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Fund Manager Focus - May 2010

Randolf Salzsieder and Alexander Damm, B. Metzler seel. Sohn & Co. - Frankfurt

B. Metzler seel. Sohn & Co. is the oldest German private bank with an unbroken tradition of family ownership. Established in 1674, it has evolved from a trading company and all-round bank to a modern investment bank and asset management institution. Metzler specializes in advising institutional customers and private clients in its core areas of business: Asset Management, Corporate Finance, Equities, Financial Markets and Private Banking. Since Metzler is fully owned by the founding family with no obligations to outside owners, it can act independently. Metzler Asset Management, its money management subsidiary, is a relatively large investor in European and international markets and currently has $57 billion in assets under management. The fund managers on the equity side employ different styles in various regions, such as Core, Growth, Value, Small & Mid Cap in Western and Eastern Europe as well as globally. The bank is headquartered in Frankfurt, Germany.

Randolf Salzsieder (right) and Alexander Damm (left) manage two global equity mutual funds – the Metzler International Growth Fund and the Metzler Wachstum International Fund, jointly worth $600 million. They also manage funds for institutional accounts.
Randolf has been with Metzler since 2007. Before joining the bank, he worked as a portfolio manager at Cominvest/Commerzbank for 8 years. Alexander joined Metzler in 2006 where he started his investment management career.

Can you tell us a bit about Metzler and its positioning in the German investment management industry?

“Germany’s asset management industry is concentrated in Frankfurt. There are a few big players and some smaller boutique firms. Metzler Asset Management is well-positioned between these two categories. The advantage of our structure is that - given our size - we are very flexible. We are a small team of 12 equity portfolio managers who constantly exchange information, thus allowing us to react quickly to changes in markets or stocks. However, with our sizable amount of assets under management we are very competitive through economies of scale and also corporate access. Our equity team meets with several hundred companies a year. On the international side (excl. Europe), we meet with at least 200 companies and external analysts a year.”

How would you describe your investment style for your global funds?

“The key element of our equity investment approach is a transparent, bottom-up, fundamentally driven process. The investment horizon is generally medium to long term. As stock pickers, we look for inefficiencies in the valuation of the stock price. As growth investors, we focus on two main factors: firstly, qualitative factors like long-term strategy, organic growth potential and scalability of the business model, management quality, innovation power and ownership structure and secondly, quantitative factors like above-average growth, profitability, asset growth and strong cash flow. We compare all data on a global rather than local basis.”

How do you screen stocks?

“Due to the large number of companies in our global universe, we have a structured screening process focused on relative metrics. We use comprehensive screening tools to support our investment process in a technical and fundamental way. In addition to screening for growth, quality, valuation and momentum it is important to screen for relative trends, trend stability and changes in these relative factors in order to detect turning points early. Due to our global analysis, we are able to identify trends in all parts of the world. The final decision for an investment comes from our fundamental analysis.”

Favored themes?

“We are always searching for new trends and identifying whether they have the potential to become sustainable and are therefore attractive for investors. In our global funds, we invest in secular themes in all parts of the world. Once we see trends emerging, we can build up positions. Based on this approach, we are very flexible when a trend is maturing, and therefore have a competitive advantage over single-theme funds. Currently, we are able to observe interesting global trends like cloud computing. Cloud computing describes a new consumption and delivery model for IT services based on the internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service via the internet.

An example for a long-term sector trend is commodities. Here, fundamental changes in supply and demand for single commodities have a strong impact on price and market structures. In addition to these trends, we invest in global trends like emerging markets and demographics.”

Favored companies and why?

“We look for the most attractive companies with growth potential, attractive valuation and momentum in each sector and focus on long-term earning fundamentals and stability. Currently, we see a lot of opportunities i.e. high quality secular growth companies with historically attractive valuations.”

How many US positions do you typically hold and what’s your average position size?

“50 to 80 stocks. Our largest holding could be up to 5%, but at the moment our largest holding is 3% of the fund volume. An average holding is between 1 and 3%, but this number is flexible and depends on the market situation.”

What do you think of the US market at the moment?

“As mentioned, we like to invest in the most attractive companies in each sector that pass our screening. The number of US companies from different sectors is very high at the moment. We have found many perfectly positioned large global leaders and smaller domestic names which benefit from improving economic conditions in the US.”

Average market cap of your holdings?

“85% of our portfolio has a market cap of more than €5 billion ($6.5 billion). We invest in the world’s leading growth companies and also in smaller names, but we usually focus more on global leaders. When we see opportunities below €5 billion, we invest, but the focus of the fund is mid to large cap.”

Average holding period?

“We are mid- to long-term investors but are flexible if the environment changes faster than we anticipate. When changes occur to our investment case, we adjust the affected positions quickly.”

What’s your active share? How much will you bet against the index?

“Our tracking error target is in the 4–8% range. Our benchmark has roughly 1000 constituents (MSCI World growth).”

Any sector constraints?

“We do not have any sector constraints but we want to be diversified in sectors and regions. Risk management is crucial for us; therefore we are always broadly diversified.”

Do you have an geographical constraints?

“No. Because of our global approach, there is no difference between the US, Canada and other countries e.g. Brazil or China.”

How important are SRI considerations?

“For our European mandates, we have a long history in dedicated SRI funds, but currently not for international mandates.”

How do you measure your performance?

“For mutual funds, we compare ourselves to some important funds and global growth indices. On the institutional side, it depends on our client restrictions.”

How important is it to meet management?

“Very important! We prefer meeting with companies at our offices in Frankfurt. We also travel to other destinations and visit companies in person.”

What triggers your decision to meet a company?

“If we are invested in a company or it appears in our screening, we would definitely like to meet the management. If we are not yet familiar with a company, we run our screening, do our fundamental homework, prepare a meeting and take time to meet with the company.”

Who do you prefer to meet?

“We prefer to see the CEO or CFO.”

Tips for US companies visiting Frankfurt

“We like to meet with US companies frequently, e.g. every 6 months. It is important for us to stay in touch with the management in order to remain on top of any structural changes. All large German institutions are very keen on company contact, and we believe this improves the quality of fundamental research.”

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