Highlighted Tweet by MRAfunds

June 4, 2021 in Twitter

Larry Cunningham on Margin of Trust: The Berkshire Business Model

June 1, 2021 in Audio, Equities, Explore Great Books Podcast, Full Video, Interviews, Meet-the-Author Summer Forum, Meet-the-Author Summer Forum 2021, Meet-the-Author Summer Forum 2021 Featured, Member Podcasts

Lawrence Cunningham discussed his book, Margin of Trust: The Berkshire Business Model, at MOI Global’s Meet-the-Author Summer Forum 2021.

Warren Buffett endorsed the book in his 2019 Letter to Shareholders:

“The two of us [Buffett and Munger] base our optimism upon five factors. First, Berkshire’s assets are deployed in an extraordinary variety of wholly or partly-owned businesses that, averaged out, earn attractive returns on the capital they use. Second, Berkshire’s positioning of its ‘controlled’ businesses within a single entity endows it with some important and enduring economic advantages. Third, Berkshire’s financial affairs will unfailingly be managed in a manner allowing the company to withstand external shocks of an extreme nature. Fourth, we possess skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job. Finally, Berkshire’s directors – your guardians – are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations. (The value of this culture is explored in Margin of Trust, a new book by Larry Cunningham and Stephanie Cuba that will be available at our annual meeting.)”

The following session offers a preview of our Meet-the-Author Summer Forum 2021, designed to provide summer reading inspiration to MOI Global members. We look forward to releasing additional conversations in the coming weeks.

Editor’s note: We are delighted to have Alex Gilchrist, a London-based research associate at MOI Global, host the Meet-the-Author Summer Forum 2021.

The full session is available exclusively to members of MOI Global.

Members, log in below to access the full session.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:

This conversation is available as an episode of Explore Great Books, a member podcast of MOI Global. (Learn how to access member podcasts.)

About the book:

Warren Buffett and his company, Berkshire Hathaway, are legendary for their distinctive investing approach. Yet many equally unconventional but less well known aspects of Berkshire’s managerial practices and organizational structure are rich with lessons for those seeking to follow in Buffett’s footsteps. Margin of Trust is the first book to distill Buffett’s approach to management and corporate life. It provides a definitive analysis of the tenets of the Berkshire system, its costs and benefits, and how it can be adapted for other organizations.

Lawrence A. Cunningham and Stephanie Cuba develop a new account of how Berkshire Hathaway works, showing that the key to its success is trust. Profiling partnership practices and business methods, they contend that Berkshire’s distinguishing feature is a culture in which autonomy and decentralization are core management principles. Cunningham and Cuba provide instructive examples of how this model has been successfully adapted by other companies that share a faith in trust as an organizing principle. They also offer candid commentary on the risks of a trust-based approach and how to mitigate them. Margin of Trust features illuminating analysis of Buffett’s take on the role trust plays in business agreements, what Buffett looks for in great corporate boards, and what lies ahead for Berkshire after its iconic leader leaves the scene.

About the author:

Lawrence Cunningham is the Henry St. George Tucker III Research Professor of Law at George Washington University. He is the author of 20 corporate governance and investing books, including Berkshire Beyond Buffett: The Enduring Value of Values (Columbia University Press, 2014) and international best seller, The Essays of Warren Buffett: Lessons for Corporate America. Stephanie Cuba is a consultant in the fields of real estate investment and development. The two are married and previously jointly produced The Warren Buffett Shareholder. They live in New York City with their two daughters.

Larry is founder of the Quality Shareholders Group.

Ep. 43: The Big Ideas of Investing | A Case Study in Incentives

June 1, 2021 in Audio, Podcast, This Week in Intelligent Investing

It’s a pleasure to share with you Season 1 Episode 43 of This Week in Intelligent Investing, co-hosted by

  • Phil Ordway of Anabatic Investment Partners in Chicago, Illinois;
  • Elliot Turner of RGA Investment Advisors in Stamford, Connecticut; and
  • John Mihaljevic of MOI Global in Zurich, Switzerland.

Enjoy the conversation!

download audio recording

In this episode, Phil Ordway, Elliot Turner, and John Mihaljevic discuss

  • the “big ideas” of investing, i.e., what could be said about intelligent investing on a single piece of paper; and
  • the sale of Nuance to Microsoft as a case study in management incentives.

Follow Up

Would you like to get in touch?

Follow This Week in Intelligent Investing on Twitter.

Engage on Twitter with Elliot, Phil, or John.

Connect on LinkedIn with Elliot, Phil, or John.

This Week in Intelligent Investing is available on Amazon Podcasts, Apple Podcasts, Google Podcasts, Pandora, Podbean, Spotify, Stitcher, TuneIn, and YouTube.

If you missed any past episodes, you can listen to them here.

About the Podcast Co-Hosts

Philip Ordway is Managing Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining CFIP, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005. Philip earned his B.S. in Education & Social Policy and Economics from Northwestern University in 2002 and his M.B.A. from the Kellogg School of Management at Northwestern University in 2007, where he now serves as an Adjunct Professor in the Finance Department.

Elliot Turner is a co-founder and Managing Partner, CIO at RGA Investment Advisors, LLC. RGA Investment Advisors runs a long-term, low turnover, growth at a reasonable price investment strategy seeking out global opportunities. Elliot focuses on discovering and analyzing long-term, high quality investment opportunities and strategic portfolio management. Prior to joining RGA, Elliot managed portfolios at at AustinWeston Asset Management LLC, Chimera Securities and T3 Capital. Elliot holds the Chartered Financial Analyst (CFA) designation as well as a Juris Doctor from Brooklyn Law School.. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.

John Mihaljevic leads MOI Global and serves as managing editor of The Manual of Ideas. He managed a private partnership, Mihaljevic Partners LP, from 2005-2016. John is a winner of the Value Investors Club’s prize for best investment idea. He is a trained capital allocator, having studied under Yale University Chief Investment Officer David Swensen and served as Research Assistant to Nobel Laureate James Tobin. John holds a BA in Economics, summa cum laude, from Yale and is a CFA charterholder.

The content of this podcast is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this podcast. The podcast participants and their affiliates may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated on this podcast.

Robert Mullin on the Investment Case for Commodity Companies

May 31, 2021 in Audio, Commentary, Deep Value, Energy, Equities, Featured, Full Video, Interviews, Macro, Materials

We are delighted to share the following interview with Robert Mullin, general partner and portfolio manager of Marathon Resource Advisors, conducted by MOI Global contributor Rohith Potti.

Robert has authored a widely shared paper, The Road Ahead for Natural Resources, which serves as the backdrop to our conversation.

Robert discusses the valuation of commodities and natural resource-based companies in historical context; makes the case for tin, a niche metal; shares his investment thesis on Whitecap Resources (Canada: WCP), and much more.

Robert’s work has been featured in an issue of Grahamian Value Week in Review.

Listen to the conversation (recorded on May 27, 2021):

download audio read report

This conversation is available as an episode of Gain Industry Insights, a member podcast of MOI Global. (Learn how to access member podcasts.)

About:

Robert Mullin is a finance professional with nearly three decades of experience managing natural resource investment portfolios for individuals, family offices, and institutions. He serves as general partner and portfolio manager of Marathon Resource Advisors. Previously, he was a portfolio manager at Tocqueville Asset Management from 2016-2020. He served as a partner and portfolio manager at RAEIF from 2010-2016 and as general partner of Marathon Resource Investments from 1998-2012.

The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.

Marc Rubinstein on Financial Sector Investing (Background Interview)

May 28, 2021 in Audio, Commentary, Equities, Financials, Gain Industry Insights Podcast, Interviews, Member Podcasts, Net Interest

We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his path in investing and his thoughts on intelligent investing in the financial sector, including the impact of fintech.

Listen to the conversation (recorded on May 18, 2021):

audio series newsletter

This conversation is available as an episode of Gain Industry Insights, a member podcast of MOI Global. (Learn how to access member podcasts.)

About the Net Interest Audio Series:

MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.

About Marc Rubinstein:

Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.

About Net Interest:

Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!

Members, log in below to access the restricted content.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:

The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.

François Rochon on the Investment Philosophy of Giverny Capital

May 28, 2021 in Audio, Case Studies, Equities, Featured, GARP, Interviews, Invest Intelligently Podcast, Jockey Stocks, Member Podcasts, North America, Portfolio Management, Wide Moat

We had the pleasure of speaking with quality-focused superinvestor François Rochon, president and portfolio manager of Giverny Capital, based in Montreal.

Over nearly three decades of following the same investment strategy, François has delivered outperformance of roughly 6% per annum as compared to the relevant benchmark.

In the wide-ranging conversation with John, François discusses:

  • the core tenets of his investment philosophy;
  • quantitative vs. qualitative factors in the research process;
  • portfolio construction and risk management;
  • Giverny’s selling discipline;
  • AMETEK vs. Stericycle, and the Philip Carret rule;
  • the Carmax case study;
  • developing rationality, humility, and patience; and
  • building a great team at Giverny Capital.

Members, log in below to access the restricted content.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:

The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.

A Profile in Leadership: Bruce Flatt, CEO of Brookfield Asset Management

May 27, 2021 in Equities, Featured, Financials, Jockey Stocks, Large Cap, Real Estate

We are pleased to share a profile of noted corporate leader Bruce Flatt, who has become synonymous with the enourmous value creation at Brookfield Asset Management (NYSE: BAM, TSE: BAM.A) over the past couple of decades.

Bruce joined Brookfield in 1990 and became CEO in 2002. Under his leadership, Brookfield has developed a global operating presence in more than 30 countries, while assets under management have grown to more than $600 billion.

Background

Bruce Flatt was born in 1965, in Winnipeg, the capital of the Canadian province of Manitoba, which shares borders with the US states of North Dakota and Minnesota. Bruce graduated suma cum laude in 1985 from the University of Manitoba. He trained as an accountant at Clarkson Gordon (later acquired by Ernst & Young), before joining Edper (the precursor of Brookfield) in 1989 as CFO of Edper’s financial hub, Hees.

In 2002, Bruce took on as CEO of the Edper controlled but publicly listed Brascan (Brascan changed its name to Brookfield in 2005). Since then Bruce has diversified Brookfield of its non-core cyclical holdings and centred the company around Asset Management, Real Estate, Renewable Power, Infrastructure and Private Equity. Brookfield currently has AUM in excess of $500 billion and over the last twenty years has achieved a CAGR of 17% per annum versus 6% for the S&P 500 over the same period.

Focus on incentives and transparency with shareholders

Soon after Bruce took became CEO of Brascan, he forced board members to hold a minimum amount of equity and increased holding periods of options issued to staff. By 2012, Bruce wrote that, “[Senior management is] commit[ed] to align our interests with yours by holding the vast majority of our individual net worth in Brookfield equity.”

Bruce increased transparency by emphasizing key metrics: “We have two principal financial performance metrics: operating cash flow and total return, both measured on a per share basis. We define total return as the change in underlying value together with distributions to shareholders.”

He communicates Brookfield’s investment goals clearly to shareholders: “Our goal is to invest capital for our clients in opportunities which have reasonable returns in a downside scenario (6% to 8% on equity), have the potential to generate good returns under most scenarios (12% to 15%), and in the upside cases will generate excellent returns (20% plus).”

A value investing approach has supported these goals

“We consider ourselves value based investors who own and operate real asset based businesses on a global basis.” Bruce emphasizes the importance of “purchas[ing] assets at a discount to their replacement cost, building a margin of safety into our acquisitions.” Obtaining such opportunities necessitates going against the crowd. Brookfield offices all contain a picture of the herd running of a cliff. This serves as a reminder employees of the contrarian mindset that is necessary to execute a value strategy.

Notable examples of this contrarian mindset include acquiring in 2002 “a 1.2 million square foot divided interest in Three World Financial Center… at a substantial discount to replacement value,” due to a hangover of fear from the September 2001 attacks.

Having maintained a strong balance sheet Brookfield went on a shopping spree for $4.1 billion of equity investment during 2008 and 2009. Many of these investments were made through “the purchase of debt for conversion to equity,” benefitting from over leveraged capital structures.

During the sovereign debt crisis, Brookfield bought “various distressed real estate and infrastructure investments” in Europe. In 2015, Brookfield was able to purchase assets in Brazil, “that would never otherwise have been available” with pricing “at fractions of replacement cost” that “discounted almost every negative scenario.”

Recently Brookfield has been able to utilise its competitive advantages of size and operating expertise to continue to find value in more expensive markets, acquiring a number of businesses that have “inherent defensive protections.” These include “a long-term contracted” “natural gas gathering and processing business for $3.3 billion” in Canada; as well as “an $11.4 billion portfolio of largely office and residential properties in four premier markets in the U.S,” that was acquired “with few competitors due to size and diversity of assets.”

Brookfield has also made use of more fully priced markets “to sell mature stabilized assets and redeploy the proceeds at higher yields or return the capital to our investors,” selling a total of $12 billion of assets in 2017.

Core principles

“Over time, we have found that the five most important principles to successful real asset investing are to: stick to what we know; ensure that we are diversified; buy at a discount to replacement cost; focus on quality assets and businesses; and finance with asset specific non-recourse debt.”

Brookfield employs a series of strategies to reduce risk:

1. Long-term leases – an average length of 10-20 years provides visibility to cash flows
2. Balance sheet strength and high levels of liquidity, allow Brookfield to withstand adverse economic circumstances implement its value investing strategy
3. Matching debt to asset characteristics – Often long-term leases are matched to long-term fixed debt
4. Debt expiration – Debt maturities are diversified over extended periods of time with only 10-20% being renewed annually
5. Non-recourse debt – Debt has recourse to the asset and not to the corporation
6. Make use of a diversified funding base including fundraising and preferred securities
7. Interest rates strategy – Locking in low long term fixed debt when available
8. Currency Risk is often hedged to USD
9. Transactional approach to emerging markets – Sell assets once they reach intrinsic value rather than hold on for longer in emerging markets to protect from future uncertainty
10. Cutting losses short – “[S]ome businesses, no matter how deep the discount to replacement cost, are just bad businesses.”
11. Avoid participating in structured financial assets
12. Being prudent in the face of development and approval risks

Increased size is an advantage to real asset investors

“[I]nfrastructure (as well as real estate and private equity) usually becomes more attractive as investments get larger. The competition for larger acquisitions is less and the sophistication required to operate these assets increases because of their complexity, therefore favoring large and experienced managers. Lastly, the larger assets acquired are generally also higher quality – they often have better counterparties, and stronger management teams. As a result we believe that our infrastructure business can scale to many times the size it is today.”

Re-organising Brookfield’s structure

Early on, Bruce realised the inherent potential of real assets to be attractive to a wider investor base, “aim[ing] to establish Brookfield as an asset manager of choice for institutions and other investors.”

“We expect that over the next 10 years, most institutions will increase their allocations of real assets to between 25% and 40%.”

Bruce re-organised Brookfield’s holding structure, grouping activities into key businesses and then listing each of these as listed partnerships both on the Toronto and New York Stock Exchanges.

Brookfield Asset Management sits on top managing and owning part of the share capital of the four listed partnerships:

  • Brookfield Property Partners
  • Brookfield Infrastructure Partners
  • Brookfield Renewable Partners, and
  • Brookfield Business Partners

Further to the listed partnerships, Brookfield also offers investors private funds and public securities. Total assets under management were in excess of $600 billion as of 2021. Neuberger Berman’s Charles Kantor, cites that through the listing of its partnerships and Brookfield’s significant contribution to its investment funds, Bruce created a “brilliant” structure of “lifelong entities” with essentially permanent capital.

The diagram below, captures the relationship between asset management, ownership vehicles and operating assets.

(Source: BAM Annual Report, 2018)

Acquiring Oaktree

In March 2019, Brookfield announced its takeover of Oaktree. The acquisition allows Brookfield to offer a larger range of credit strategies. Simultaneously it represents the joining of forces of two titans in the value investing world. Howard Marks explained that Brookfield’s offerings mesh with Oaktree’s “without significant overlap and cannibalisation, with the same reputation, with the same growth record, with the same culture.” Furthermore “Oaktree is known for being able to ‘ring returns’” during sluggish periods “when it isn’t right for them [Brookfield] to grow.” Oaktree is a hard to replicate business that would have taken “a long, long time” for Brookfield to “buil[d] it ourselves,” in the “one area that we were lacking.”

The acquisition of Oaktree was financed with $2.4 billion of cash and the issuing of 53 million Brookfield shares. Bruce expects it to create value in excess of the 11% FCF yield that otherwise would have been returned to shareholders. Bruce’s remains focused as ever to “generat[e] increased cash flows on a per share basis and as a result, higher intrinsic value per share over the longer term.”

Antoine Gara’s description of Brookfield as “the safest growth stock on the planet” captures perfectly Bruce’s phenomenal achievements as an investor and operator at Brookfield.

Members, log in below to access the restricted content.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form: