We had the pleasure to interview Andrew Brenton of Turtle Creek Asset Management in November 2019. Here you can find the full video and the transcript of our conversation.
- His way into investing & value investing
- Andrew Brenton's track record
- Portfolio concentration and risk
- Is Andrew Brenton of Turtle Creek Asset Management a buy-and-hold investor?
- Why he does not believe in moats
- Turtle Creek's top holdings
- Portfolio concentration
- Geographical focus
- Differences between Canada and the US
- History and culture of companies
- How long does it take to invest?
- Generating ideas
- Interesting industries and geographies
- Key metrics and definition of value
- More efficient markets?
- Sources of the outperformance
Tilman Versch & Roman Solf: Hello YouTube! We just had a great interview with…
Andrew Brenton: Andrew Brenton from Turtle Creek Asset management in Toronto.
Tilman Versch: And we talked about how he got the return of 22% over the last years of the inception of his fund and how this process works. So, if you like the content, subscribe and leave a comment. Thank you!
Tilman Versch: Hi Andrew! Welcome to our YouTube channel, it’s nice to have you here.
Andrew Brenton 00:26: I am very pleased to be here.
Tilman Versch 00:29: How did you come into the industry and how and when did you identify yourself as a value investor?
His way into investing & value investing
Andrew Brenton 00:40: Well, it’s interesting, my two partners who founded Turtle Creek with me – maybe it’s a little different as an investor path – we were investment bankers, mergers and acquisition specialists, we actually worked on a lot of transactions in Europe. This was back when I was much younger in my career. In the middle part of my career, I had the opportunity to set up from scratch and run and build a private equity fund for one of the large Canadian banks. I did that in the 1990’s and my two partners who were with me at Turtle Creek also joined me in that phase of our career. I never really thought of myself as a value investor, I hadn’t really read much in the way of investing so it was only years into running Turtle Creek and investing that I realized that the only way to invest is to think about the present value of cash flows and the fundamental value of a business. It just didn’t occur to me that there was any other way to invest. So, I guess I’m a value investor without having known what it meant at the beginning.
Andrew Brenton’s track record
Tilman Versch 01:59: Interesting. What is your track record at Turtle Creek, since you started to invest there?
Andrew Brenton 02:04: The track record is quite strong, we’ve earned better than 20% compounded returns. We’ve grown a dollar over 21 years to around $65 today but I want to stress – and this is one of the issues that we have when we meet new investors – that we never set out to make those returns, we would never represent that we could make those returns going forward. Our approach is to really try and minimize risk rather than earn high returns, but it is a decent track record over many different market environments.
Portfolio concentration and risk
Tilman Versch 02:39: Could you maybe share with us your views on portfolio concentration and risk?
Andrew Brenton 02:45: Sure. I think the biggest risk factor is owning things that are too highly valued, too highly priced. We don’t have any formal limits on our portfolio weightings, what we do is we require the portfolio to have at least 25 holdings. By doing that, it is in a sense a risk mitigator in case you are wrong on one of your companies. But within that 25 or more holdings we have no formal caps, we do drive incremental money to things that we think are more and more out of favor and that does mean that at times a weighting could be more than 10% of the portfolio today. For example, our largest holding is 10,5%. In 21 years, we never actually been in a situation where we got to buy more of a company as it was getting cheaper and cheaper in price such that it was more than 10%. I’d like it to happen, maybe someday it will happen. The company that I just referenced is 10,5%, we were recently buying it at lower and lower prices and made it probably around 8.5% to 9%. Now, as it happens, the price is risen and that’s how it’s gotten to be 10,5%. But from a risk managing standpoint it’s now that we will – if it continues to rise in price – now begin to trim the position and if it really rises in price it will become a much smaller percentage. That is the approach we are applying across the board with all of our holdings.
Is Andrew Brenton of Turtle Creek Asset Management a buy-and-hold investor?
Tilman Versch 04:30: Would you call yourself a buy and hold investor?
Andrew Brenton 04:34: The way I would describe it, we have a buy and hold intention unless the prices change. If you think of our prior career as private equity investors, we were by definition a buy and hold; we invested and had control positions in private companies. We applied that same thinking to the public companies that we own at Turtle Creek but if prices don’t change, we don’t do anything. One of the great features of the public market and something that really drew us to the public market is that prices change and often they change dramatically. We love that as a feature of the public marketing.
Why he does not believe in moats
Tilman Versch 05:19: Let’s change the topic to economic moats. In your top holdings, could you name two or three economic moats which are clearly identifiable and have you seen changes over the last years?
Andrew Brenton 05:38: I’m actually not a believer in economic moats, I think that they’re rare and the ones that do have moats, the market recognizes it and gives them premium pricing. I think the world is changing more and more quickly either from a technology standpoint, there are disruptor companies showing up all of the time so we are very focused on finding highly intelligent companies that are the best in class in their sector and recognize how uncertain the world is and are flexible and nimble. To me, I think being a great operator and reacting to changing environments is the ultimate economic mode, I suppose to some kind of regulatory for example protection the companies might have.
Turtle Creek’s top holdings
Tilman Versch 06:31: Could you name one or two of your top holdings and why you like them so much?
Andrew Brenton 06:37: Sure. One of the themes in the companies that we own is that many of them are quite good at making acquisitions and the reality is that most public companies are not good at acquisitions. I think maybe because of the background of myself and my partners both in mergers and acquisitions and then in private equity were maybe pretty good at identifying the few that are good at acquisitions. For example, our second largest holding today is a Canadian company which operates all throughout North America, especially in the food area and they have done an amazing job over the many years, we’ve owned it probably for 15 years now, of creating value through acquiring specialty niche brands in the food industry, both in Canada and the States. We met a management team that identified long-term trends in food and consumer behavior. They have been very disciplined, they’ve created a lot of shareholder value, as an example. Since we’ve owned it, they have compounded returns for their shareholders at about 25% a year. And so, in a sense that portfolio activity that I’ve described, we’ve somewhat struggled to do better than that. We have; we’ve earned about 35% annualized returns in that position but just a buy and hold in that company has been really terrific.
Tilman Versch 08:12: How concentrated is your portfolio?
Andrew Brenton 08:17: It’s interesting that with a minimum of 25 holdings, but as I described they are nowhere near equal weight and I looked at it just the other day, the top three holdings might be between 25% and 30%, the top five holdings over the years have been typically 35% to 40%. The top ten holdings have always been more than 50% of the portfolio. So, think of it as a normal distribution of 25 or today 27 holdings that range from the 10% I’ve mentioned all the way down to 1% or 0,5%.
Tilman Versch 09:02: Do you have a certain geographical focus?
Andrew Brenton 09:06: In terms of where the companies operate, we really don’t. The geographical focus – if you think of where mind and management is – for the first many years of our life, our attitude was “We’re based in Toronto, Canada. Before we start looking anywhere else, let’s identify all of the companies in Canada that we think are ones that we might want to own”. We look for highly intelligent organizations as I’ve described that are nimble, honest, good governance and importantly focused on their shareholders. To find those companies, there isn’t a screen you can run; you have to meet the companies, you have to talk to lots of people. The first 10-12 years of our life we focused just in Canada, we don’t own basic resource companies, so no oil, gas or mining companies ever. Once we felt we had done our job in Canada about ten years ago, we started doing the same thing in the US. We are very focused on what I call the ‘mid cap space’ so one to two billion market cap at the small side, about 25 billion market cap at the upper band and we are still in that multi-year process in the US of trying to identify the uniquely, rarely, remarkable companies.
Differences between Canada and the US
Tilman Versch 10:32: If you look at stocks from Canada and the US, do you see some differences in the management behavior in general or is it similar?
Andrew Brenton 10:42: It’s interesting, when it comes to the companies there is no difference. I mentioned the specialty food company, Premium Brands, which is headquartered in Vancouver. Because they are headquartered in Vancouver, when they went public, they raised money in Toronto. If they were slightly south and were headquartered in Seattle, they would have gone public in the US. We don’t see any difference between Canadian head office companies and US head-office companies. There is however a difference in the stock market, so we find that in the US – and I don’t know all the reasons – there is a more vicious reaction in the market to short-term news and events. Maybe it’s a cultural thing, maybe it’s the size of the US capital market, but we actually find that element of the US market attractive because of the fact that we have this act of overlay on top of the buy and hold foundation.
History and culture of companies
Tilman Versch 11:51: If you are analyzing a company, what role does the history and the culture of the company play in the assessment?
Andrew Brenton 11:58: They’re huge. We think it takes a long time to really understand a company. We don’t have any industry specialization, we try to identify that uniquely, well-managed company within an industry with the believe that through management’s eyes over time we will learn about the industry that they’re in, but culture is absolutely critical. If we use the food company as an example, over the years as I’ve spoken to different entrepreneurs who’ve sold their food business into Premium Brands and into what they describe as the premium culture in the ecosystem, I have never heard a single one of those entrepreneurs complaining; they’ve always raved about the culture and how much help joining in effect the premium team has been to their division or to their company. It’s something that we’re constantly monitoring, it’s not always easy to assess from the outside but if you take the time you have lots of conversations you do learn over time. As an example, we always go to the annual meetings of our companies. Very few shareholders actually do go to the annual meetings because not a lot happens at the annual meetings in the sense of content but what you do have at the annual meetings typically is half the room is management, not senior-management only but mid-level managers and it’s a great opportunity for us to have conversations with people that we don’t typically converse with. Most of the time we are talking to the CEO and the CFO and the senior management of the companies we invest in.
How long does it take to invest?
Tilman Versch 13:51: How long does it take for you to discover a company to invest in?
Andrew Brenton 13:55: It really varies; sometimes you meet a company and you realize “This is remarkable, this is the real thing”, And so, it’s immediately on our list of a company that we might want to own if it’s cheap. Then we start doing our valuation work and that can take time to get to know the company. I’d say, probably the quickest we’ve ever invested from identifying it as a company that we might want to own to then doing the valuation work is probably half a year, often it takes longer than that. And of course, with most examples we’ve identified a great company, we do the valuation work and we conclude “It’s a great company but it’s trading at a great price”, but then we continue to follow it with the belief that sooner or later every company falls out of favor in the public market and if that happens it gives us a chance to add it to the portfolio.
Tilman Versch 14:54: How do you generate ideas?
Andrew Brenton 15:00: We speak to a lot of people. In fact, if I can use the US market as an example, we don’t actually look at what other shareholders are invested in companies, we’ve never really looked at that. We have lots of conversations with the sell site analysts but not at the large bulge bracket investment banks but at the more regional research focused firms. Those analysts often have been covering their sector for their entire career, they have high quality views on the companies that they follow, they’ve known them for a long time and that’s extremely valuable for us to have those conversations with the analysts and really get context on the different companies. We’ll often tell this analyst “This is what we’re looking for” and many times they’ll say “If that’s what you’re looking for, there is only one company that I cover that you should really spend time on”. That’s one example of how we identify companies. We go to conferences, one of our largest holdings today is a US company called SSNC Technologies and one of my partners went to a conference, listened to the founder CEO speak for half an hour, followed him into what are called break-out-sessions, spent another half an hour with him and came back to Toronto and said to me “We really have to look at this company”. We did and as I said, today it’s our fourth largest holding in the funds. Those are a couple of examples of how we find our companies. We’re not rushing it; in 21 years we’ve owned only 100 different companies. The changing in the companies doesn’t happen that often and it wouldn’t bother me if for the next five years we didn’t find another company. In our main fund we have 27 remarkable companies and I have no intention of not owning them for the next many years. The only reason we won’t own one of those companies is if either they get taken over, which happens once in a while, but more commonly they simply rise in price to the point where we don’t think it’s attractive enough to be in the portfolio.
Interesting industries and geographies
Tilman Versch 17:25: You said you like to invest in companies from old sectors, is there one sector or one geography where it’s easier to find good companies at this time?
Andrew Brenton 17:41: I would almost turn it around and say that there are times that an industry loses its sense and becomes uninvestable. One example for me would be what is called the specialty pharmaceutical industry. One area that we would never spend time on is in drug discovery or biotech, it’s not something that I’m comfortable with for a host of reasons. I mentioned that we don’t look at basic resource companies. But years ago, I found the specialty pharmaceutical space very attractive, that’s at the other end of the drug industry with more mature products. We found a Montreal company called Paladin Labs. The founder that ran it was remarkable and we owned it for years and did very well. We also found a company in the US called Warner Chilcott based in New Jersey and that was also a very well-managed company. Those companies both were acquired by firms like Valiant and Endo and in the industry it felt as though it just went crazy in terms of the prices they were paying for products and companies and then the actions they took after the fact. So that industry became uninvestable for us and we sold out of all those positions. That may change at some point in the future. There are a few industries I don’t like, I mentioned a couple, but overall, for us it’s about the company; there has to be a company that has figured out how to run circles around their competitors in a good way and if we can identify that company we will learn about the business through that company.
Key metrics and definition of value
Tilman Versch 19:27: If you look for value, what are your key metrics and how do you define them?
Andrew Brenton 19:32: We define value only one way: the present value of the cashflows. So, for each of our companies we use a discount rate ranging from 8,5% to 10% which has a little bit to do with the size of the business and the riskiness of the business. Then we look at the present value of cashflows and we create a large financial model for each of our companies and apply a discounted cashflow basis. I can’t tell you often what PE-multiple our companies are trading at but I can tell you how much their trading below our view of intrinsic value, that’s the only metric we think about. Also, I don’t want to rely upon the public market to see what we think we see, so it’s important that the companies we own have strong cashflow, have strong balance sheets and are open and willing to repurchase and cancel shares if their company share prices are trading well below their estimate of their intrinsic value.
More efficient markets?
Tilman Versch 20:41: Many peoples say that markets are getting more efficient, at least less inefficient, so maybe the changes are also your forward returns at Turtle Creek? What is your best guess on your future returns, what range did you have in mind?
Andrew Brenton 21:01: I actually think the opposite about markets; I think that markets are become less efficient and if you think about the changes in the market, one thing that has never changed – and I don’t think ever will change – is human nature, the short-termism that many people are subject to. That focus on short-term results and overreacting hasn’t changed; if anything, it has gotten worse because we are inundated with information and very few people step back and think reflectively in longer term. If you think of all of the other changes in the market, the increase in passive investing, which is fine for a lot of people, a lot of people should just own the index without trying to pick stocks. But as more and more people are doing that, that’s a component of the market that is simply not doing the work. And then there are features like people back testing and using big data and momentum to try to find a flaw in the market and I think that’s driving larger and larger share price movements at times. I define efficiency as lack of share price fluctuations because if you pull off a stock chart of any company over a 1–2-year period and you look at it, a rational person would say about the true business value that that company hasn’t changed that much, does not fluctuate that much. And so, we’re excited about the opportunity to take advantage of those overreactions. In terms of what our returns will be going forward, if you would ask me that 21 years ago, I would never have said “I think we are going to earn 20% plus returns”. I won’t say it now; I don’t believe it. But I do think that our approach, over the long term, will do better than the market. I do think that we can get into double-digit returns on a compounded basis. We’ve written about that in some of our materials. If you step back and think about the equity market over the long term, I think nominal returns are 9% or 9,5% so I think we can outperform the market. But again, our approach is to try to de-risk the portfolio, not to reach for higher returns.
Sources of the outperformance
Tilman Versch 23:32: To sum the interview up, what are your sources of your 22% performance?
Andrew Brenton 23:39: I think the sources are owning above average companies and below average valuations. In a nutshell, better companies that on their own are creating value for their shareholders and then that reacting activity, that willingness to gleefully buy more stock as something is getting cheaper and cheaper. It’s interesting in the early years, I used to say to my partners “If you aren’t excited about the idea that if the stock is down 15% or 20% that you want to buy a lot more, then you probably own too much today”. That thought process has informed how we size each of our holdings at a whole variety of prices. I think it’s a combination of above average companies and then taking advantage of what the public market serves up in terms of at times irrational price action.
Tilman Versch 24:44: Thank you very much!
Andrew Brenton 24:45: Thank you!