“I'm impressed that you rode the bull market with emerging market like returns in 2005 - 2007 but that your clients didn't lose their shirts during the credit crunch.”
What Makes Us Different?
Philosophy, Process, Performance
We use a proven value investment philosophy that has produced consistently superior returns for more than 70 years. This, backed up by the strength of our proprietary research and selection process, has enabled us to achieve tremendous returns for our clients. Indeed, since we began trading, we have substantially outperformed all major markets; yet our volatility has been lower than that of both the UK FTSE 100 and the MSCIW.
Putting our Clients’ Interests First
We believe that the raisson d’être of an investment management company should be to enrich its clients. It must therefore be structured accordingly. Too many investment management companies are structured in ways that ensure that their interests are often directly in conflict with those of their clients.
Sadly, when such conflicts occur, it is all too often the clients that suffer.
We carefully structure our products so that our own interests as a company are as closely aligned as possible with the interests of our investors. This creates a situation where the more we strive to achieve our clients’ objectives, the more we fulfil our own objectives. Conflicts of interest are minimised. We are free to act in our own self interest, for in doing so we act in the interests of our clients.
Examples include:
Performance Fees
Our use of performance fees ensures that our profitability is tied to the returns enjoyed by our investors.
Capping the Size of Funds
We believe in putting a cap on the assets under management for each of our funds.
Many investment funds start small and achieve good results. But this causes larger and larger amounts of money to be invested. This tends to dilute performance but is welcomed by investment management firms as revenue continues to increase.
We believe that many of the largest funds have effectively become closet index trackers, as their size makes them unable to differentiate themselves from the markets as a whole. To avoid this scenario, we will seek to limit the Elite LWM East-West Value Fund to a maximum size of £400M.
Earning no Revenue from Trading
We are not, and nor have we ever been, incentivised to buy and sell stocks. Many studies have shown that long-term, “buy and hold” investment strategies produce the best returns, yet many investment management companies receive revenue from trading. This is a clear conflict of interest and is something that we avoid entirely.
Covering all Fixed Fees
Funds incur various fixed fees. For example, for auditing and registration with the regulator. We cover all of these fees. Not only does this help to keep the costs low for our investors, it also ensures that those who invest when the fund is relatively small do not pay proportionally higher fees than those who invest once the fund is large. We want to make sure those who support us from the very beginning are treated well, not penalised by higher charges!
Building Sustainable Relationships
For us to achieve and maintain success as a company we must build durable, high-quality relationships with our clients, our employees, our suppliers and our distributors.
By acting with honesty and integrity at all times and by offering tremendous value to our clients, employees, partners etc., we create win-win relationships that secure our company both now and in the future.
Transparency
Transparency is vital to the building of a sustainable business.
We provide our investors with full details of the positions that we hold and performance, good or bad. We seek to explain to our investors both the benefits and potential risks of investing with us.
Our reports on market events tend to be very balanced, pointing out both the positives and negatives in any envisaged situation. And by clearly explaining what positions we hold and why we hold them, we arm our clients with confidence in uncertain times.
Risk Management and Risk Reduction
Warren Buffett said: “The first rule of investment management is don’t lose money. The second rule of investment management is don’t forget the first rule!”
By diligent application of our value investment principles, by applying a diversificationary filter on our selection process and by being prepared to hold cash if we feel it is warranted, we seek to reduce risk wherever possible.
Indeed, the real beauty of classical value investment is that, by seeking to identify and invest in established companies offering the largest possible discount to their real (or ‘intrinsic’) value, you both reduce the risk of purchase and enhance the likelihood of higher returns.
Our investment process therefore focuses upon reducing the risk of each investment rather than upon chasing returns. The more that we are able to reduce risk, the greater the eventual returns that we are likely to achieve.
Our Definition of Risk
Many investment management firms equate risk with volatility. However, we define risk as the possibility of capital loss. We believe that our definition is a more meaningful definition for most investors.
Given that our investment strategy focuses upon identifying companies that are substantially undervalued by the market but that are not at risk of bankruptcy, we are quite prepared to accept volatility in the short term in return for outperformance over the longer term.
Focused Portfolio
We believe that the vast majority of investment funds are too diversified and many do not deserve to be considered as actively managed.
We deliberately limit the number of stocks that we hold in our portfolio – typically investing in only 25-35 companies. Experience has shown that this number is sufficiently large for us to diversify away a substantial amount of investment risk, but not so large that we overly dilute the benefits that arise from our investment philosophy and process.
Global Investment Outlook
We research and invest in the companies offering the best value from around the world. We want to find the best value available and, as long as we can perform the level of due diligence necessary, we will invest in that company, wherever it is based.
This global mandate allows us to seek out the best opportunities available, as well as to further reduce risk through international diversification.
Investment Management as both Art and Science
We believe that too many investment management companies are overly dependent on risk modelling. In fact, a significant number of global financial crises can be directly attributed to a tendency to forget that models are merely tools, rather than the reality itself. (Prime examples include the recent crisis and the debacle surrounding Long Term Capital Management). Also, too many investment strategies are based upon a temporary paradigm. When conditions change, such strategies blow up, losing more money than they ever gained. Investments into technology stocks in the late 90s or leveraged investment into CDOs in 2007 / 2008 are both good examples.
We use a classical value investment strategy that is based on a timeless principle – ‘buy something for less than it is worth’. We focus on companies with little debt and real products. Our focus on real, tangible value helps us to avoid falling prey to the latest ‘hot’ investment fad.
At the same time, we apply principles rather than hard and fast rules. We appreciate that investment management is both art and science. Hard data is required, but context and interpretation are also critical. Each of our principles in isolation is mutable. But as each principle is compromised, it becomes harder for a company to convince us that it is worthy of investment. We are pragmatic in every detail, yet the concept of value is paramount at all times.
Avoiding “Groupthink”
From the very beginning we wanted to avoid “groupthink”. Many investment management companies employ teams of very smart people, all with similar educational and cultural backgrounds and all based in London or New York. Such teams can suffer from the problem that their members think in a similar way and are therefore prone to similar mistakes.
Our team is drawn from four continents and we have deliberately brought together people from a diverse range of professional and cultural backgrounds. This allows us to strip down the companies we investigate from a variety of perspectives. We believe that this has been a key factor in our ability to both select stocks that have gone on to outperform, as well as to anticipate and safeguard against systemic risk.
Maintaining a Detached Perspective
Classical value investing is by nature contrarian. Through our process and the diversity of our team, (plus the fact that our investment team is based in Beijing which gives us an interesting perspective on world affairs), we seek to be able to maintain an independent perspective on global macroeconomic themes and on the likely fortunes of individual companies.
A superb example of how this approach has benefitted our clients is the way in which we handled the credit crunch. We became increasingly uncomfortable with global macro fundamentals throughout 2007. We moved to cash throughout 2008 so that by the end of July we were approximately 85% in cash. By October 1st 2008 we were 89% in cash.
This enabled us to protect our investors against the worst of the losses during the credit crunch. In fact, so successful were we that we posted a positive return of 6.75% (gross returns in GBP), whilst over the same 12-month period the MSCIW fell by 46.45%. (Figures are from October 27th 2007 to October 24th 2008.).
Avoiding Over-confidence
We know that we will not always get things right.
We therefore seek to reduce risk through all means available to us: diligent research and an extremely grounded investment philosophy; by treating cash as a viable investment class; and, by using options to reduce risk.
The secret of successful investment management is not to achieve spectacular returns. The secret of successful investment management is to achieve consistently decent returns whilst avoiding spectacular losses.