The principle of what we try to do is simple: we aim to construct portfolios with investments that are understandable, which are trading below our conservative estimate of future cash flows. However, this is far easier said than done. The investment management business is highly competitive and ‘sure things’ are very rare. We believe there is no systematic way of picking winners.
Therefore, our investment process is necessarily a slow and manual one, carried out by people with considered judgement and many years investment experience. As no two investments are the same, our process must be adaptive, taking account of specific stock and sector risks.
We are proud to say that we do not seek or follow stockbroker investment recommendations (unlike many of our competitors), whose opinions are compromised and whose goals are at odds with ours. We aspire to make money for our clients rather than stockbrokers!
Investment ideas can originate from many and varied places. For example, our fund managers attend industry and value-focused conferences and have developed relationships with other like-minded value investors. Setanta subscribes to value investing publications which can highlight interesting opportunities. We also track the portfolio activities of admired managers. We run screens to highlight ‘statistically cheap’ investments, albeit with the knowledge that many other investors are likely fishing in the same pool. Other times, research into one idea can lead us unexpectedly to another more interesting case. Such investment ideas – and many more besides – are then fundamentally and rigorously researched.
The firm is organised to ensure that the Portfolio Managers can focus on fundamental research. The vast majority of research is conducted internally, with stock research typically carried out by the sector specialist.
When researching stocks, we try to examine and understand how our companies make money, how the business is likely to perform under various economic scenarios and how technological and competitive forces may change their fortunes. We also try to understand companies’ culture, management incentives and try to gauge their ability to allocate capital.
At all times we are wary of companies with high (or even moderate) levels of indebtedness and other quasi forms of debt, as these have an elevated probability of encountering serious solvency-related problems when bad times inevitably come.
As Seth Klarman says “Risk is not inherent in an investment – it is always relative to the price paid”. Buying assets below a reasoned assessment of their worth affords a ‘margin of safety’ if something goes wrong.
The world is highly complex and many outcomes are possible at any point in time, so we don’t think it makes sense to think of point estimates of intrinsic value. Rather we think probabilistically and aim to buy assets that are trading for less than their objectively assessed odds would suggest.