An eye for intrinsic value lends itself to finding takeover targets
You wouldn't be blamed for thinking the team at the Collins Street Value Fund were takeover punters - some of their largest performance contributors have come as a result of bids for holdings such as Sirtex, Billabong and Spookfish. However, this doesn't stem from a strict eye for takeover targets, but instead an alignment in investment perspective.
"We're looking out for good quality businesses that are trading cheaply... I think, fundamentally speaking, industry insiders take a similar view. They're not concerned about what the market thinks or what the share price has done. They recognise inherently the value in those companies in much the same way that we are."
This is where their commitment to doing research from beyond the computer screen shines - going the extra mile is a core tenant of their approach to securing an information advantage on the market.
In this video, executive director Michael Goldberg shares what makes the fund so successful, how the team go about getting a research edge on the market and finally their approach finding a company's true intrinsic value.
The Collins St Value Fund has delivered a 19% p.a. net return since inception in 2016 – around 8% p.a. higher than the broader market and is the #1 fund in its Morningstar universe over the 3 and 5 year period to 30/09/2021.
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unconstrained and deep value approach that underpins this performance, backed
by a truly investor aligned zero fixed-fee model, please click here
Some of the best performers for CSVF have been from acquisitions - would you say you have an eye for takeovers?
Fundamentally, we're looking out for good quality businesses that are trading cheaply, and I think fundamentally speaking industry insiders take a similar view. They're not concerned about what the market thinks or what the share price has done. They recognise inherently the value in those companies in much the same way that we are. So I think there are two sorts of companies that have been involved in takeovers that we've been involved in. There are the companies where like Broadspectrum, like Certex, like others, we've recognised that this asset is exceptionally cheap, we've bought into that position, and then shortly after someone from the industry has recognised that same thing and gone to make a takeover over.
Whereas, alternatively, the other kinds of takeover investments we've made have been companies that were already in play. So we've identified that a company's being taken over, let's say, we recognise that there's a significant spread between the takeover offer and the current share price, and that's normally because the markets are concerned or they don't understand the details, and so we make some effort to try and get better informed than the markets.
We'll go out there and do our own due diligence, and once we can get comfortable that, that takeover is going to get completed, if there is sufficient enough a return to be made, we'll go and invest in these companies before they're taken over.
So, there's one example that we recently invested in where it had previously had a takeover offer on it and it fell through because a major shareholder decided not to sell, so when the second takeover came about a year later I think the market was concerned again, and they were offering a significant spread. I think annualised it was somewhere in the vicinity of 20%, 30% annualised return, which is quite attractive to us. So I sat there across from (my colleague) and we were having a chat about, how can we be certain that this one's going to go ahead and that it's not going to get stopped by the same fellow? So we had a look and we tried to find this person's contact details online, and for the life of us, we couldn't find anything except for a residential address.
So, again, this is a bit weird, but we like to do weird things from time to time, we worked out who lived closer. It turned out that Vas lived closer. So he wrote out a letter and the idea was, we'd go and ring on their doorbell and strike up a conversation. If they're not there, we'll leave the letter behind. So we ended up getting to this person's house and we knocked on the door, and they answered it and they said, "Who are you?" - as you'd imagine if you were getting some random person knocking on your door and we just started the conversation.
Having had that conversation, we got comfortable that this person was not going to hold things up. He didn't tell us anything explicit, because that would be potentially problematic, and if he changed his mind obviously you don't want to get in any sorts of trouble. But once we were able to touch base with this person, we were confident that it was going to go through.
So yeah, sometimes we're buying these companies and other people recognise the value shortly after. Sometimes we're buying these companies because they are specifically being taken over.
Could you explain your ‘rolling your sleeves up’ approach to gaining an information edge on the market?
There's no question in our mind from our own experience that there's information that you can achieve or you can find by getting out from behind the desk.
It's very easy just to read broken notes. It's very easy to read company announcements. But if that's all you're reading, then you're starting from the same place as everybody else. There's no advantage there for you to take advantage of. So, look, we'll speak to management. Obviously, that's always a good place to start, but we'll speak to staff, we'll visit operations. We'll often talk to competitors and we'll ask them, "If you had a silver bullet, who would like to shoot and take out of the industry?" Normally, that's the company we like to pay special attention to because that's the company that's doing the best.
But, look, I mean, it seems to us that if you can get that information advantage if you can do that little bit of research that perhaps is a little bit uncomfortable for you or a little bit different to what the broader market is doing, that there is that advantage to be had, which often translate into significant performance benefits. So that is our goal in going out there and rolling up our sleeves as you put it.
How has the concept of intrinsic value changed in a world of ‘money for nothing’?
I think the idea of worth or intrinsic value is always going to be a little bit subjective. There are certainly companies out there where you might say they're worth 10 times earnings and then there are other companies out there where they might be worth 20 times earnings according to the markets. You've got plenty of companies that trade at a discount to the value of their assets and you've got plenty of companies that have no assets to speak of yet trade at hundreds of millions or billions of dollars worth of market cap.
I think our view is that certainly money for nothing will have an impact on valuations, certainly particular valuations like discounted cash flows and things like that. But our view is we're looking to achieve double-digit returns over the medium to long term.
So if something I don't want to call it insignificant, but if an idea requires a cost of capital at 2%, which is around about where the market currently is, it's probably too marginal to make it into our portfolio to start off with. And I understand that not everyone has that luxury. I understand that our mandate, as you pointed out, being very concentrated, means that we're really only looking at our favourite ideas and so we have that liberty to be highly selective.
But I think our general view is that if a case can only be made for a business based on what we view as an anomalous situation of basically free money, then it's probably not the sort of company we'd like to invest in for the longterm. Because our view is, one of the few things that are guaranteed in life is change, and today we're seeing interest rates at almost zero, but I can be fairly confident that's not going to be the case going into the future. So if we have to make long-term decisions based on short-term anomalies, I think that's probably a mistake. And so we tend to steer clear of that and we'd always rather be overly conservative in ascribing costs of capital rather than using the current exceptionally cheap money.
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