July 08, 2014
Benedicte Gravrand, Opalesque Geneva for New Managers:
The manager of a three-year old ethical value investing fund talks about the types of
companies he searches, economic moat, value strategies and his activism plans.
Abdulaziz A. Alnaim, President and Fund Manager at Mayar Capital Management, a
$21m Cayman-registered asset manager with offices in Al-Khobar, Saudi Arabia, recently
talked to Opalesque about the Mayar Fund.
The fund mainly invests in equities globally ands seeks to achieve its objective over the
long term (defined as a minimum of five years) by applying a disciplined value investing
strategy to the selection of securities. It only invests in securities that comply with Islamic
ethical standards, aka the Sharia standards.
The managers at Mayar try to identify the types of companies that they want to own
before deciding whether the prices are attractive, he explains. And the most important
thing they look for is an economic moat; "some sort of barrier to entry that keeps
competitors away and gives the business the ability to earn superior economic returns,
turning themselves into capital compounding machines," he adds.
Renowned investor Warren Buffett coined the term 'Economic Moat’ (a competitive
advantage that is difficult to copy or emulate). Buffet said that he seeks "economic
castles protected by unbreachable 'moats.' " The idea is to buy, when they are
reasonably priced, shares of companies that dominate their industries and show clear
potential to maintain their superiority over decades," writes Jonathan Burton in the Wall
Street Journal. Apparently, Morningstar describes five ways moats develop. In the first,
the so-called network effect, a service becomes increasingly valuable as more people
adopt it. Second, customers lack incentive to embrace a competing product. A virtual
monopoly or control of a limited market can be a third type of moat, such as an airportservices provider would command. A fourth consists of proprietary brands,
patents and licenses that create consistent cash flow. And a final advantage is
pricing, or the ability to sell a better product cheaply, generating higher profit
Aside from the moat, the managers at Mayar also want to make sure their companies
have business models that they understand very well; ethical products and services;
favourable long-term economic prospects; a good financial position and quality; and
"Once we’ve identified such companies, we want to buy them at those rare instances
when they are trading at a discount to our estimate of intrinsic value," Alnaim says.
To find companies that meet the criteria, his favorite method is to look for "companies up
and down and right and left from companies we already like," that is, competitors,
suppliers, and customers. All help expand their knowledge of an industry and often are a
source of ideas too. Mayar also watches what other similarly minded investors are doing
by looking at 13F filings and reading interviews for example. Finally, they also conduct
"old-fashioned quantitative screening."
Finding value stocks is currently a challenge for investors as valuations look stretched in
almost all corners of the market after five years of bullishness, reports Nasdaq.com. As
value stocks have typically outperformed in periods of consolidation, there may be a
good time for them soon.
But, Alnaim notes, the environment is still good for value investing; "there are
opportunities to be found, but not as many as 2008, 2009, or even 2011. But it’s not as
bad some years where we couldn’t find any ideas, like 2007."
According to him, research finds that value strategies such as Mayar’s will have periods
of underperformance that can last up to three years. "Part of a value manager’s job, I
believe, is to first make sure that his or her investors share that long-term investment
horizon and then continue to communicate the strategy with them. We do no cater to
Mayar is setting its sight to a more dynamic future. Indeed, as the fund’s assets grow, the
managers intend to take on a more active role in the companies they invest in.
"We’ve been in situations in the past where it took a very long time for value to be
unlocked at a company," Alnaim says, "and I felt that we could have been able to
accelerate that process had we been able to engage actively with management and the
board. In the meantime, we frequently invest in companies alongside activist investors."