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Fund Manager Focus - November 2012

Eduardo Olano & Josep Maria Aymami, Merchbanc - Barcelona

Eduardo Olano & Josep Maria Aymami

Spain's financial sector is undergoing a major restructuring process as assets under management shrink and investment firms consolidate. Some successful stock pickers remain. Merchbanc was established in 1981 and is based in Barcelona but has offices in Madrid and Zaragoza as well. It has €500 million ($655 million) under management - 70% in mutual funds and 30% in pension and private client funds. It invests internationally.

Eduardo Olano has been the Chief Investment Officer at Merchbanc since 2006. Previously he worked as a consultant and a financial analyst at Banco Urquijo, and fund manager at Banco Santander. He holds a degree from Universitat Internacional de Catalunya, a MBA from ESADE, and is a European Financial Analyst (EFA).

Josep Maria Aymami has been the Head of Equity Investments at Merchbanc for the last couple of years. He originally joined Merchbanc in 1997 where he started as an analyst covering European companies, and later on assuming responsibility for the Healthcare sector. Josep has a degree in Economics from Barcelona University (1993) and has also studied Economics at Yale University and Financial Analysis (Certified European Financial Analyst) at the IEF.

How has the crisis in Spain affected you and the fund management industry more generally?

"In terms of savers taking money out of Spain – I don't think this is such as big deal as presented by international media. But the Cajas sector – the public financial sector is being consolidated, privatised and partially closed so we expect much less competition going forward. A number of institutions have been merged; fund management departments have been consolidated and in some cases closed down. The Cajas were 50% of the local financial sector.
In 2007, we took a very conservative stance and today our net asset value is above pre-crisis levels so our funds didn't lose money. In fact our equity funds are up by 10 to 20% from those levels. However, our assets under management are more or less flat. This compares with our competitors who track Spain's IBEX market index where some have lost half of their assets under management. The IBEX has lost over half of its value from the peak."

Am I correct in thinking the big players are in Madrid?

"The main banks – BBVA and Santander – the fund management departments of these banks have changed a lot in the last couple of years. They used to have big units with several managers but they've reduced their capabilities and they've outsourced much of the global investment capability. They still have local management capability but in global products, we are more unique in our local market. The large banks don't have managers that actively manage US or Japanese equities. They don't know where to invest in the US for example. They follow a benchmark and invest via ETFs or funds, often from foreign fund managers like Fidelity and BlackRock."

Can you tell me Merchbanc's investment philosophy?

"Merchbanc was established in 1981 and immediately started investing outside Spain. All of our portfolios are global and we are basically stock pickers. We don't use benchmarks. We don't focus on small, medium or large caps but a mix of all different market caps."

You seem to have a bias towards healthcare investments?

"We've been very active in this sector since the very beginning. To give you an example, we invested in Amgen 20 years ago and we still hold it in some of our portfolios. It's been a huge investment for us and it's been very successful. We are not solely healthcare focused but it's a very important piece of the portfolio. We do fundamental analysis and we are very long term oriented so we look for trends. For example in healthcare, the needs of our society so we look for particular names that have products or services that solve a particular problem or serves a specific need."

Does the team specialise by sector?

"I think some degree of specialisation in necessary if you aim to do some in-depth analysis. Jesus Imas looks at tech & telecoms; Alberto Mayor covers consumer and distribution while Carmen Ruiz looks at financials and insurance. I am responsible for Healthcare and Industrials as well as managing Merchfondo. Eduardo is head of the department and he is ultimately responsible for most of the funds. He has added more asset allocation discipline to our funds. But we share information and discuss our ideas within the team.
We do our own analysis of companies. We use all the available information but knowing companies personally is key. We travel to the US to meet companies we are very interested in. We try and attend conferences and form our own opinions on companies. Everyone in the market gets almost the same information so you can't just trust brokers' opinions. We try to be independent. We also use industry experts – particularly in the healthcare space. We want a portfolio of very well managed companies that provide products and services that are very useful and we try to buy them at a reasonable price."

Do you use screens?

"Our initial ideas come from the long term trends we have identified. There are 800 companies in our universe. We look for companies that are growing revenues and margins. The ideas come more from our long term investment themes. The screens might raise some names but is not the decisive part of our fundamental investment process. We don't use quantitative measures simply to decide to buy or sell, and we are long only. In the healthcare field, for example, we have the support of an expert who assists us with interpreting drug trials, and with some of the technical details. Approximately 50 – 60% of our equity positions are invested in the US, and approximately 50% of the $655 million is invested in equities. We are not very aggressive in debt. Our core business is stock picking and therefore we favor equities."

What's your market cap cut off?

"It is where we don't feel comfortable with liquidity. We are very long term oriented so it is natural that we find ideas in growth companies and when you look for that you will typically end up with small and mid market cap. But we also hold large cap names. I'm not sure what our average market cap is. We own a very small number of companies in the $200 - $500 million range."

Describe your investment style?

"We are a fundamentally focused stock picking house, with a very long term approach. We focus on growth names but may sometimes be contrarian and buy stocks that have fallen out of favor for a particular reason but where we still see very good prospects. That's more a value slant. For example, we've been investing in the financial sector for the last few months. It is more a turnaround story so we're not necessarily looking at next year, but longer term. We are looking for companies with differentiated services and products that will generate good margins. We are also trying to be as prudent as we can. We were very prudent at the start of the financial crisis and this helped the performance of our funds. We will also use futures and options to hedge our funds where we feel it is necessary."

Is a dividend important to you?

"Not really. We are not looking for dividend paying stocks. By the way, it is a very crowded trade now – everyone is trying to find those. It's not a deciding criteria for us. If a company is not paying a dividend and then starts paying one; that's an important message, but the actual dividend payment is not that important to us. The important thing is that you don't mess up by investing in a company that is paying a dividend and has a lacklustre future. We want to invest in companies that will be successful whether they pay a dividend or not.
We try to be very open in our investment approach – not growth or value or dividend. Our different funds have different risk criteria, and we use macro analysis to control risk. Merchfondo is more aggressive and the other funds are managed more conservatively. It allows our clients to have two different styles. Year to date our funds are more or less flat as we have been very defensive. However, the Merchfondo, where we are fully invested, has been very successful - Merchfondo is yielding 45% so far this year."

Do you have a price target when you buy a stock?

"We don't actually have a defined target for a name. As we are longer term, we look at companies as an investment not simply an asset that when it is 20% higher, we sell. We revaluate our positions all the time."

What is your average holding period?

"I don't know but for Amgen it's been 20 years. For Qualcomm it's been over 15 years. For Qualcomm, we've made 47 times our initial investment. This is one of the successful things about very long term investment. The companies that really succeed will yield more than you expect initially. So we try and keep our winners. Even if we take profits on some of the gains. The idea of long term investment is to have your winners in the portfolio. If we invest in a name and we realise we've got the story wrong, we will sell. However, we do not rotate aggressively our portfolios on an annual basis for example."

What's your Active Share ratio?

"We don't even look at the benchmark. For example, we only own four names in Spain, three Japanese names, but many healthcare names – not the most widely known ones. We invest in companies not in an index."

Do you own any Canadian stocks?

"We own RIMM in some funds, and we owned some mining names in the past, such as Potash. We follow some of the financials and telecoms names. We used to own Nortel years ago."

What about SRI/ethical considerations? Would you invest in A&D stocks for example?

"We haven't looked at the defence sector for a number of reasons. Mostly because it is difficult to ascertain the fundamentals of the industry as it is so dependent on political whims and what governments decide. There are too many things outside our control."

What about companies with high valuations? E.g. Red Hat

"We'd certainly invest in Red Hat. We've actually been very interested in it. We owned it and it was successful but unfortunately we left it too soon. In the healthcare names you find yourself investing in a company that has a very bright future and profits will only come over the years."

How many companies visit Barcelona?

"Not many! We met ADP in Barcelona about a year ago, also InterMune, a biotech name. We also attend investor conferences – there's a TMT conference and a growth conference taking place in Barcelona each year. Also the Mobile World Congress - we meet companies there. Some of the smaller cap NASDAQ OMX names. Not the big cap names. It is easier to see them in the US or at conferences in New York. We would certainly like to see more companies here in Barcelona."

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