Chips, commodities and activists
With a portfolio consisting of the managers' absolute best stock picks, SKAGEN Focus has quickly grown to reach over EUR 100 million in assets under management. The high concentration global equity fund has just celebrated its first birthday.
Managing a concentrated portfolio of just 35 companies is a pure form of value-based investing which involves selecting your absolute best stock picks. SKAGEN Focus' lead manager, Filip Weintraub, describes it as putting all your eggs in one basket, and then guarding your basket very carefully.
"If you make a mistake, it hurts. Not many managers can cope with the stress. But we feel it is right for our clients, and the right way to invest," he says.
Filip Weintraub believes that all investment philosophies are fundamentally simple. In SKAGEN's case, the philosophy is about buying companies cheaply and selling when they become expensive.
"It is important to understand the risks - and be sure to get paid for them. But most companies are not as cheap as they appear to be; no more than one out of 100 companies are really interesting and worth digging deeper into. Each new holding competes with the existing positions, so in our minds, we buy our portfolio every day."
An active year
Over the past four months, SKAGEN Focus has outperformed its benchmark index by over 9 percent.* But in retrospect it was less than favourable to launch the fund in late May 2015. We launched in an environment in which value-based investing had long been unpopular, while index funds, which by definition buy the highest valued companies, were becoming increasingly popular. Companies' fundamentals and good, honest stock picking have taken a back seat in an investment environment that has been negatively affected by low interest rates and speculation around what the central banks will do with the interest rate and monetary policy.
On the positive side, this has provided the team with the opportunity to build up a portfolio with good long-term return opportunities relative to risk.
"What a journey SKAGEN Focus has been on until now! We got off to a terrible start with the fear of a Chinese collapse in the summer of 2015, and this affected our high exposure to Asia and related sectors such as commodities and finance. Since then SKAGEN Focus has performed well, although we are not entirely satisfied yet. Our clients have continued to have faith in us and we have seen stable inflow since start," says Filip Weintraub.
As promised, the fund has not followed its benchmark index and paradoxically, despite its high concentration, SKAGEN Focus has lower volatility than the market average even though the performance of companies in the fund has fluctuated significantly. The fund's first year has been one of the most active trading years in Filip Weintraub's career:
"In the 1970s, investors held shares for 2.2 years on average. Now the corresponding time span has shrunk to a breath-taking 2.2 seconds as a result of high speed trading on the New York stock exchange. You can barely say that investors own shares these days; they just loan them. It is remarkable to see the intra-day movements for individual shares. This provides long-term investors with even better opportunities, but it does require time and patience."
Commodities and activists
The stars of the fund over the past year include a number of commodity companies, including the Canadian mining company Pan American Silver. SKAGEN Focus' portfolio managers sold the shares after they reached the target price of 15 dollars, having gained 120 percent since the start of the year. The commodities exposure in the fund has thus been substantially reduced.
Another good contributor in the Focus portfolio is the US multi-line insurance company AIG (7.22 percent weighting) which performed well in 2015. During the first quarter of this year, however, the share price fell 12 percent in local currency. One of the reasons the company continues to be of interest is that the US billionaire and investor Carl Icahn, who owns over 44 million AIG shares, has for some time been trying along with other activists to persuade the company to split into three independent companies. Such a division would likely reduce the company's regulatory burden and capital requirements as well as trigger major value for shareholders.
Activists also play an important role in the continued development of fish oil company Omega Protein. Omega's share price surged over 70 percent in dollar terms in 2015 whereupon Focus halved its holding, only to buy the shares again in May 2016 at a significantly lower price. Activists are now pressuring the company to optimise operations and questioning management's ability to diversify the company's revenue base.
"I would like to emphasise that we don't seek conflict – we invested in the companies first and activist investors became aware of them afterwards. The activists, who are often also value investors, confirm our investment thesis and help bring about the change that we anticipated would come," says Filip Weintraub.
Another activist scenario which also has rerating potential is now playing out in the Central European vodka and spirits producer Stock Spirits. The company floated on the London Stock Exchange in 2013 and the stock has had a rough time of it since peaking in 2014 as tax increases in its biggest market, Poland, have altered the business environment. Stock Spirits has also lost market share, despite the group's strong brands, good distribution network and strong finances.
When Stock Spirits reported weak figures for the third quarter 2015 and the share price continued to fall as a result, the largest shareholders, led by Portuguese entrepreneur Luis Amaral, challenged the company's chairman and managing director. Given the potential for positive change in Stock Spirits and the significantly reduced price tag, the SKAGEN Focus managers believe there is a possibility that the company will be re-rated in the medium term.
Filip Weintraub and his colleagues Jonas Edholm and David Harris rarely participate in IPOs, but in May they took an opportunity that arose through good contacts in South Korea to take part in the IPO of South Korean confectionary and snack manufacturer Haitai. Haitai is known for its Honey Butter Chips – which have become so popular that they have given rise to chip fever among young South Koreans. Although Haitai's factories work around the clock, the chips are sold out in stores and command prices of up to 50 dollars a bag on eBay.
The IPO was oversubscribed but SKAGEN Focus received a large allocation as the portfolio managers have a long and good history as owners of small Korean companies. The price was set at 15 000 won and it rose in a short time to our price target of 64 000 won, whereupon we sold the company out of our portfolio.
"It was an almost unique opportunity that we took advantage of. This is the kind of chance that might come up every fifth year," says Filip Weintraub.
The fund's joint largest holding at present is the Brazil-listed meat producer JBS combined with the US's largest chicken manufacturer Pilgrim's Pride. JBS owns 76 percent of Pilgrim's Pride and together JBS and Pilgrim's account for over eight percent of the Focus portfolio.
In mid-May JBS reported weak figures for the quarter, but then announced news that bodes well for the future: the company is going to be split in two between JBS Foods International, which will be listed in the US, and the remaining JBS Brazil. The Focus managers believe that JBS shares will increase in value as a result of the split which should make it easier for investors to compare the company with its peers such as Tyson Foods, which trades at a significantly higher multiple than JBS' current value. Another advantage may be increased liquidity. The JBS share gained over 21 percent in one day (from a low level) on the news, and still has potential in the medium term, according to the Focus managers. The development will also have an effect on Focus' related position in Pilgrim's Pride, which is also listed in the US.
Facts about SKAGEN Focus
- SKAGEN Focus is a global equity fund with a limited number of holdings and high return potential. Like all of SKAGEN's funds, Focus is actively managed and invests in undervalued, under-researched and unpopular companies with the potential for rerating.
- The team consists of Filip Weintraub, Jonas Edholm and David Harris.
- Start date: 26 May 2015
- AUM as of 26 May 2016: EUR 112 million
- SKAGEN Focus has a concentrated portfolio and the top ten positions constitute almost 45% of the fund at present: AIG, JBS, Softbank, Carlsberg, SBI, Infineon, Omega Protein, China Telecom, Citizens and Jenoptik.
- Small and midcap companies account for 60% of the fund.
- Filip Weintraub on the teamwork: "I have been managing global equities since 2001, and SKAGEN Focus is a continuation of this work. Jonas Edholm, David Harris and I have worked together as a team for many years."
*From 26 January to 26 May 2016 SKAGEN Focus A generated a return of 16.3% while its benchmark index (MSCI All Country World Index) gained 7.3%.