During RV Capital’s Annual Meeting 2022 Rob Vinall hosts a traditional allocator panel. Patrick Maurenbrecher, Claudine Innes and James Ferguson joined to answer the questions of the guests.
They have discussed the following topics:
[00:00:00] Robert Vinall: Difficult to believe, but we’ve reached the final session of the day, or the weekend rather. We always finish up traditionally with the panel discussion. The panel is made up of different types of investors. So, we have a multifamily office, a single-family office, and an endowment. Of course, the biggest challenge for an emerging manager when they’re starting out is attracting capital and ideally attracting the right capital. This session is all about your questions. It’s an opportunity to ask the people who you’d like to attract, what they think about when allocating capital and what type of traits they’re looking for, and whatever else is on your mind.
Starting at the right, we’ve got James. James is an old hand here. I think it’s the second or third time he’s done this panel. So, he very graciously offered to take all the hard questions and works with a global endowment, an endowment based in the US. Then we have Claudine, who works for a single-family office based in Spain. And finally, Patrick, based in Hamburg, works for a multifamily office. So, three very different types of investors. And before I pass the microphone off to you guys, maybe I’ll ask each of you just to briefly introduce yourselves, and whatever you want to say about the organizations you work for. Please, Patrick, you can go first.
The background of the participants
[00:01:31] Patrick Maurenbrecher: Okay. Thank you for inviting me. It’s been a pleasure and it’s been a wonderful weekend. So thank you, first of all. I’m from Hamburg. We run a multifamily office. It’s just my partner Stephan and myself. We have 70 employees. We almost exclusively cater to entrepreneurial families and some single families and some trusts. The way we do it is it’s basically an advisory service. We do advisory on the strategic asset allocation, we source managers like Rob, but maybe we come to that later, because it was very difficult not to source him but to get in. Then we also do, of course, all the administrative stuff. As of today, it’s about 6 billion that we advise on or do the numbers for. You can book us for whatever service you want. You don’t have to use us as a single-family office. So maybe that’s it.
[00:02:41] Robert Vinall: Yes, and I’ve had the privilege to meet some of your investors and they’re all really successful entrepreneurial families based in Germany and families who oftentimes are not in the public eyes in Germany, and I just like to make a shout out for your podcast. Unfortunately, only in German. Maybe there are plans for an English language version where you interview some of these really great family companies in Germany.
[00:03:09] Patrick Maurenbrecher: Thank you, Rob. I’ve done six or seven now. I’m still learning a lot. I find it very difficult to do a podcast. But maybe I mean, what Rob’s referring to— Yesterday, you said, you try to avoid talking to intermediaries. I think when I first reached out to you, you thought I’m some sort of private banking guy. So it was very poor communication on my side. But in the end, it’s the families that invest directly with Rob. And it’s just my job to find him, do due diligence, and then advise my clients on it. But he wouldn’t take any meetings. He didn’t want anything of this. When I was with a client in Zürich, I basically pushed through and said, “Rob, we’re here and we want to meet now.” That was the moment when he understood that actually, the type of clients that we have are exactly the type of investors that Rob likes, I think.
[00:04:10] Robert Vinall: That’s the wonderful relationship I’ve come about through. So thank you for that. Claudine, tell us a little bit about your background.
[00:04:16] Claudine Innes: Okay. Well, I work for a single-family office in Spain. The family wealth came from an investment in a company the father operated and then sold. So the family history was the kind of operating investor entrepreneur. So there was no real background in being a financial investor. So the typical…
[00:04:43] Robert Vinall: The business was sold and all of a sudden there was the problem, “Where do we invest the capital?”
[00:04:46] Claudine Innes: Yes, a nice problem to have, but the one that you have to solve. The people that father left in charge used their philosophy. Initially and still, much of the assets are invested in real estate which we run internally. We have a team that invests in property for rental, but also buys building up, and sells. Then there was 20%, more or less, which was investing in a portfolio of blue chips that was run by an outside manager, who was not a professional manager, in the sense that he was running his own money and he ran this portfolio the way he ran his own family money.
So it was like a very common sense portfolio of global blue chips, that did a good job. But when the younger generation took over about six years ago, first of all, they wanted to internalize the knowledge, not have it all outside and not know what was happening. And also they felt generational they had the assets to be able to have a much longer-term view and therefore take some more risk. So, I came in as new blood to try and help them in that process of being more ambitious in their investments. Then we were very fortunate, I think just a month after I joined we went to the Value Spain event. There I met someone very nice, who’s here, Rafa Leon, who introduced me to Rob and other excellent investors. That’s why we’re here. So, thanks for that.
[00:06:25] Robert Vinall: You’re comparatively new to the capital allocation. But what I appreciate about you is an incredible intellectual curiosity. You often ask some of the best questions I come across.
[00:06:34] Claudine Innes: Well, I come from the dark side. I’ve been a broker for 30 years. You learn all the bad things that you don’t want. The internet’s been a great thing. And then learning from some other people, they begin to introduce you to things, and you start reading and then you realize that there’s another alternative universe. Also, even within broking, there’s some nice, clever people and some good investors. You kind of migrate towards those people and those people open windows and that helps one to learn.
[00:07:04] Robert Vinall: Charlie Munger always says invert. So it’s it sounds like— Great. James.
[00:07:11] James Ferguson: Good morning. Yes. I’m James. I come with our investment team at Global Endowment. It’s our 50th anniversary this year, as of this summer, which we’re very glad to be here. Our background is our founder was the CIO at Duke University’s endowment. The original idea was to pool small and mid-sized endowments together and then invest as if it were one endowment. That’s the basic idea. That’s essentially what’s transpired. We have about 45 clients today. It’s really important that we pull them together at the asset class level in particular, because then as we face the market, we’re out in the world looking for the Robs of the world, and we can invest through one single structure. So, it makes it very efficient to do and it allows us to really focus on the core aspect and the most fun part of our job, which is traveling around the world, at least pre COVID and hopefully post COVID as well. Seeking these managers, many of whom or most of whom do not want to be found.
[00:08:02] Robert Vinall: What was your background prior to coming to Jim?
[00:08:05] James Ferguson: I have a long and winding background. I graduated from Duke in 2006. I was an E-Con major. I worked for one of the largest private real estate developers in the US. It was an insurance structure, a very entrepreneurial firm, and all of the equity capital was internal. It was created by basically generating development returns, then rinse and repeat. It was incredible background as a way to learn about an operating business. I saw the best and the worst commercial real estate market in the US in a six-year period. I really felt like I was swimming upstream. Notwithstanding that it was a great firm, I found myself reading annual reports, I started going to the Berkshire Hathaway meetings with my dad and realized that I was too young to be moonlighting doing this. So, I jumped and was very fortunate to be connected with Jim back in almost 10 or 11 years ago.
[00:08:52] Robert Vinall: Awesome. It’s great to have you here. I think you’ve been to almost everyone, right?
[00:08:58] James Ferguson: It’s very good to be here.
[00:09:00] Robert Vinall: The idea is now that the microphones get passed over to the floor for questions. So I pass them and we’re going to keep two up here. We’ll have to share and I’ll take two. And Molly and Tommy will pass around. Just raise your hand. Why not Indexing?
[00:09:35] Jonas: Johnas from Germany again. Thank you all for serving on the board and giving us an opportunity to ask questions. I will ask one, a bit trickier. Why don’t you put all your money into indexing and why do you spend so much time looking for the Robs of the world?
[00:09:53] Robert Vinall: Who wants to go and take that question?
[00:09:57] Claudine Innes: It’s a very good question because in my own reports I always compare to the index. The history is that we haven’t done as well as the index. But there is a different sense of ownership, I think when you have an index than when you have either direct investments or via a manager who has a sense of ownership in companies. The mantra is we want to be active investors. We want to know what we’re doing. We want to know where we’re invested. We want to learn from our investments. Both in terms of the companies, we’ve invested in and the way the investors invest. The index gives you a broad range. You don’t have to work, but you don’t learn. I think that would be my answer to that.
The mantra is we want to be active investors. We want to know what we’re doing. We want to know where we’re invested. We want to learn from our investments.Claudine Innes
[00:10:46] Patrick Maurenbrecher: Maybe I add one thing. These entrepreneurs, don’t like to be average. Even though they know that we try to communicate and tell them that it doesn’t make a lot of sense to have a 30-company or 50-company concentrated portfolio, they still sometimes don’t feel that they want to have all their equities just in an ETF. So they fundamentally like the idea of being an owner of a company. That puts them straight onto one Captain ships with very concentrated or five to 10 company portfolios because they can understand that. It relates to their own entrepreneurial journey. They can talk to Rob. I mean, can talk to the investor, and they like that. And of course, they like to beat the index. It gives them satisfaction if that’s working out. I can just say for our clients, it’s often a combination that they do own some ETFs, and then they also give money to someone Captain ships.
These entrepreneurs, don’t like to be average.Patrick Maurenbrecher
[00:12:07] James Ferguson: The only thing I’d add is I think it’s worth just acknowledging that it’s a brutally competitive game. So sitting in our seats— I feel very, very fortunate to meet some of the best and most talented investors in the world. And notwithstanding someone who set up their firm in a perfect way, especially in the public markets for a long-only stock-picking sop, the odds are against you, the odds are against us. We certainly do not have a tailwind behind our backs. That notwithstanding, I think there’s a small group of investors out there in the world, we’ve been fortunate to be in that group over time, although it’s been tough lately, where you are capable of beating the market. So it’s not that the pursuit is not worth following, but I think it’s worth acknowledging the odds from the outside.
So, it’s not that the pursuit is not worth following, but I think it’s worth acknowledging the odds from the outside.James Ferguson
[00:12:50] Robert Vinall: I wasn’t planning on commenting, but there was one thought I wanted to put out there, which is, obviously an event like this and the reason you guys have all traveled here is really to talk about investment excellence and to learn how to be a great investor. It’s worth remembering that that’s not how the industry as a whole works. If you think of the average private bank or investment bank or a large fund management company, they’re not built for investment returns. They’re built for raising capital. The fund manager’s incentives are to cover their asses not to create a great performance. So, all of that is in that sort of average that goes into them, the statistic that on average the active fund doesn’t beat the market. But a lot of the active funds aren’t really trying if we’re honest. I think that’s worth bearing in mind as well.
[00:13:45] [inaudible question]
[00:14:23] Patrick Maurenbrecher: Well, I mean, as other people have said here before, we cannot predict where interest rates will go. We just don’t know. What we can do is build resilient portfolios. Our risk management very much takes place on strategic asset allocation. So you asked about private investment. In most of our families, about 60% of their wealth’s in private investments. When we think about asset allocation, for us, it actually doesn’t matter if you’ve invested in a private equity fund, a direct investment in a company, or a company listed on a stock exchange, you’re basically buying the future cash flows.
When it comes to liquidity, from my perspective it is a protection for our families not to be too emotional when they invest their money. I don’t know where the markets are going. I can only tell you in the 15 years that we’ve been doing this, we only twice basically changed fundamental ideas about strategic asset allocation. One was about eight years ago. We said we’re not going to do any bonds anymore, listed that is not an interesting risk-reward perspective. We added venture capital at one point. That’s the only change we made.
[00:16:09] James Ferguson: I might comment on the rate side, which I cringe even bringing this up. One of my favorite things to do and one of the things we do on the team a lot, not specifically to rates, but just in general look at the ‘what do you have to believe’ question. That’s as it relates to a single stock and industry manager’s portfolio and looks at what the market is pricing. So one thing we did, at the end of January of this year, obviously before Ukraine turned in what it’s turned into, what’s really the key question that was being asked is – What do you have to believe if you look at companies today and many of which are the largest businesses in the world?
An interesting thing is many of those companies were not remotely priced for interest rates to be really high. This means you had a pretty significant margin of safety, even if rates, at least in the US went up to the ten-year, let’s say 3-4-5%. If you’d looked at the forward market, the forward market was not suggesting that you’re going to get to that level. But even if you did get to that level, many of those businesses, we talked about Facebook earlier, but if you look at Google as another example, those businesses arguably just with a basic dividend discount model should have been trading at 60 times earnings. Instead, they were trading at 25 or 30 or 20, depending on what you’re willing to adjust. So, one of the things that we observed that was interesting is that “the market was very concerned about interest rates.” But that really didn’t seem to translate to the single company level, at least in some of the largest businesses.
[00:17:31] Claudine Innes: In our case, I think the discussion is important because we have a lot of real estate. So, the real estate cycle has been driven significantly by falling interest rates in the search for yield. And with COVID, you realize that it’s not necessarily a safe, indexed asset because the asset supposedly is indexed, but it’s no longer useful. The discussion is not just on the impact that rising rates will have on yields, but also on the utility and the usefulness of the asset and whether it actually does have pricing power, even if the contract has the indexing within it. Then as we have a relatively low proportion of equity for us, this is an opportunity to actually increase our equity weighting, where we think that there’s more capacity to hedge against inflation and create value through actual growth in earnings.
The discussion is not just on the impact that rising rates will have on yields, but also on the utility and the usefulness of the asset and whether it actually does have pricing power, even if the contract has the indexing within it.Claudine Innes
[00:18:35] Moritz: Hi, this is Moritz from Germany. I had an interesting conversation with Anthony here earlier, and we were both wondering why nobody brought this topic up so far. It’s about crypto. My best guess was because our biggest role models Charlie and Warren considered rat poison. I believe Warren said it’s rat poison squared. I will just give it a shot then. Do you have any opinion on the space? Are you looking at it? Do you maybe have exposure to it? What’s your view on the matter?
[00:19:14] Claudine Innes: We have no exposure to it, but our colleague who’s building up the private equity side has investments in crypto on a PA basis, he’s super interested. (If I didn’t answer that bit of your question which I come back to). So he has a group of friends, weird friends, or whatever it is, and very interested. So in fact, even next week, we’re going to have a meeting with our bank where we’re going to see their expert and we think we have to know what the blockchain is, what it means. I mean, even in real estate, how contracts will be signed, just building up knowledge rather than feeling that we have to be in the asset because the asset is going up for whatever it is. We are beginning to do our homework to just understand what use will be long-term.
[00:20:14] James Ferguson: I mean, the only thing worth mentioning is we cover all public and private asset classes around the world. I gravitate towards the public. That’s just the area that I prefer in the end as my home base. I think the public lens, it’s hard to argue that there’s really a competitive advantage for a fundamental stock picker in that area. Where we’ve seen more of it as on the private side, we do have a few investments there, primarily with blue-chip firms. Partially it’s a way to learn and to really push ourselves.
I mean, there’s no question that the technology and what it’s potentially capable of is incredibly impressive. I think a lot of the questions really. How do you monetize that? And what does it look like over time? We had a good discussion in the Gondola yesterday about would you have invested in Amazon in 1999? From an expected value standpoint, would that have been the better bet? Or someone else says, or would it have been better to invest in 2008? And I think that analogy is interesting as it relates to crypto.
I mean, there’s no question that the technology and what it’s potentially capable of is incredibly impressive.James Ferguson
[00:21:06] Patrick Maurenbrecher: I think most people in this room, not all struggle with crypto and somehow get their heads around the blockchain. Same for us. What we don’t do generally is invest just in currencies, for example. I mean, there’s no opinion where the dollar is going, etc. So I don’t have an opinion on where the bitcoin is going. But what we did and what we still do as we try to understand the blockchain, we have given a manager money that is basically investing in companies that invest in the blockchain, in business models on the blockchain. So that’s what we’ve done. But I mean, certainly, I don’t have enough knowledge to really understand this in a way asset class. But one thing, I’m pretty sure it’s not going away. We do need to build up the knowledge to invest in that space.
[00:22:09] Robert Vinall: Yes, it really reminds me of investing in telecoms and the internet in the 1990s. There was this really strong sense in the 90s, that the internet was a thing. This idea of connecting people together through a data network. It was absolutely clear that was going to be something big that changes the world. But it wasn’t clear which companies, and which business models were going to work. Businesses were based on eyeballs. I think eBay was the only company that managed to monetize in those early stages. It was clear it was going to be something but it wasn’t clear what the winners were going to be. In actual fact, of all the companies that started in the 90s, none of them really turned out to be the really successful ones, apart from Amazon, and to a lesser extent, eBay. All the other sort of great internet companies sort of came in the second and third waves. It reminds me a lot of that, and although I’m sure crypto will be a really big thing and change the world in the years to come, I doubt the most successful companies have even been started yet.
It was clear it was going to be something but it wasn’t clear what the winners were going to be. In actual fact, of all the companies that started in the 90s, none of them really turned out to be the really successful ones, apart from Amazon, and to a lesser extent, eBay. All the other sort of great internet companies sort of came in the second and third waves.Robert Vinall
[00:23:21] Claudine Innes: Sorry, I didn’t answer the question on the private side. It is a strategic aim of the family to build up. But we have a couple of investments in funds, in growth private equity. So they’re financing companies to grow rather than buyout strategy. The family’s aim is to try and build direct investments in a few companies where we can be minority investors. Again, going back to this idea of trying to be active, real owners of companies and not just a fund that compounds or whatever it is. The idea of being close to the underlying investment. So, that’s a really slow process, we recognize that’s really difficult to do and we’re just going to be learning a lot in fact, from some of the conversations here about being patient, about that objective. But it is an aim to be in private assets. Again, one of my mantras should we say is what you’ve just said, is that its business. So how do you own businesses? Do you own them directly? Or do you own them via owning stocks? Or do you own them via managers that buy the company? It’s seamless really.
[00:24:49] Armando: Hi, I Armando from Italy. I know it’s not the primary concern for the fundamental investor, but I’d like to know how the ESG trend that is a merging is affecting you if it is affecting you in some way in terms of allocation, decisions, and some. Thank you.
[00:25:08] Robert Vinall: Which trend?
[00:25:10] Armando: The ESG.
[00:25:18] Claudine Innes: I think this is something that is a lot of concern to families. You want to feel that your investments are worthy. When I joined the family, I was quite anti-ESG. Because I thought any good investment does that process of what is good governance. I mean, I thought it was obvious the “G” is super important. And that your companies are not going to do things that are going to produce environmental problems, and that they look after their employees, and they create jobs. I was anti the whole thing that you have to have this cookie-cutter issue. But it has become a thing.
I mean, a lot of the funds that we see, suddenly they’re super ESG concerned, and they all show how their process gives you the ESG and gets the points. It also produces a bit of anti-reaction because of how much marketing is involved in the ESG process. I think any good company has those concerns. It’s a question of whether you’re ticking the boxes and using the prints that people want to that you have the right point, or whether it’s the actual investment process that takes you towards those outcomes. But it is a concern, yes. Particularly on the private side, where we’re going to decide which companies we buy, there we have more control over how they’re managed and what their objectives are.
Particularly on the private side, where we’re going to decide which companies we buy, there we have more control over how they’re managed and what their objectives are.Claudine Innes
[00:26:45] Patrick Maurenbrecher: Maybe I’ll add one thing. What we see as many families, when they get the next-gen getting involved and invest the money, this ESG theme is everywhere. And there are huge conflicts in these families. We have situations where maybe the daughter is now 24, and she looks at the portfolio that her dad has built. She says, “We have to sell it all. This has all to go.” I mean, from my perspective, I’m very much in your camp here. Very ESG-conscious portfolios. I mean there’s housing involved and all sorts of things that you can say make the world a better place. What we are struggling with is this trend of greenwashing actually, because suddenly, this girl is fine when you have a stamp. That doesn’t really make sense.
We tried to look for all these investments and then present them to our clients and then what we don’t want to do is we have three funds investing in weapons and porn. Now we have the ESG bucket, and the girl will do that one, and rest of the year her dad will do the other three. It doesn’t make sense at all. That’s why it’s a huge thing in our firm. We have to get a framework we can really work with and there is no black and white. And sometimes, especially the next-gen, they would like to have it black and white. And that’s difficult.
[00:28:31] Robert Vinall: James is looking at me as we’ve discussed quite a lot. I think it’s a positive thing. What I increasingly hear is people are approaching companies and asking them about their ESG policies and what they’re doing for various causes that they care about and on balance. I think that’s a good thing. But there’s a lot of muddy thinking about it as well. One of the things that drive me crazy is sort of this idea that oil companies, not ESG. Our society runs on oil. It’s for running the tractors that produce the food, it’s for producing the plastics to… We wouldn’t be sitting here today if there weren’t people who went out there to drill oil and risk their own lives so that we can use it. So when I hear a sort of people moralizing about how unethical oil producing company is, I get quite upset.
We wouldn’t be sitting here today if there weren’t people who went out there to drill oil and risk to their own lives so that we can use it. So when I hear a sort of people moralizing about how unethical an oil-producing company is, I get quite upset.Robert Vinall
Investing in Emerging Managers
[00:29:35] Mikela: Hi, everyone. Mikela here from Zürich. First of all, thank you, Rob, for organizing this. I’ve been reading your letters and some of the early ones about how you started out. I find it particularly personal because I’m also here in Switzerland. I’ve had the early letters very appealing, and relatable and were definitely an inspiration to take the jump and become an independent manager quite recently. So thank you, and thank you for organizing this.
I have a question kind of around structuring. I think in the earlier discussion about withdrawal, you mentioned the kind of chicken and egg problem that a lot of emerging managers have. I got around to solving it through the family and friends type of route of raising initial capital, which is my current structure kind of keeps me afloat and lets me sleep at night not worrying about the costs. But it is a separately managed account structure. It’s perhaps not something that’s scalable to the types of institutions like the ones that the panelists here represent.
My question would be kind of around the structuring issue. To what extent would you kind of expect an emerging manager to come to you and kind of have a ready structure for you that you can invest in? Perhaps as a fund structure? Because that’s kind of something I’m considering. But then if I take the wrong approach and perhaps don’t suit the institution accordingly? And to what extent would you kind of be open to also helping the manager with that particular aspect of it? How do you think about that, particularly for managers really in the early stages of starting out? Thank you.
[00:31:16] James Ferguson: Thanks for the question. I think it’s a really hard one. Our assumption is always that the hardest part from our standpoint is to find the investor that we want to partner with. I would echo a lot of the sentiments earlier that this is very much a qualitative endeavor. Ultimately, it’s essentially a game of trust. So you’re trying to find people that during those very dark moments, or during the inevitable periods of underperformance, you have confidence in their ultimate judgment. To me, that’s a much more difficult thing to figure out. If and when we figure that out, we always assume that we can solve for structure. So we’ve been very involved in a number of different structures in the past, and I’ve worked very closely with the managers, whether it’s on day one, opening a separate account, or setting up a separate account at a new custodian.
So you’re trying to find people that during those very dark moments, or during the inevitable periods of underperformance, you have confidence in their ultimate judgment.James Ferguson
The one thing maybe of caution is, that it’s easy on the chicken and the egg front, I think, to set up a structure in anticipation of having “the big institution come in”. The trick is that can become quite unwieldy. So it’s a little bit of “if you build it, will they come?” I on a personal level generally prefer or would suggest that managers avoid that because I think it can just put them in a very difficult position where you can end up easily with a sub scale overall structure. So let’s say you set up a master-feeder, and you have an onshore fund and offshore fund and a separate account, all of which ended up being sub-scale, the cost to the small business of the firm in time can be quite overwhelming.
[00:32:42] Claudine Innes: In our case, the first part of what you said is true. The most important thing is the manager and what job they will do for us in terms of the investment return. But it’s true that there’s an economy of scale. We have 13 people in our family office. And I was very fortunate when we wanted to invest with Rob. We had the people who could come up with all the paperwork on the beneficial owners and the ultimate owners and whatever it is. If I’d been in a smaller office without those people, I think it would have been difficult. So, it depends on who you’re trying to attract and whether they have the capacity to deal with a difficult structure.
[00:33:28] Patrick Maurenbrecher: In the context of a multifamily office, you have another layer that is a bit problematic, and that is that we as a firm have to be regulated to advise our clients on people like Rob. We have to look into this from two perspectives. On the one hand, there must be a solution for the asset manager. It has to be as easy and smooth as possible for the asset manager. On the other hand, it has to be smooth for our clients. We actually solve some of these problems in a way that we could also even offer asset managers that we like a structure they could use. For example, for liquid investments, this is not working right now. But we’re trying to find a solution. Because thinking about our own business as building a mode, is a huge mode. If we could get there, we are the one-stop-shop for an asset manager where we basically provide. We take away the problems that some of you guys are thinking about. That would actually be a nice thing to do. We’re not the asset manager in any case, but we would be the provider of the solution to get it done. But we’re there in some cases. Especially the illiquid stuff we take care of now. But on the illiquid side, we don’t have all the regulations right now.
We’re not the asset manager in any case, but we would be the provider of the solution to get it done.Patrick Maurenbrecher
[00:35:04] Claudine Innes: I’ll just add in one more point. I’ve had this discussion a lot with Rafa. It kind of self-selects. People that set up a UCITS fund want to be able to grow more easily. People who have a more difficult structure mean that they want investors that are willing to live with a more difficult structure. Again, it depends on what your objectives are.
[00:35:36] Robert Vinall: Any other questions? Maybe a last one. What I’m curious about is maybe some of the pitfalls you’ve come across. Managers that look like they’re on a good track, or maybe even we’re on a good track, but kind of messed up? What are the big mistakes to avoid?
[00:35:57] Patrick Maurenbrecher: Thanks for that one, Rob. Well, actually, one problem that we figured out was when you get to very specialized niche strategies, we often like them a lot. It’s never a problem if it’s just say three or four of our clients investing, and then the asset managers putting their money in. Basically, when you run into trouble, you just sit around the table and find a solution that is a good solution in the long term. That’s easy. Of course, there are problems with some investments, and then you can just figure them out. A mistake we made in the past is when you get into some structures where you have some outside investors.
So, you have a fund with 30 million euros, for example, and maybe 10-15 million would be from our clients, and then you have some other outside clients that you don’t even know, and you have these semi-liquid structures. That is highly problematic in the moment when some event happens and some of these other investors just run to the door. Then suddenly, you’re not in control of the situation, and everybody might lose money. We try to avoid the situations now. But that was learning. We had actually two investments where this happened. I didn’t see it coming. It was really a shame because you could have figured these things out. But with some people panicking, you cannot control it.
It was really a shame because you could have figured these things out. But with some people panicking, you cannot control it.Patrick Maurenbrecher
[00:37:31] Claudine Innes: Well, we had a very distressing experience this year. I told Rob about it. A fund managing company that attracted a very experienced emerging market investor and set up a fund. So, they were offering a very attractive seed investment, asset class, or share class. The whole thing was very compelling. The managers were extremely experienced. They were very long-term. I did the whole due diligence process. The other people checking them out. We checked the managers out several times, and so it was great. We became seed investors.
Seven months later, I get a notification “shareholder changed”, that the manager is leaving. How could this happen? And to be honest, I don’t know what questions I could have asked to have figured out that could have happened. I guess these things happen. But now, I think I will be far more focused on people that aren’t in an institution professional, where you think that this is my opportunity to make a lot of money, and much more on someone much smaller without all this institutional backing that gives you a sense of security. Well, it doesn’t. It doesn’t give you that security. That’s my real painful learning experience.
[00:39:02] James Ferguson: We have a long list of learnings. But the ones that we’ve observed are the mistakes that we’ve made. Maybe I’ll speak to the concentration at the portfolio level and then the team. So, I’ll split them into two. I think concentration is an especially interesting topic. Obviously, many of us have read all the Berkshire letters. I have a lot of respect for the approach with which Buffett in many of those types of partnerships generated the returns. I think speaking from the standpoint of an LP, it’s an interesting idea because it’s really an outcome. So, in the perfect world, if you could find a collection of, let’s say, 100 or 1000 mispriced securities, all of which had similar expected values, it’d be great to have the benefits of diversification. But arguably the reason that you end up with concentrated portfolios, markets are mostly efficient.
And so it’s very hard to find that small collection of securities that are mispriced. But I think that nuance is actually quite important. And so we’ve seen managers who have ended up with a position that’s really oversized and doesn’t match the conviction that they have. They don’t even necessarily realize it at the time. But they ended up in a position where they’re almost cornered, not specifically from a flow standpoint, but just mentally where they built this position. When you have a big position that’s going down, it’s easy to really end up feeling like you’re cornered and become quite stubborn. So that’s an area where a lot of the great returns have been generated that way, many of what’s shown up in books, like, the outsiders are companies that were written about in the outsiders.
But there are a lot of other situations that have not been written about. So very much embrace concentration and appreciate it. It’s been a key driver behind our returns. But I think the “why” is extremely important there.
And then the second one is really just on the team. There’s no more difficult situation than when a team is really learning who they are, and what they’re made of. When the market is basically screaming at you, the team that you have no idea what you’re doing. All investors go through that. We’ve seen a couple of situations, one in particular, I will speak to where we had an investment with a manager. They were effectively 50-50 Partners, which is dramatically different from 50 plus one versus 50 minus one. And so this was a position, I think if you even look at Munger and Buffett, they’re talked about as partners and they are very much partners, but it’s clearly been Buffett driving those returns over time from a decision-making standpoint. So this particular situation, the managers, didn’t explicitly have two portfolios, but they effectively were operating that way. And so one of these managers, the securities that he was buying, he continued to really struggle, ended up with a number of companies that didn’t work out. It created a lot of tension among those two managers. They basically split without telling us or themselves. They moved to different cities effectively and had a falling out.
If you think about the economics behind a lot of these businesses, you’re heavily incentivized, potentially to do that in that particular situation. So, to the extent that you do have a team or thinking about working with the team, I think it’s worth just being very clear at the beginning about what the objectives are, everyone in the room, how the decision-making works, what’s the overall growth plan and what everyone signed up for, just so you have a better shot of enduring those difficult periods.
How to contact the allocators
[00:42:04] Robert Vinall: Any other questions? So maybe a question people are a little bit shy to ask but I’ll ask it. What is the best way to approach you guys? Patrick, do you want to go first? Or I’ll give you 20 more seconds to think and just maybe add a point. Maybe it’s best not to approach. Maybe you prefer to find things yourself. Maybe that’s an answer. But I’ll give you an extra 20 seconds. And now here is the microphone.
[00:42:38] Patrick Maurenbrecher: Well, you always say you don’t do marketing. In a way, the way you worked with me was fantastic marketing from my point of view. You really wanted me to get in and you rejected me twice. That kind of was a buy signal for me.
I don’t know. It’s probably the same for you. It’s often good if you get it through a recommendation. Because at least the guy approaching you has gone through the process of thinking, “Okay, how can I approach this guy?” and then has put some work into, “What’s What people does this guy know? Do I know anybody that he knows? I can ask him if he can do the intro.” Maybe the intro isn’t that important, but at least you get the first data point is that they have put enough effort into this whole thing.
What I find sometimes strange is just getting a cold mail-in LinkedIn. So I mean, it’s simply impossible to answer all these emails. If the question goes in how do you approach, I would always say, at least put enough effort into trying to get it through a recommendation. Because I mean, just to give you an idea, we look at about 300 investment ideas over all asset classes in a year and we invest about 20 of them. That’s about our ratio. Sometimes it’s just the noise we have to get through and that’s sometimes not easy. It’s my problem. It’s not your problem. But you would help me with that approach.
[00:44:40] Robert Vinall: I think that’s such a great idea. It brings home to me just how important it is to have a wide network so that you know people who are able to make that introduction. It also makes me realize we had the comment or the question earlier from Euclidean about the lack of female representation. For example, how important is it for people like me to make sure underrepresented groups are present at places like this, because that’s where networks happen, which leads to the introduction, which leads to funds?
[00:45:12] Claudine Innes: This was one of the interesting things when I started this job. I’ve been a broker. No one wants to speak to you. So you’re calling and no one wants to speak to you. We always just say, “Can you at least get a—” Like, “No, thank you.” And that “No, thank you,” was already a win. Someone actually answered your email or your Bloomberg message or whatever. When I changed to this side, suddenly, everyone wanted to speak to me. It was like, everyone’s so nice.
[00:45:38] Patrick Maurenbrecher: Quite a shock.
[00:45:38] Claudine Innes: Yes. “You’ve such a brilliant question. You’re so smart.” So, I had to learn that that was not real— Yes. I mean, since then, what I have had to do is select things that I don’t want to see. So things that we’re not going to do, then there’s no point. Initially, I wanted to learn about everything. So, I should see everyone. But then you have to decide what kind of things you’re looking for. Basically, we want to invest in businesses. So, what really helps is people that show their thinking. So your letters were obviously super useful. But there needs to be some way that you learn that you’re interested in the way that person thinks. So, I think some way to show your thinking, which is either your portfolio and being able to explain why it’s like that, or letters or something that helps. And that to me is a really good introduction. Because otherwise, you have nothing to go on. We do try and see as many people as we can, but in the end, you have to select the kind of thing that you’re looking for.
[00:46:55] James Ferguson: I love both of those. Patrick stole my thunder. That’s the favorite way. I mean, many aspects of life. Rob, you’ve talked about, often, when you get warm introductions to companies through pure fund managers, you’ve got a higher chance that it’s a fit for you. I would very much echo and share that sentiment as it relates to managers.
I think one of the hardest things is thinking about when you do approach initially, sort of what the objective is. So whether it’s someone trying to raise money immediately, is it a longer game, both of which are fine. But just being clear about that upfront. And certainly, I think we can certainly do a better job of that, not just explaining our process, but also setting expectations for is this something that is going to be an opening close where there’s an initial shot, and that’s it. We personally struggle, or I personally struggle with those types of launches. Because it’s very difficult to get to know someone in that environment where you’re under the gun. We say this all the time on the private side, with no disrespect intended. That’s just the nature of how that particular type of fundraising works.
The ideal way that we’ve gotten to know many of our managers is really over time. I know that’s easy to say, sitting in the chair that we sit in. It sounds very noncommercial when someone’s trying to build their business and really needs that initial dollar so that they can fund some of those operating expenses. But we’ve had some of our best relationships really come out of that. I think about a couple of investments we made two years ago that both of those managers we initially met in 14-15. Obviously, all of our manager relationships don’t take that long. We’re happy to make investments quicker than that. But I think from both sides, the longer that you have to get to know someone and the more environments in which you can see them on both sides of the table, the better chance of success once you ultimately do invest.
But I think from both sides, the longer that you have to get to know someone and the more environments in which you can see them on both sides of the table, the better chance of success once you ultimately do invest.James Ferguson
[00:48:34] Robert Vinall: There’s a question at the back there. I think looking at the time we’ll make this the last one.
[00:48:48] Peter: Good afternoon. I’m Peter Vela from Cape Town, South Africa. We run a fund domiciled in South Africa. My question is on jurisdictions. Do you have a list of jurisdictions that you prefer, that you don’t like or you totally ignore? Because of the tax or whatever rules applicable to those jurisdictions? Just interesting to hear your thoughts on just jurisdiction of funds, especially given our background in investing in South Africa. The fund does invest globally, but it’s regulated in Durban South in South Africa.
[00:49:32] James Ferguson: Thanks. I don’t have a specific view on the South African regulation. We’ve invested with funds throughout the world both onshore and offshore. Many endowments prefer offshore funds. We’ve actually found that onshore typically works just fine if you look at the costs of going through UBTI. But we do have fund investments in the fund structure that are both onshore and offshore. I think the one jurisdiction we struggled a lot with and I think many people have is domestic India. So there’s a number of great managers that we’ve met that are set up in India that arguably the best ones are either not based there invest through Mauritius or other places. And so that’s the only specific area that we’ve had a pretty tough time sort of crack in the nut of how to get through that regulatory burden.
[00:50:19] Claudine Innes: I just go back to my economies of scale problem. When you’re small, it’s very different. A family office to an institution. The resources you have for doing difficult things are limited. So you do have to build simplicity into how you manage the asset. So we tend to look for something that is easier to invest in rather than something that’s complicated. We’re in a process though. Eventually, we found something that was complicated. Maybe we try but simplicity is still we need to focus on that.
[00:50:53] Patrick Maurenbrecher: Yes, from my side, I can relate to what I said before. We figured out a way to basically invest on a global scale enclosed and funds. That’s actually possible, no matter where. But we still haven’t figured out how to do it with liquid portfolios and open funds. But that’s our regulation. We’re trying to work on that. And then I’d love to have a look at a South African portfolio.
[00:51:25] Robert Vinall: Great, well, thank you so much, everybody for coming. We made it. It’s possible you can have a big group event again.
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