Fund manager with a quarter of a century of investment experience on working with a long-tenured team, the importance of patience and having held onto one company since 1998.
Fergal Sarsfield joined Dublin-headquartered Setanta in 2007 and is today responsible for co-managing the EAFE (European, Australasian and Far East) Equity Fund. Previously, he divided his time with sector responsibility for the technology sector within the Setanta Global Equity Fund, while co-managing EAFE.
Setanta was established in 1998 and today manages around $15 bn with $8.9 bn in equities across three strategies: global, EAFE and dividend (with roughly $3-$4 bn in US equities). Setanta is a wholly owned subsidiary of Canada Life, which is in turn owned by Canada’s Great-West Lifeco. There is an investment team of 30 based mainly in Dublin with representatives also in Toronto and Frankfurt.
Before joining Setanta, Sarsfield spent five years working at KBC Asset Management. He has a BBS and Advanced Diploma in Corporate Governance from UCD. He is also a CFA Charter holder and earned the CFA Certificate in climate risk, valuation and investing in 2024. Here, Sarsfield talks about what he looks for in digging for value, what his relationship with IR looks like and why companies should meet with Setanta – and much more.
How do you negotiate the current the market turmoil?
The Setanta fund management team is long tenured. Most of us saw the dotcom bust, the Great Financial Crisis, Covid and, now, the start of a global trade war. So, we’re experienced in market drawdowns/corrections.
Fundamentally, we’re trying to understand how exposed our companies are and as we tend to invest with a conservative, risk-averse mindset, we feel confident that the companies that we’re invested in are somewhat more immune. Secondly, we need to understand if there are potential opportunities for us to upgrade the quality of the companies we own without compromising valuation.
Earnings kick off in a week or two and it will be interesting to hear companies’ views on the tariff situation and what it means for their businesses.
You’ve been in investment management for 25 years. What do you like about working in fund management and what has changed for you in that time?
By nature, I’m intellectually curious. So, when you think about how we manage our funds as fundamental stock pickers, being able to take that intellectual curiosity and put it to work on every company that we look at is very rewarding: building an investment thesis, and over a period of months and years after we’ve made our decision, looking at how that thesis has played out. What events have transpired that have either proved or disproved our initial investment thesis? It’s great when our thesis is proven but it’s also important that we take positives from our mistakes. I believe we can learn more from our mistakes than we do from what we get right.
We learn from those mistakes and take it on to the next investment thesis to compound our knowledge and mitigate the risk of further mistakes.
I love that challenge and I love the level of accountability. We’re constantly accountable to our clients and there’s a very tangible benchmark which we’re measured against.
What’s Setanta’s investment style?
Long-term and contrarian. We focus on high-quality companies that are mispriced. We are risk averse and highly selective with a long-term investment horizon and low portfolio turnover. We like wide moats, dominant niches, companies that reinvest cash flow. We dislike overstretched valuations. Liquidity is also a consideration.
What’s your average holding period?
Ultimately, we would love to own a share of the business into infinity, but rarely does that happen. Setanta was founded in 1998 and there is actually one company in the portfolio that we’ve owned since then. But currently our average holding period is three to five years plus.
I guess quarterly earnings are not a focus?
One of the changes I’ve seen in my long fund management career is that, over the last decade, markets have become much more myopic – the majority of the market is focused on the next quarter and how corporates are going to come in relative to consensus expectations.
That, for us, creates opportunity because that level of short termism means that the market isn’t really focusing on the long-term opportunities like we are. Often there are some short-term speed bumps with which the market is preoccupied. When you look out over the longer term, the investment case may be compelling and our assessment of intrinsic value is materially higher than what the market is currently ascribing.
Our strategies are all-cap strategies. The most important driver for us is liquidity given that we are risk-averse investors and want to be able to exit a position within a few trading days if necessary.
Do you focus on leverage?
There’s no one-size-fits-all when it comes to financial leverage. The most important consideration for us is the interaction between operating leverage and financial leverage. Some businesses have very little operating leverage and therefore, they can deploy higher levels of financial leverage.
How do you identify mispriced companies?
We don’t believe we can value a company unless we fully understand it. So, once we understand the company, we can then go about estimating the long-term sustainable revenue and growth rate to estimate intrinsic value. We are looking to be directionally right rather than precisely right, over three to five years. Once we’ve assessed that intrinsic value, we can then compare it to what the market is currently willing to pay. As above, the market’s short termism creates opportunities for us given our long-term, patient capital view. It’s time arbitrage.
Does your focus on valuation rule out investing in big tech for example?
No, as in a lot of instances with big tech companies, it’s nearly a winner takes all. So, in a sense, the competitive landscape for some of the large tech companies has become more relaxed. The level of competition is lower and we get a greater sense of the sustainability of revenues and growth. As risk-averse investors, the risk has been reduced so we should be willing to pay a little more. These large tech companies are trading on multiples that look expensive, but when you dig deeper and understand the company, it’s not actually the case.
What screens do you use?
We typically don’t rely on screens to a major extent but do for idea generation – at the early part of the investment journey. We are looking to get behind the numbers that may show up on the screen. Value is more than a number.
How do you incorporate ESG into your investment process?
We have Article 6, 8 and 9 funds. So, the extent to which ESG scores are used is determined by the classification of the fund. We use Sustainalytics as our primary provider.
What’s your active share ratio?
Setanta has three core strategies: global equity, dividend and international equity – and within those strategies, we’ve got close to $9 bn in AUM. The active share ratio across those strategies would be more than 85 percent.
We’re running quite concentrated portfolios with high active shares. Our global equity fund would have 70 to 80 holdings, our EAFE fund would have 35 holdings and our dividend fund between 40 and 45.
Do you have a minimum dividend yield that you look for in the dividend fund?
It’s not set in stone, but around 2.5 percent.
Dividends or buy backs?
If a company has internal projects that can generate returns in excess of the ROI of the company, then we’re strong proponents of continued capital investment. Companies need to continue to invest to remain competitive. The dividend strategy needs a balance – a return of capital to shareholders and reinvestment.
What do you look for in performance?
Our client mandates typically require us to outperform the benchmark over a rolling three-year period. Of course, we’re reviewed annually, like everyone else. Performance ultimately comes down to four factors: people, philosophy, process – and luck.
We believe our track record shows we have the right people, a clear and consistent investment philosophy and a disciplined process to deliver outperformance over the long term – acknowledging, of course, that luck always plays a role, particularly over the shorter term.
Any sectors that you don’t invest in?
We’re looking for two things> Firstly, an attractive industry that can grow revenues and profits sustainably. Secondly, does the company have the right people, the resources and strategy to allow it to win and benefit from that inherent growth? We never entirely rule out any one industry, but we are acutely aware that some industries don’t have compelling long-term growth opportunities ahead. Examples of those industries would be the likes of telcos and utilities.
Management is another important criterium for you – do you like to meet management?
Absolutely. When you think about our risk-averse, contrarian approach, it’s always good to meet the people who run businesses in which we are interested. When meeting management, ultimately what we’re looking to do is understand their mindset, understand their capability to drive strategy, implement strategy and execute strategy – and then understand whether we believe that strategy can lead to long term-growth in revenues and profits, which will lead to share price out performance.
We also look at how incentive plans are structured, ensuring that they’re aligned with shareholders, strong corporate governance can be value accretive over the long term.
How do you prefer to meet management?
For the companies that we own, we have a direct relationship with the IR team and look to get access to senior management. Companies travel to Dublin to meet us, but we also attend conferences and do site visits. We will also try to have a minimum number of an annual calls with investee companies.
Why should companies meet you?
We’re long-term investors and good managers run businesses for the long term. So, we are wholly aligned in that regard. Also, we tend to get to know companies very well. We try to understand the strategy and the ability of the company to win over the medium to long term. Our risk aversion and in-depth knowledge of companies puts us in a unique position to be able to evaluate corporate strategy and sometimes challenge management in a non-confrontational way which I think can be mutually beneficial.
As fund managers we’re looking to glean as much information from companies as we can to allow us to make the most informed decisions.
By Gill Newton, partner at Phoenix-IR, a European-based IR advisory firm. This interview was also published in IR Impact and can be accessed here : IR Impact