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Fund Manager Focus - March 2012

Fund Manager Focus - Georg von Wyss, Classic Fund Management - Switzerland

Georg von Wyss

Classic Fund Management (CFM), a fund manager in Liechtenstein, and Braun, von Wyss & Müller (BWM), its Swiss-based advisor, is a group of fund management firms established in 1997 by Erich Müller as well as Thomas Braun and Georg von Wyss, former colleagues from the Swiss private bank, Rüd Blass. CFM/BWM is one of Switzerland's most successful value investors. They run approximately $865 million in US and European stocks through their three mutual funds; the Classic Global Equity Fund ($645 million), the Classic Value Equity Fund ($155 million) and the Classic Leveraged Equity Fund ($65 million). With a three to five year time horizon their strategy is to invest primarily in very undervalued small, mid and large cap equities (market cap >$1 billion). The Classic Global Equity Fund can invest up to 15% in one stock (approx $100 million).

Georg von Wyss is Swiss but grew up in the US and has an MBA from the Amos Tuck School of Business Administration at Dartmouth College. He is a partner, responsible for portfolio management and research. He was previously a securities analyst and investment adviser at Rüd, Blass & Cie. AG.

Is there any difference in investment style between the three funds (they seem to be invested in a lot of the same stocks)?

"No – there is no difference in the investment style but the investment techniques differ for the three funds. Many of the stocks are in all three funds.
The Classic Value Equity Fund is a UCITS and is therefore subject to size of position restrictions and accumulation restrictions that a UCITS has. Also, it can only invest in companies with a market cap of Sfr 2 billion or more.
The Classic Global Equity Fund is not a UCITS so is somewhat freer than the Classic Value and can invest in any market cap. It tends not to buy companies with market cap of less than Sfr 1 billion for liquidity reasons.
The Classic Leveraged Equity Fund is like the CGEF but can short securities without a long hedge against it, so if we think a company is overvalued and there's reason to think it will go down we can short it."

Do you invest in bonds as well as equities?

"We do invest in bonds if they are distressed. We are omnivores so if a bond is beaten up and distressed, we'll buy it. For example, we owned AIG bonds and MBIA bonds during the crisis. We also owned some Tier 1 Securities from Natixis. So we'll own them if the bonds are getting a little equitylike. We now have zero investments in bonds, as we are opportunistic. That means we only do it when we find an incredibly cheap bond. If there is dislocation in the bond market we may end up buying some bonds, but it is not our bread and butter."

You are mostly long investors but how much shorting do you do?

"We can short stocks. Currently 8.5% of the Classic Global is short."

What is your investment approach?

"We calculate the intrinsic value of a company and try and buy it at a discount. That's basically what we do here. We try and figure out what the normalised earnings power is and what the normalised valuation is and that allows us to calculate the intrinsic value. And if the company is trading at a big discount to that, then we'll buy it and hold it until it reaches its intrinsic value or we find something even cheaper. That's the general principle that governs everything we do – all the buy, sell and hold decisions."

As value investors, what screens do you use?

"We are not huge screeners but we use screens such as price-to-book and EV/EBITDA. We keep our ears pricked for stocks/companies that are out of favour."

Is there anything you won't invest in? Does a stock have to be profitable?

"We tend not to invest in defense for ethical reasons, but we have invested in companies that supply the defense industry. However, we'd be unlikely to invest in a company whose main business is making tanks, for example. Companies that produce alcohol or tobacco are investible as we don't consider ourselves moral guardians.

A company has to have been profitable in the past for us to invest in it. If it is currently losing money but we think it has every a chance of getting back to making money, then we're interested. So it is likely to be a mature company that is in an inherently profitable business and where we believe the company is capable of coming back to a level of profit. If we buy it while it is making losses, that's because we think that condition is temporary."

Average holding period?

"Three years or more."

Average size of a holding?

"We tend to hold around 30 positions – sometimes less. If you do the math, an average position would therefore be 3.5% for 30 stocks. Sometimes we are below 30 stocks." (An average position would be around $25 million).

Which benchmark do you use? How do you measure your performance?

"The MSCI Global is the one we publish when we compare our performance but we don't refer to benchmarks when making weighting or allocation decisions. We are really just stock pickers."

So your active share must be high?

"It's absolutely high – I don't even know what's in the index!"

You own mostly US and European stocks – what about the Canadians?

"We can invest in Canadian companies and have done in the past. I guess I don't know enough about the Canadian market!"

What are your favored stocks, sectors or themes at the moment?

"Companies held in both Classic Global Equity Fund and Classic Value Equity Fund include: Intel, Cisco, Newell Rubbermaid, Boston Scientific, Avis Budget, CA and Kelly Services (Classic Global only).

Intel (position size circa $44 million) went up, which is why it is now a 6% position. We bought a 4% position and then it performed well relative to the rest of the portfolio. We like its market leadership – it owns the market for computer chips. We thought that the fears that the growth of the tablet market would hurt the PC market were exaggerated. People still need a PC. Analysts overlooked the growth of the PC in emerging markets. Those numbers tend not to be captured in the industry data that people use. Intel said it would be a very good market for them and it has been. Most laptops and desktops have Intel chips. That's not going to change. It has a natural monopoly position. And it was cheap at less than 10x earnings, ex the cash. That was very undervalued considering its terrific market position, cash generation and its growth prospects.

Cisco (circa $43 million) – similar thought really. Again it is a leader in anything to do with network equipment and servers – anytime you are moving large bits of data around, the odds are that it has got Cisco equipment in there somewhere. It has enormous size and marketing and research resources and generates tons of cash. And the stock was trading very cheaply.

Newell Rubbermaid (circa $40 million) – it was a restructuring case when we bought it. We believed that the inherent potential of a lot of its business was actually pretty good. Some of them are cyclical, which has hurt it, but they have fairly strong positions in a number of markets. Now, some of these are quite diverse markets. Sometimes they are also not markets that you tend to read a lot about. Beauty products such as bobby pins which girls and women use to put up their hair. Not something your typical analyst bumps into – especially not if he's a man! They have a very strong position in it. The company has gone from being a collection of manufacturing plants to a marketing organization in the consumer business. They've always done well with industrial products and they've gotten much better at consumer products, but they never traded as a consumer products company. Given its cash flow and its earnings power and the potential to increase margins – we thought there was a lot of potential that the market was overlooking, given how interesting those cash flows were.

Avis Budget (circa $32 million) - the car rental market is essentially an oligopoly. There's a space limitation at airports and you have to have a network that covers the US. There aren't that many of those. If you're flying to a place you've never been to, you're not going to rent from just anybody. You are going to want to rent from one of the big names as you'll know that even if it is at the other end of the country, they can handle it because they have the national system. Plus when you get there you'll get a certain level of quality. So those are the reasons to own it. What happened is the debt crisis hit them so the stock became even more cheap as people worried that they wouldn't be able to finance their fleet. The stock is undervalued right now as there are some lingering concerns about their ability to re-finance themselves and people are skittish about what might happen if the bond markets gets shot down again. When you combine the fear of investors with the quality of the business itself that's why we own it.

Boston Scientific (circa $40 million) - is too cheap relative to what we think it was worth. It is too cheap as people overestimate the risk. People don't believe management has the ability to get these businesses up to a level that corresponds to the competition. The company has been poorly managed for years and years. It's actually been a disaster. No-one believed, and it was correct until recently, that management could get the business operating to the level that their peers are operating at. I actually made the mistake of thinking the old guys could do it, but I'm pretty sure the new guys will. I believe they will as they make a much better impression.

Kelly Services (circa $18 million) – we basically like the temporary employment market because it is a secular growth market. In most countries, there is a trend to using more temps in cyclical businesses. So it's a natural growth market and its economic function is to absorb the volatility and demand for labor, which means the businesses themselves are very cyclical. In times of worry about economic growth, people will tend to underprice them but they tend to overprice them when the economy is doing well. Kelly has the additional positive factor that it was poorly managed. Three to four years ago, when the economy turned down sharply in the United States, Kelly got into some serious trouble with its banks even though it had virtually no debt. That really woke them up to the fact that they needed to do business differently, that they needed to become more efficient and reduce their losses in some of their operations. And they've been doing that. They are running it much more tightly, but I don't think the market has recognized that yet and how much room for improvement there is in that business. In the last couple of quarters they've shown that they are keeping their promises and have become more efficient, but they still have a way to go. If you match them against their peers in Europe - Randstad and Adecco – they still have a long way to go but I think they know that. So that makes it an extremely interesting company. And also everyone else in the industry would love to own Kelly, so it is a potential take-over candidate.

CA (circa $31 million) – the software industry is inherently cash generative if your products are good, which CA's are. CA is strong in the management of IT infrastructure and security, which are not very sexy but they are very important, especially for large corporations. The company suffered from an accounting scandal and growth took a hit but things are changing. New management is getting better at running it and is finally tackling the problems in Europe in a way that convinces us. It was the victim of American arrogance in neglecting the rest of the world and thinking everything would be great. And that is not how it is. And they've got more sensitive to that now and are actually solving the problems abroad. This will allow them to grow faster and then the market ought to give them a higher multiple. So again, it's a story of unrealized potential."

Recent sales?

"We sold out of MBIA a few weeks ago. We calculate the intrinsic value for every stock we own. We look at it as if we would buy the whole business. It reached our intrinsic value, which was $12 a share on a conservative view, so we sold."

What is your buy trigger?

"We use a typical value investor rule of thumb, which is to try and buy companies trading at 60% of their intrinsic value. If you are right and everything happens how it should, this implies doubling your money over a three year period. That's the typical value investor rule of thumb and it gives you a margin against mistakes and bad luck."

Do you vote your proxy?

"Oh yes – we do more than that! We will certainly vote our proxy if we have a meaningful stake and we write nasty letters if need be! But we remain behind the scenes activists as a rule."

How do you know if you want to meet a company?

"If it looks cheap we want to meet them. Various sectors will be undervalued at certain times for various reasons so it is difficult to predict who we want to see. If nobody wants to talk to one of your clients, call us! We are contrarians."

How important is it to meet management?

"Pretty important – even in these days of conference calls and webcasts we still want to do it."

Who do you prefer to meet (eg CEO, CFO, IR)?

"For initial research the best person is obviously IR, as they speak our language and know the answers to basic questions about the industry and the business. But once we've got past that stage and we want to discuss strategy or challenge the management on how they are doing things, then obviously we like to speak to management directly."

Any problems with corporate access?

"Some companies are insanely closed to meeting analysts like us and it is incomprehensible why they behave like they do. But most companies you can always talk to investor relations. We generally don't have problems getting access to top management of small and mid cap companies and often the big ones, too."

Any US names who stand out in terms of IR?

"Most US companies are pretty good. But Millennium & Copthorne (the UK hotels group) make it extremely difficult for us to even get to a results presentation. Agfa have an annual conference for analysts, but it is not webcast and this is not efficient and that makes no sense."

How many companies do you see a year?

"We see around 45 companies a year one-on-one – that includes visits. I prefer one-on-one meetings to small groups when I know a company. Small groups can be a good way of getting to know a company and it can be interesting to hear investor questions. You also don't need to do so much preparation for a small group as the onus is not on you to come up with all the questions. When we do a one-on-one, I want your clients to come out saying 'that was an interesting meeting, it passed by quickly' but that means we need to do a lot of preparation. For the companies we own, we talk to them more than once a year."

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