events turn out to be, perhaps one of the immediate reactions from all fund managers should be ‘there but for the grace of God go I’. Such a response is, of course a human one but it also goes to the very heart of what active fund management is.
Our job is to recognise opportunities, be able to action them in a way that is consistent with our mandate and be proven right in a timeframe that is acceptable to our investors. Essentially, we must look at something with webbed feet, making a quacking noise that most people believe to be a duck publicly say ‘that’s not a duck’ and be vindicated in the time it takes to grow into a swan.
And beauty is very much in the eye of the beholder. Whether it is a great compounder, a small illiquid company, small companies or a company that has been badly run in the past, none of these characteristics on their own make for a good or bad investment. Mayar Capital has invested and made (and lost!) money from investments with these characteristics over the 8-year history of the Fund. We expect that opportunities of all types will present themselves in the future. Ultimately, we have to answer the question ‘what’s in the price’
The way Mayar begins to answer this question is to Qualify the Quantitative. We have developed a tool to take historic financial statements of a company and screen for ‘health’ and ‘red flags’. This enables us to get a sense of the robustness of the numbers and to direct us to areas of research to help us understand companies in greater depth. We are able to do this with all our ideas, our portfolio, activist short positions and, if a blog post finds it convenient, other manager’s positions.
In our output, companies in the red section do not pass our screen and are ruled as unlikely to ever be included in our portfolio. You will notice the green dots that populate the top left. We completely accept that many opportunities that transpire to be great investments may look terrible at first. All approaches have trade-offs and our methodology generates Type II errors – that is companies which fail the screening process that, in hindsight could have made the portfolio. However, we also believe that there is a deep pool of opportunities in which, under our methodology, we can be confident a turnaround story or a mispricing is based on sound economic fundamentals. Does that eliminate the possibility of mistakes finding their way into our portfolio?
No – no process can ever do that. With our process, we accept that we may reject some good investments but view this as the price we are willing to pay to also reject a much larger proportion of bad investments.
This asymmetry is achieved by combining an ethical-owner approach, accounting health checks, incorporating learnings from behavioural science within a probabilistic framework, we invest our clients’ capital consistent with our own values and beliefs.
Through this it is our way of attempting to solve the conundrum of recognising opportunities, be able to action them in a way that is consistent with our mandate and be proven right in a timeframe that is acceptable to our investors. When we get it right and when we get it wrong, remember - there but for the grace of God go I.