Previous fund manager focus publications

Fund Manager Focus - April 2014

RWC - London

RWC Partners was founded in 2000 and today has more than $7 billion under management. Although the firm started out as an absolute return, long-short house, today most of its money is long-only, focused on long-term real returns. None of its funds are constructed to track an index.

Louise Keeling joined RWC in April 2013 to head the long only Global Equity team and launch the Global Horizon fund. She had previously spent six years at Marathon (2006-12). Before this she worked for Insight Investment as a US Portfolio Manager. She began her career as a graduate entrant at the Bank of England.

What percentage of AUM is in equities?

"The vast majority. 76% is in equities and the remainder is in convertible bonds."

RWC has done well in the relatively short time it has been established. To what do you attribute to its success?

"RWC has a very entrepreneurial culture. The fund managers have historically performed well and RWC attracts them into the firm. RWC doesn't try and cover every possible asset class, every possible fund. It launches funds where it believes it can excel by finding fund managers which it believes can be the best in class in that area. That's why there is a finite number of teams. RWC has attracted individuals as there is a revenue share on the products so there's a lot more skin in the game for the fund managers than in a more standard fund management operation. So it really matters to them and RWC that they perform. There's a very strong alignment between the client, RWC and the investment teams."

How did the launch of the Global Horizon fund go?

"It was launched at the end of November 2013. There has been a lot of take up from institutions, foundations and endowments so we are very lucky that people have got engaged as quickly as they have".

To some issuers, RWC is a long/short house, what percentage of AUM is long only?

"92% of assets managed by RWC are long only and 8% are long/short. The first fund RWC launched in 2000 was a long/short fund but the business has developed from there and the majority are now in long-term equity and convertible bond strategies."

You focus on "capital cycles" - can you explain this approach?

"Capital coming out of an industry often means a very poor demand environment or excess capacity. So most people who are focused on performing between the 1st January and 31st December, will not be interested in those companies. But I have a different perspective. I don't have to make huge predictions on the demand side. I focus on asking 'are these mispriced assets' and 'is it priced in that there is a bad demand environment?' Often I can see a change in the supply side which means that even if demand stays at current levels, returns are likely to improve because of what's happening on the supply side. Supply is often far more visible than demand and translates directly into returns. In effect there's a time arbitrage as most people's time frames are much shorter (they can't focus on the supply side, they have to focus on the demand side). So these less popular, contrarian stocks are excessively discounted because of the myopia of most fund managers. I am an owner not a renter of companies."

What's your average holding period?

"In excess of five years."

You also focus on "management incentives and alignment of shareholders' interests" - can you elaborate on this?

"I think about the intrinsic value of a company. I think of the company as an owner would - if I owned 100% of it. I think about the competitive environment and how it might change, how capacity is going to change over the next few years, the cash flow that company is going to produce and that all builds out into an intrinsic value. Then I look at the market price and if it is below intrinsic value, that company is interesting to me. Why management alignment then matters is that the differential between the market price and the intrinsic value is more likely to be narrowed if capital is effectively allocated over time. If you have very good management that are thinking and acting like owners then the possibility of that differential narrowing over time is much greater. If management focuses just on sales growth at any cost, unprofitable sales, then they are very likely to be destroying value. If they are allocating capital in a creative manner, if they are value focused, if they are thinking about free cash flow rather than earnings then that differential is going to narrow over time."

Describe your investment style?

"Long-term and contrarian. The other part of the capital cycle is that you find companies with very good returns. People might assume they are going to deteriorate over time but I may have reason to believe that they are not going to deteriorate at the rate the market is assuming. Something like Amazon where they share a lot of their economies of scale with their customers which enables them to build out the competitive moat which I believe is sustainable. And because you've still got the founder there, Jeff Bezos, owning 19%, he is making significant investment in the company which hasn't bourne fruit yet but I believe will do. So all those things mean it's not fully baked into the valuation yet. So I say 'contrarian' but things like Amazon you wouldn't think of as contrarian. However, I think about them in a different way to some people and I'm thinking over a longer time frame."

Favoured sectors?

"It is on a stock by stock basis but there are a couple of sectors which are particularly interesting - one of which is cable. I have liked the cable industry for years and continue to do so as the capital intensity has peaked and you are beginning to see consolidation in the US and Europe which bodes well for free cash flow generation going forward (particularly if a more concentrated sector allows content cost inflation to come under control)."

Does a company have to be profitable before you invest?

"Not necessarily. Something might be making losses because it's at a trough in the cycle but once that excess capacity has come out, you may end up with a regional duopoly, making strong returns on investments for example."

Current likes?

"Amazon is a stock we like (as above). Spain is a region I like currently. You've had massive consolidation in the Spanish banking system. Probably not fully out of the woods on a provisioning basis but there is the new book of business which is very profitable and the change in that market suggests it is going to be more rational going forward than it has been historically. And it is still at a discount to book value." The structural reforms which are underway in Spain really are breath-taking and have set the country up well for the next decade from a competitive stand point."

Current dislikes?

"Australia is very expensive but part of that is for structural reasons because the superannuation funds are continuous buyers of Australian stocks so it looks very expensive on a global basis, especially Australian banks."

What's your average market cap size of a holding?

"I will go anywhere in the market cap range. What's interesting is that you sometimes find good alignment of (management) interests at the mid cap level because you may well still have a founder there or management is very focused on the business vs. the megacaps. But that doesn't preclude me from owning mega caps. For example, Zions - Harris Simmons - founding family is still there. TripAdvisor - the founder is still there." (Editor's note: <$1 billion+ is Keeling's definition of mid cap).

I am surprised you will invest below $1 billion - elaborate?

"I had Standard Pacific in 2011 and the market cap was $450 million. I'll go wherever the value is. I find it ridiculous that people say 'I can't buy it, it's too small' so the stock more than doubles to $1 billion and they then buy it. It's nonsense. I don't spend much time focusing on the cap - it's about whether there is value there."

What's your active share? (i.e. how much will your holdings differ from the index)

"94%. I currently hold 83 stocks."

Where do you stand in terms of dividend vs. buy-backs?

"I have a keen interest in management's capital allocation decision making process and dividends and buybacks are part of that. I like management being prudent with capital so redistributing capital to owners when they don't need it for business opportunities is a positive. If they want it back at a later stage they can come to shareholders and ask for it again. However, I am most interested to understand how management think around dividends and buy backs. Clearly when the company is massively undervalued by the market at any one point in time, there is a significant return benefit to a company buying back its shares when they are under-priced. What I don't like to see is management viewing buybacks as the same as dividends or as a function of cash flow generation. Then you get into the situation which happened with investment banks who end up buying back stocks at the peak of cash flow generation (i.e. the peak of the cycle) and then raising equity at the bottom of the cycle. You end up with this haircut on returns to shareholders through the cycle because management have misallocated capital. So I want to understand how they come to the conclusion that their company is undervalued or overvalued. If it is overvalued, they should use dividends to redistribute capital back to shareholders."

Would management ever regard their stock as overvalued?

"Potentially. They may not say it to me directly in a meeting but they can signal it by the fact that they are only doing dividends, if they historically think smartly about buybacks or management are selling their personal equity holding."

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