MOI Global | The Membership Community of Intelligent Investors

Yum China: Attractive Reinvestment Dynamics

September 8, 2017 in Asia, Communication Services, Equities, Ideas

This post by Jake Rosser has been excerpted from a letter of Coho Capital.

Yum China Holdings is a Chinese quick service restaurant (QSR) operator, which was spun off from Yum Brands in November of 2016. The company’s primary brand is KFC with 5,200 units, followed by casual dining concept, Pizza Hut, with 1,700 units. Yum China also has a hot pot chain called Black Sheep with 40 units and a nascent Chinese food focused brand called East Dawning with approximately 14 restaurants. Yum China’s smallest brand is Taco Bell, which just opened its first China restaurant in Shanghai. In aggregate, Yum China operates the largest network of chain restaurants in China with over 7,600 restaurants spread across 1,100 cities. Its restaurants see more than two billion customer visits per year.

Despite an attractive growth profile, high returns on capital, and strong brand equity, we were able to acquire shares of Yum China at less than half the price of no moat local competitors. Spin-off dynamics, coupled with investor disdain for all things China, kept investors away resulting in the price misappraisal.

Yum China is three times as large as its next largest competitor, McDonalds. Yum China’s size yields significant economies of scale over competitors in sourcing, distribution, real estate, tech investment and advertising. For example, Yum China owns its supply and distribution system with 20 logistics facilities and a fleet of over 500 refrigerated trucks. This provides the company a 1.5% margin advantage against competitors. Further, the company’s supply chain enables it to serve tertiary cities that are too expensive for other multinational QSR brands, providing the company an important first mover advantage in markets underserved by fast food outlets.

Despite its advantages, recent operating performance has been uninspiring due to an overhang created by two food safety incidents. The first in 2012, when two of KFC’s poultry suppliers were found to be using excessive antibiotics in their chicken, and the second in 2014, when a supplier to KFC was found to have expired meat, even though none of the meat ever made it to KFC. Publicity from the incidents hit same store sales which are now trending neutral relative to annual comps of 6-20% in the five years prior to the incidents.

We think the challenges Yum China is currently facing are temporary and believe a resumption in sales growth will lead to a dramatic acceleration in profits. Such a scenario does not require heroic assumptions. Unit sales volumes are 25% below Yum China’s prior peak of $1.6 million per restaurant, achieved just five years ago. But even if we assume 0% traffic growth, Same Stores Sales (SSS) should grow 3% a year based upon historical pricing patterns. Even minimal SSS growth is impactful due to the inherent operating leverage within the model (Yum China owns 80% of its restaurants). Just 1% growth in SSS translates into an extra five cents per share in earnings per share (EPS).

Our belief in a resumption in sales growth is based on the idea that Yum China’s three-decade presence in the country has created deeply rooted brand equity. A 2016 brand image survey, conducted by AC Nielson, highlighted Yum China’s strong brand resonance in the country with 60% of survey respondents naming KFC as their most preferred QSR brand. A recent survey by Euromonitor also illustrated Yum China’s strong brand position with survey respondents naming KFC as the best western QSR and Pizza Hut as the best pizza operator.

We think one of the most underappreciated aspects of Yum China’s growth prospects is enhanced utilization of the digital channel. The company counts Alibaba as a strategic partner after the firm invested half a billion dollars together with Primavera Capital Group, a private equity firm run by the former head of Goldman Sachs China, Fred Hu. Mr. Hu is also Chairman of Yum China’s board.

The strategic partnership has paid off with Yum China generating over $1B in cashless payments in the last year. Yum China has utilized insights gleaned from payment data to cross-pollinate digital marketing channels and now counts over 100 million social media fans. That in turn has helped fuel growth in Yum China’s digital loyalty program, one of the largest company loyalty programs in the world at 93 million members.

One of the most compelling aspects of our Yum China investment is the company’s attractive reinvestment dynamics. Even with 7,600 restaurants, Yum China’s growth opportunities within the Middle Kingdom remain substantial. Restaurant penetration is still nascent with 20 units per million people versus the US at 600 units per million people. Relative to Yum China in other Asian markets, the company is underpenetrated in China. For example, the company has 25 restaurants per million people in Hong Kong and 33 per million people in Malaysia. This compares to only 5 Yum China restaurants per million people in China.

Tertiary cities present a compelling opportunity for expansion with rising consumption, limited chain restaurant competition and greater demand for value offerings. Because of its nationwide distribution system, Yum China is better positioned than any other chain restaurant operator in China to cater to this demographic.

Management believes Yum China can triple its number of units over ensuing years. Importantly, Yum China believes it can self-fund growth due to its $600 million in annual free cash flow. New unit economics are compelling with recent new-builds generating cash on cash returns of 26-40% within the first year, suggesting payback in only 3-4 years.

Apart from existing owned brands, M&A offers opportunities for growth. Yum China is particularly well-positioned in this regard with $1 billion in net cash on its balance sheet and the best restaurant supply chain in China.

Despite its share- leading market position, cash generative economics, and abundant growth opportunities, Yum China is priced like a sub-scale local fast food purveyor with a commoditized offering. Yum China trades at a 10.5x 2018 EV/EBITDA multiple, at parity with competitively disadvantaged, local QSRs. We think a more relevant comp is global master franchises which share a similar growth profile and trade for an average EV/EBITDA multiple of 14.5X.

With Yum China, you have trough earnings and a trough multiple. You get the double-barreled effect of improving business economics and a rising multiple. In addition, you get intriguing optionality on utilizing technology to enhance returns, rolling out new concepts, such as Taco Bell, or tapping Yum China’s net cash balance sheet for value accretive M&A. In time, the merits of Yum China’s business will be recognized by the market. We think steady execution without any heroic assumptions can offer a double in price over the next four years.

It would seem the CEO of Yum China, Micky Pant, agrees – having purchased over $3 million worth of shares in April.

download printable version

Preparing for a Market Downturn

September 8, 2017 in Commentary, Letters

This post by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.

Providing guidance or meaningful commentary on the current market is a bit like forecasting the weather in Palm Desert, California during August. Each day is very similar to the previous one until one day it isn’t. Moreover, with the VIX trading at 10-year lows and the indexes hitting new highs, it appears that the equity markets have become complacent to any rising geopolitical issues impacting the world: North Korean aggression, rising tensions with Russia, and Trump still believing that his presidency is a reality TV show complete with daily tweets and firings.

“Everybody wants happiness, nobody wants pain, but you can’t have a rainbow without a little rain.” –Unknown

With US equity markets hitting new highs, many market pundits are calling for caution – advising investors to move into cash and/or hedge their current positions. A market decline is not a bad thing. In fact, as long as a company’s fundamentals have not changed, Hazelton Capital Partners often takes advantage of market sell-offs as an opportunity to enter into or add to a current holding. It is important to remember that a market decline does not mean that every position will decline or decline in tandem with the market. Hazelton Capital Partners positions itself for a possible decline in the market the same way it prepares for a potential market rally by pruning back positions, selling out of companies whose investing thesis has failed or has been achieved, and redeploying the capital into new or existing positions. The first line of defense against a downturn in the market are the positions in the portfolio and the level at which those positions were purchased. Cash levels in the portfolio are an indication of market opportunities, not its future direction.

When focusing on a long-term investing strategy, one must understand that the path to financial success is littered with potholes, twists, and turns. The journey is not a continuous smooth trajectory higher. Sometimes, share prices need to go lower, allowing for capital to flow from weak to strong hands, before it can regain its momentum higher.

Besides running a concentrated portfolio, another major component of Hazelton Capital Partners’ portfolio management is to maintain a long-term investment outlook. A good deal of thought went into determining what constitutes a “long-term” investment horizon, especially in today’s short-term focused environment. A 5-year time horizon was chosen, in part, because it reflects a classic business cycle: 1-1.5 years of contraction, 1 year of recovery and roughly 3 years of expansion. Early into an investment, it is difficult to differentiate between an investment thesis that was “too early” or one that was “just plain wrong.”

Maintaining a 5-year investment horizon not only provides adequate time for an investment thesis to develop but after 2 years, it should become clear to an investor whether one’s investment thesis is accurate or unsound. The Fund recognizes that not every position will be held for at least 5 years; however, having a long-term outlook encourages investing patience and ensures that the expected investment return is commensurate with a long-term holding period. Currently, the average holding period for our top five positions is 3.5 years.

Heineken: Family Control Provides “Capacity to Suffer”

September 7, 2017 in Case Studies, Consumer Staples, Equities, Ideas, Large Cap, Wide Moat

This post by Tom Russo has been excerpted from a letter of Semper Vic Partners.

Heineken stands out… as it surfaced several examples of how the protection of the Heineken family voting control of the public company, Heineken N.V., has enabled Heineken’s chief executive officer, Jean François van Boxmeer, and his teammates to make right decisions about how to best invest deeply for future long-term wealth of the Heineken family and shareholders of their public company fortunate enough to be treated as equal partners by the family.

I am reminded of how important the family orientation was at Heineken when I reflect back on my first visit to their headquarters in the late 1980s. When I first visited corporate headquarters in 1986, I was greeted by then Director of Economic Financial and Information Affairs, Mr. Jan Beks, who, following my introduction, looked me directly in the eyes and asked me, “Why are you here?” He meant me no ill will, he just thought it odd that an outside investor, and even more odd, an outside investor from the United States, would come to visit what was then run entirely as a family-controlled company.

Indeed, Chairman Freddy Heineken expressed this long-term focus of the company around the same time when asked at his then advanced age why he continued to work so hard. Mr. Heineken responded by pointing to a ten-year-old boy playing in a nearby sandbox and said, “To make my grandson, Alexandre’s grandchildren rich.”

I knew that I had come upon a group of like-minded family owners and non-family management when I reflected on both of those developments. This is how I began an association with Heineken, on behalf of my investors, which has remained unbroken now for over 30 years. During this time, Heineken’s share price has advanced over 25 times, compounding at an annual rate on a total return basis since 1991 of over 15 percent. Heineken shares have been amongst my top ten holdings consistently since the 1980s and remains roughly seven percent of Semper Vic’s assets today. Even though Heineken’s share price has advanced steadily over decades due to the success of investments made along the way, I do believe that Heineken’s best years are ahead of it.

We have owned, over this period, almost exclusively the Heineken Holding N.V. company shares of Heineken. Heineken Holding N.V. controls the public company, Heineken N.V., through its majority share stake. In turn, the Heineken family (and its affiliates) has controlled the Heineken N.V. company through majority control of the Heineken Holding N.V. company.

Ironically, for over 30 years, Heineken Holding N.V. shares have often traded at a discount to the operating company shares which they control. The discount has exceeded 15 percent, in some instances, even though every share of Heineken Holding N.V. economically represents a share of the more expensive public company holding.

Better alignment, reduced valuation! As is the case with Heineken Holding, I often find that I have been able to invest in family-controlled companies at discount valuations when compared to shares of their competitors in similar businesses whose share registry is fully open, without such family control. This is so, even though it is my belief that we increase, not decrease, the chance of successful returns when we “partner” with wise, able, long-term-minded families who treat outside shareholders as partners. I believe that, through such carefully selected family- controlled holdings, we have reduced agency costs and better aligned the interests of management with my long-term investors.

While I relish our long-standing ability to acquire shares in family-controlled public companies whose businesses typically enjoy better prospects for compound growth in intrinsic value on a per share basis, I find it puzzling why so many investors prefer the seemingly “professional” activities of non-family-controlled companies. I attribute the discount to investors’ general unwillingness or inability to believe that they can distinguish between family-controlled companies, where the family provides management the “capacity to reinvest” for the longest term without regard to near-term profit disruption, from those where the family treats the public company as its own personal piggy bank from which they can extract personal gain not shared equally with public shareholders whose interests they are duty bound to represent.

Company research can reveal whether families in control of public companies are fair and shareholder-minded from those prone to self-dealing plunder. I believe that time spent with management of such family-controlled public companies can reveal whether they believe the family’s presence to beneficially extend their reinvestment resolve. Where such resolve is fortified, I believe managements’ ability to profitably build future value is magnified multifold.

Harnessing the power of such family control has become increasingly the focus of Berkshire Hathaway’s investment activity. The search for new, large, privately held, family- controlled companies is the focus of most of Berkshire Hathaway’s “elephant hunting” these days. I perceive that Berkshire seeks out such family-controlled businesses when searching for companies to acquire wholly. Berkshire Hathaway seeks out such companies when doling out capital to subsidiary companies seeking to expand their own businesses through acquisition of their privately held competitors, suppliers, etc. Such formerly family-controlled companies enter Berkshire with good habits developed over years of reinvesting to make owners more long-term rich over time rather than participating in the quarterly earnings race, which ultimately diminishes the long-term value of public companies lacking such long-term focus.

Back to our Heineken Holding N.V. company investment. Three examples arose over the past six months that recognize how valuable it has been for Heineken’s management to have had the ability to invest properly for the Heineken family’s long-term wealth even when their action (and in some cases, indeed, their lack of action) placed them squarely out of step with Wall Street analysts, leaving their shares underrated as Wall Street expressed displeasure over diminished near-term prospects.

Heineken’s first example has been its relationship with Brazil. Brazil is one of the world’s top five markets for beer. Indeed, one formerly mainly local brewer, AmBev, today has grown beyond its borders to become AB InBev, by far the largest and most global brewer in the world. For years, Heineken management has been excoriated for not having a broad beer strategy for this important market. Five years ago, Heineken management received particular Wall Street heat for failing to dare to be great when Brazil’s second largest brewer, Schincariol, was offered for sale. Heineken management, criticized for unwillingness to act to grow Brazil, retreated to a strategy to grow Heineken brand slowly in high-end markets of Brazil, passing on the purchase of Schincariol, as they felt the price Kirin paid, over $4 billion, vastly overvalued the business.

Fast-forward to today, Kirin indeed overpaid. Kirin could not successfully run the acquired business given the demands and reality of a relatively complex and peculiar market structure. After four years of mismanagement and after hundreds of millions of dollars of operating losses, Schincariol offered what remained of their mistakenly acquired Brazilian business sale. Four years later, and for a mere $1.1 billion, Heineken acquired the money-losing business from Kirin.

Heineken acquired the business with enthusiasm borne by several factors. First, Heineken management knows how to run businesses in quirky, demanding markets like Brazil as they do so around the world in similarly challenging settings. Second, the acquired company will allow Heineken to more rapidly expand its already spectacular business it has built over the past five years for brand Heineken at the high end of the Brazilian market. Through the efforts of Heineken’s existing Brazilian subsidiary, Kaiser, Heineken already sells over two million hectoliters of green-bottle brand Heineken in Brazil. Finally, Heineken could not have been happier with the price it now paid for Schincariol.

It is because Heineken management knows that they have the “capacity to suffer” the significant investment (possibly as much as $1 billion), which they will need to pass through the acquired business’ income statement over the coming years to restore best practices, that I believe they were able to acquire the business at such an attractive upfront acquisition price in the first place. Other potentially interested bidders would have blanched at the burden of passing through as much as $1 billion over coming years likely required to right-size the acquired operation.

Heineken management need not face such fears, secure in the knowledge that they have like- minded owners willing to invest in building the acquired business, expanded as it will be with Heineken’s own portfolio in Brazil. Heineken management’s “capacity to suffer” through near- term burden will deliver them long-term gains on the total investment they will be fortunate enough to have made in Brazilian beer markets once the integration is complete.

Second, Heineken management was able to endure the potential risk to their own careers at Heineken of an opportunistic takeover offer over the past 18 months. As a result of significant corporate turmoil following the premature passing of the former chief executive officer of our SABMiller long-standing investment, SABMiller found itself in the uncomfortable position of being a takeover target of AB InBev. Amongst their investment banker’s recommendation for defense was a plan for SABMiller management to take over Heineken, hopefully finding refuge from a hostile takeover by launching a hostile takeover of its own.

SABMiller, however, failed to fully recognize the obvious benefit with which the Heineken family possesses in the form of 50.1 percent of the vote, which effectively allows them to block such unwelcome offers without reproach. Heineken management, secure in the knowledge that they would be protected against such advances, did not have to take any short-term steps designed to buy votes from fickle institutional investors. Indeed, the Heineken family “just said no” fully rebuffing SABMiller’s entreaties. Management was able to continue to invest in an unchanged manner throughout the “siege,” without harming long-term prospects to promise near-term better results, as other managements would have had to do if they lacked shareholder control such as that held by the Heineken family.

Heineken’s third example of management’s “capacity to suffer” surfaced when I visited with Heineken management in Vietnam. Vietnam stands for the perfect sort of market wherein Heineken has enjoyed both the “capacity to reinvest” and the “capacity to suffer,” Heineken only re-entered Vietnam as recently as 1994 and endured substantial upfront investment costs through its affiliate, Asia Pacific Breweries, to gain early leading market awareness. More recently, Heineken bore the risk of near-term declines in market profitability as they repositioned their Heineken and Tiger brands to create a new price tier at the high end of Vietnam’s beer market. Heineken prices were increased while Tiger prices were slightly reduced. Tiger’s repositioning, though margin reducing in the near term, has resulted in accelerated growth of both repositioned brands and increased profitability for the market overall.

Heineken’s family control and influence suffuses their Vietnamese operations. In the main factory, signs designed to encourage workplace safety express gratitude from the Heineken family of just how highly they value careful workplaces. They look out for their employees as evidenced by prominently displayed posters at Heineken’s Vietnam brewery entrances extolling the virtues of a safety-conscious workplace. In the main factory, Heineken’s Vietnamese teams have won Heineken’s award for most productive breweries worldwide, as they strive to invent ways, year after year, that allowed them to increase total brewery output two to three percent a year merely by running operations more effectively and efficiently. This added volume, I believe, is a return on the investment the family has made over years signaling to their workforce their care and appreciation. Finally, Heineken’s Vietnamese operations benefit from having rewarded management for working within the parameters of developing markets to insure that they take advantage of their coveted route to market advantages. Heineken alone has the market share density to allow its informal network of motor scooter-enabled agents to deliver from factory to consumer, and back to factory, reusable glass bottles of Heineken.

The velocity of the network that can reuse returnable glass bottles (RGBs), 30 or 40 times per bottle, drives economics that are amongst the most favorable in the entire Heineken global network. Indeed, as a result of Heineken’s willingness and ability to invest organically behind market-leading position, Vietnam today ranks as Heineken’s second most profitable beer market in the world. This is despite the fact that neither Vietnam’s consumer disposable income levels, nor population levels, would naturally deliver such profitability. It is the result of deep market investments in brewing, brand management, and route to market logistics that drive Heineken’s Vietnam market shares and outsized market profitability.

download printable version

Zooplus: Disruptive, Winner-Take-All Business Model

September 7, 2017 in Equities, Ideas

This post by Jake Rosser has been excerpted from a letter of Coho Capital.

“The big money’s been made in the high-quality businesses. Over the long-term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for 40 years, you’re not going to make much more than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.” –Charlie Munger

We are big fans of companies focused on widening their moat over the next decade rather than trying to top analyst estimates for the next quarter. Amazon is the poster child of such an approach, almost completely ignoring Wall Street while summarily increasing the sustainability of its competitive advantages. These types of companies often don’t screen well on valuation metrics as reinvestment soaks up capital obscuring short-term economics. For those with longer time horizons, however, such companies can represent a bargain hiding in plain sight. Zooplus, Europe’s largest online seller of pet food is such a company.

I know what you are thinking, what about the sock-puppet from Pets.com. Unlike the ill-fated Pets.com, Zooplus is profitable, earns high returns on capital (pre-tax ROIC of 25%), and has been growing its top line by over 30% a year over the last seven years. Zooplus possesses a 50% market share of the European online pet food market. It is the only European pet product vendor with scale, serving 30 countries. Growth prospects remain attractive with online penetration of pet food sales at 7%. Pet food is a natural candidate for online distribution as consumers save the inconvenience of lugging heavy, bulky bags of food from the store. This is particularly true in Europe where driving to big box stores is less prevalent than in the US.

When one considers the value proposition for Zooplus customers, the company’s market share ascendancy seems inevitable. Consider that Zooplus customers on average pay 15-20% less than at Amazon and other online/offline competitors. Not only do Zooplus customers pay the lowest prices, they also have a vastly larger selection of product with Zooplus carrying over 8,000 SKUs (European supermarkets carry 150-200 pet SKUs). As we have seen with Amazon, the greatest selection, coupled with the lowest prices, is a tough combination to beat. This is reflected in Zooplus’ customer retention rate of over 94%. High customer loyalty compounds Zooplus’ advantage over time due to the recurring nature of pet-food sales.

Zooplus’ disruptive business model has the hallmarks of a winner-take-all business. Similar to Amazon or Costco, Zooplus chooses to reinvest its profits into lower prices for its customers. Fund manager Nick Sleep referred to this concept as “Scale Economics Shared.” Scale economics shared business models are self-reinforcing, with lower prices driving customer traffic enabling still lower prices. Zooplus’ margins are illustrative: while gross margins have dropped ten percentage points since 2011, EBIT margins have advanced 5%. This is evidence of a moat that widens over time. Perhaps this explains why Zooplus has been able to keep Amazon at bay. We tend to stay away from companies in Amazon’s competitive path but we are hopeful that in this case it is Zooplus that has Amazoned Amazon.

At 5x the scale of Amazon, we think Zooplus is well-positioned to exploit its leadership position. While Amazon could engage in a multi-year price war to gain share, a more sensible approach would be to buy Zooplus outright. Historically, Amazon has shown a willingness to acquire niche e-commerce businesses such as Diapers.com and Zappos.

Given Zooplus’ first-mover advantage and widening moat, the company’s strategic value is self-evident. We believe the company’s take-out value will lend a floor to the stock. The recent acquisition of Zooplus’ US focused competitor, Chewy.com, offers insight into the potential value of Zooplus. Chewy.com and Zooplus demonstrate similar sales trajectories with Chewy.com slightly ahead with 2016 sales of $901 million and projected sales of $1.5 billion in 2017. This compares to Zooplus at €952 million in revenue for 2016 and projected 2017 revenue of €1.2 billion. Both companies have over 50% market share with Chewy.com at 51% and Zooplus at 50%. Notably, Zooplus is far more dominant with Amazon a distant number two with 10% share in the European market compared to a strong market position in the US of 35%. Given their similarities, Chewy.com is an excellent comp for Zooplus. We should mention, however, that there is one important distinction between the two companies; Zooplus has been profitable since 2013 and expanding margins every year while Chewy.com has not yet achieved profitability.

PetSmart acquired Chewy.com for $3.35 billion in April. PetSmart’s purchase price equates to a forward price/sales multiple of 2x. Applying the same multiple to Zooplus’ anticipated sales of €1.4 billion in 2018 would result in an acquisition price of €394, 156% higher than current prices. A buyout may crystalize value more quickly but is not part of our investment thesis. As the economics of Zooplus’ business begin to shine through we think the company will compound value at 15%+ a year. We always like situations where our companies do the compounding for us.

download printable version

Western Digital: Uncertainty Continues to Create Opportunity

September 7, 2017 in Equities, Ideas, Information Technology

This post by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.

Over the last few months, Western Digital and Toshiba Corp have been embroiled in a legal dispute over their joint venture (JV) that manufactures NAND flash. The battle began soon after Toshiba recorded huge cost overruns and losses from the nuclear power division it purchased from Westinghouse. In order to cover those losses and underpin its balance sheet, Toshiba has been forced to sell its prized NAND Flash business that is jointly owned with Western Digital. According to Western Digital, the terms of their joint venture require Western Digital’s approval before Toshiba can sell its stake. Even though Western Digital is also one of the bidders for Toshiba’s portion of the JV, Toshiba has ignored Western Digital’s claim and has chosen a consortium that includes Bain Capital, and rival NAND manufacturer SK Hynix as its lead bidder. In May, Western Digital began arbitration proceedings over a potential sale, stalling the transaction.

With all this uncertainty, why continue to own Western Digital?

Western Digital has been a centerpiece of the portfolio for seven-and-a-half years and a top five holding for the past four years. Over that period of time, uncertainty has consistently hung over this company like the Sword of Damocles. At the time of our initial investment in 2009, Western Digital was a hard disk drive (HDD) manufacturer with a 30% market share. The major reason why the company’s stock was so cheaply priced was because the market believed Western Digital would follow the same path as Kodak and Motorola, pioneers and innovators of their industry, who failed to transition to the new burgeoning mobile world. NAND flash storage is the technology used in all mobile devices and is a more advanced technology than HDD: It is faster, lighter, has a smaller footprint, and uses less energy – perfect for mobility. In late 2015, to remedy its dependence on HDD, Western Digital announced the purchase of SanDisk (a leading manufacturer of NAND and JV partner with Toshiba).

The digital storage industry has historically been plagued with technology obsolescence, fierce competition, and quick, repetitive business cycles. These factors still exist, but their impact is muted as the industry has matured and consolidated. With the speed of technology innovation slowing, and the cost to retool becoming more expensive, the duration of a digital storage business cycle has expanded. As many in the industry have become “rational” about their investments, the peak to trough of the cycle has also become less dramatic.

Western Digital recently traded around 7x earnings and below that for earnings projected out to 2018 – Not quite the levels when the Fund initially invested in the company, but cheap nonetheless. The company’s current free cash flow run rate is $3 billion and it expects to add another $300 million from ongoing integration of both HGST and SanDisk by year end. Hazelton Capital Partners still believes there to be significant upside opportunity with our investment and is comfortable holding the position.

Consistency and Commitment Tendency

September 6, 2017 in Human Misjudgment Revisited

This article is part of a multi-part series on human misjudgment by Phil Ordway, managing principal of Anabatic Investment Partners.

download printable version

Consistency and commitment tendency is “a super-power in error-causing psychology tendencies”, “including the tendency to avoid or promptly resolve cognitive dissonance. Includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won.”

“What I’m saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort.” –Charlie Munger

Munger cited Max Planck, noting that the really innovative new ideas in physics required a passing of the torch between generations, and the Chinese brain-washing system, which maneuvered people by getting people to make tiny little commitments and then building from there to get results that were better than those achieved by torture. He also warned of making a public disclosure of a conclusion because pounds it into your own head –- “what you’re shouting out you’re pounding in.”

“The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.” –Charlie Munger

Update

Consistency and commitment Tendency is also known as “inconsistency-avoidance tendency” and related to the concepts of cognitive dissonance. The brain is reluctant to change and we see this in all habits, both good and bad. Almost everyone has many bad habits that are long held despite knowing they are bad, but few people can list even a single bad habit they have eliminated. “First conclusion bias” is a related and powerful issue, and one often confronted in courtrooms. There are also positive effects, such as the often less-than-rational commitment and fealty of teachers, employees, public servants, religious officials, etc. As usual, one of the primary thoughts comes from Ben Franklin, who advises us that it is easier to avoid a bad habit than to break it. (“An ounce of prevention is worth a pound of cure.”)

“The investor’s chief problem — even his own worst enemy — is likely to be himself.” –Ben Graham [9]

Consistency and commitment bias, confirmation bias, and bias from liking/disliking are also closely related to desirability bias, loosely defined as the tendency to credit information you want to believe. There is a subtle but important distinction between getting confirmation of what you already believe and getting new evidence that supports something you want to believe. Sometimes there is a divergence between what you believe and what you want to believe – a pessimist who expects the worst but hopes for the best – often there is a distortion causing alignment.

A recent study polled voters ahead of the 2016 U.S. presidential election. Voters who received desirable evidence that their preferred candidate was likely to win took note of that information and incorporated it into their own subsequent beliefs about which candidate was most likely to win. But those voters who received undesirable evidence barely changed their beliefs at all.[10] And the bias in favor of the desirable evidence existed regardless of whether it confirmed or disconfirmed voters’ prior beliefs. Good news is real news, but bad news is fake news.

This phenomenon of desirability bias also showed far more pronounced effects than mere confirmation bias. Evidence that merely confirmed a prior belief barely moved the needle of subsequent belief – updated beliefs changed about as much for confirming evidenced as for disconfirming evidence. And the effect was bipartisan – both Trump and Clinton supporters showed a similar-size bias in favor of desirable evidence.

“It is difficult to get a man to understand something when his salary depends on his not understanding it.” –Upton Sinclair[11]

Along the lines of Max Planck’s comments about physics, the same was true of baseball. There was an old guard that was very entrenched in its way of thinking, and it had to be killed off before the game could evolve. Billy Beane of Moneyball fame said that he was the bridge between two worlds – the former superstar prospect who looked the part but couldn’t quite produce on the field, Beane went on to hire nerdy outsiders with no athletic talent. He channeled Darwin in openly seeking disconfirming evidence. He looked for people who had no baggage or prior bias and sought to apply the base rate in various situations. He took a lot of heat from the establishment – a lot of criticism, and a lot of ad hominem attacks – but he was right and he ultimately won and he changed the way the game was played.[12]

“We try and avoid the worst anchoring effect which is always your previous conclusion. We really try and destroy our previous ideas.” –Charlie Munger, 2016 Berkshire Hathaway annual meeting

Update

The power of sunk costs is especially notable in fields dominated by long-duration research projects.

“When I work I have no sunk costs. I like changing my mind. Some people really don’t like it but for me changing my mind is a thrill. It’s an indication that I’m learning something. So I have no sunk costs in the sense that I can walk away from an idea that I’ve worked on for a year if I can see a better idea. It’s a good attitude for a researcher. The main track that young researchers fall into is sunk costs. They get to work on a project that doesn’t work and that is not promising but they keep at it. I think too much persistence can be bad for you in the intellectual world.” –Danny Kahneman [13]

Value Investors Club / SumZero / investment conferences / public investment pitches all seem designed to get our commitments pounded in publicly. There is merit, to be sure, in being forced to elaborate on an idea in a scrutinized public forum, but there is also a cost in the form of anchoring. How much harder is it to reverse field and buy or sell after having publicly committed to a position?

“I never liked talking to my LPs about ideas that I had…because you become somewhat wedded to it. It’s harder to change your mind over time. You become pre-committed to your positions.” –Todd Combs[14]

“If you speak up and put it on record, you end up getting too wedded to your thesis, and that’s dangerous. Because everything that you’re invested in is a function of the circumstances on a given day. It changes.” –Ted Weschler [15]

It’s not all bad. Most investors want or need to share their thinking with their partners. The process of writing or talking about an idea can – at least occasionally – improve the result. And publicity in prominent publications like the Manual of Ideas has undoubtedly helped me both personally and professionally. But it is a very, very tricky balance.

In general, I think Fisher is right that investors waste a lot of time and money by being irrationally tied up in their prior investment ideas. The idea of “just getting back to even” is powerful and destructive.

“More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason.” –Phil Fisher

When it comes to investments and allocations to certain projects and managers, how many of them still have capital for the sole reason that they were previously given capital?

In politics, how many political opinions or decisions would be different if not for commitment and consistency? Prior hours devoted to an argument, public appearances, lots of ego and social proof – it can all combine to paint otherwise decent people into a corner.

Facebook/Twitter posts also seem prone to this phenomenon of “what you’re shouting out you’re pounding in.”

“We know from the seminal work of Daniel Kahneman, author of Thinking, Fast and Slow, that when addressing a problem, the first thought that comes into our minds is often not the best answer we will ultimately arrive at. Our ‘fast’ brain comes up with its best approximation of the answer to a problem, but our ‘slow brain’ often has the last laugh. This raises the question of whether it makes sense to tweet…anything.” –Seth Klarman [16]

I’ve never had a Facebook account because nothing on it interests me. Twitter is a love/hate relationship for me. I find a ton of useful and interesting information on business, weather, sports. I’ve also met and interacted with some good people. But I also find a majority of the content to be a distraction, pure noise, or worse. And my rule for posting a Tweet is derived from Warren Buffett and my friend Nadav Manham at the Private Investment Brief: never say anything bad about anyone. I can’t think of a worse place to get into a war of words than Twitter. I use Twitter only to share information and pay the occasional compliment. I could spend all day going back and forth with idiots or correcting obvious mistakes being propagated by others, but where would that get me? Asynchronous communication is best used carefully and rarely.

Crossword puzzles are a favorite pastime of mine. They do fulfill some sort of urge that seeks order in chaos, but more than anything I think they’re fun and relaxing. In any case, it’s interesting how often I hear misconceptions about them from people, and I’m often asked by beginners how to improve. The short version is that crosswords are not so much a trivia contest as they are a problem-solving exercise, and the surest way to fail is to get one idea for an answer stuck in your head and torture the grid around it to try to make it work. An open, flexible mind that is not pre-committed to one answer is critical. Something as simple and straightforward as the clue “Run” could refer to the act of jogging, managing, operating, or fleeing, among several others. It could also be a stretch of time or a ravel in a knitted fabric or a path for animals. There are so many possibilities that your only choice is to wait until you have at least one more letter or hint from one of the crosses. But almost all new crossword solvers will immediately lock in on the first concept or definition that comes to mind and then try to make everything around that answer fit, even when it’s obviously not working. Experts are amazingly adept at keeping their minds completely blank. If I don’t immediately recognize the clue as answerable I move on. If possible I won’t even finish reading the clue if I don’t quickly recognize the answer because I’ve learned that once a certain idea gets in my head it is extremely difficult to dislodge it.

nextseries start series overview

[9] The Intelligent Investor
[10] https://aspredicted.org/idxgj.pdf
[11] I, Candidate for Governor: And How I Got Licked (1935), ISBN 0-520-08198-6; reprinted by the University of California Press, 1994, p. 109.
[12] Moneyball: The Art of Winning an Unfair Game, by Michael Lewis
[13] http://www.collaborativefund.com/blog/a-chat-with-daniel-kahneman/
[14] https://finance.yahoo.com/news/warren-buffetts-money-managers-todd-combs-ted-weschler-speak-142643892.html
[15] https://finance.yahoo.com/news/warren-buffetts-money-managers-todd-combs-ted-weschler-speak-142643892.html
[16] 2016 Baupost annual letter

Brookfield: Culture a Source of Competitive Advantage

September 6, 2017 in Equities, Ideas, North America, Real Estate

This post by Jake Rosser has been excerpted from a letter of Coho Capital.

With all the financial and valuation tools at our disposal as investors, it is tempting to think of the act of investing as a precise science. Indeed, study after study confirms the efficacy of acquiring high return on capital companies at low valuation multiples. Such a formulaic approach might offer the illusion that investing is easy if one follows the fundamental laws of value investing. But investing is never easy. Data is backward looking and it is the future that will determine our returns. In our evolution as investors, one of the things we have discovered is that it is often the things that don’t get measured that have a greater magnitude on investment returns than what is measured. That is to say, the numbers don’t provide all the clues. It is often qualitative factors such as company culture, management’s approach toward capital allocation, or customer service, that can yield critical insights into a company’s sources of competitive advantage. In fact, an advantage premised upon qualitative factors can often be more enduring. For it is far harder to build and institutionalize these types of qualities than something like Six Sigma (GE). This realization has prompted us to pay close attention to leadership and company culture as a source of competitive advantage.

Brookfield Asset Management, a Toronto based asset manager of real estate and infrastructure, has the quantitative factors we like to see in an investment. It has an exemplary record of investment returns, having compounded capital at 19% a year under Outsider like CEO, Bruce Flatt. In addition, we can acquire shares on the cheap. From a qualitative perspective, we think Flatt and his lieutenants have created a distinct corporate culture focused on discipline, patience, reputation, and long-term results. These cultural attributes continue to define Brookfield despite its significant growth and expansion into new asset classes.

Brookfield manages $250 billion in assets in infrastructure, real estate, renewable power and private equity. The company’s portfolio comprises an impressive array of assets including telecom towers, toll roads, container ports, gas pipelines, commercial real estate, and renewable power.

The assets held by Brookfield share several attributes, including modest ongoing capital investment, high barriers to entry, and cash flow generative economics with embedded growth. They also are long-duration in nature with the real estate business supported by long-term leases while the infrastructure and renewable power businesses benefit from long-term contracts.

Brookfield is one of the largest investors in each of its investment vehicles and is well-aligned with shareholders: “We promote long-ownership stability and orderly management succession and encourage our senior executives to devote most of their financial resources to investing in Brookfield. As a result, collectively our management partnership owns approximately 20% of Brookfield.” (2015 annual report)

Unmatched Global Scope

“The World is Flatt’s: When it comes to global diversification and growth, Brookfield’s collection of real assets is unrivaled. In real estate, Brookfield owns entire skylines in cities like Toronto, Sydney and Berlin, plus malls, apartments and self-storage. But infrastructure and renewable energy could become even bigger. Globally, the company already has 36 ports, 218 hyrdro-electric plants, thousands of kilometers of pipelines and rail networks, plus cell towers, wind farms and toll roads.” —Forbes, May 2017

Brookfield’s global reach is a significant advantage in opportunistically deploying capital in markets that offer the most favorable economics. Brookfield’s offices span the globe with 100 offices spread across 30 countries. Brookfield’s mixture of global resources with local on the ground capabilities provides the company key cultural and geographic advantages. Further, Brookfield’s global footprint diversifies risks and allows the company to pick its spots.

And pick its spots, it does. Bruce Flatt and his team have shown a knack for timely acquisitions since recycling mining assets, near their peak in 2005, into infrastructure, at the time a nascent asset class. Brookfield purchased Australia’s Babcock & Brown Infrastructure Group in 2009, near the height of the credit crisis. Brookfield opportunistically acquired the debt of the second largest mall operator in the US, General Growth Properties (GGP), during the company’s bankruptcy in 2009, acquiring 35% of the company. More recently, Brookfield has been accumulating attractive assets in Brazil as the country undergoes a period of deep political and economic uncertainty. In April, Brookfield closed on a natural gas pipeline formerly owned by scandal-plagued Petrobras. That same month, Brookfield acquired a 70% ownership stake in Brazil’s leading water distribution and treatment company. With minimal competition for Brazilian assets at present, Brookfield can practically name its price, as Mr. Platt eluded to in the company’s annual report: “As we often do, we took a long-term view of the opportunity at a time when few others could, and therefore competition was limited.”

The scale and diversity of Brookfield’s assets give the company unique insights into the vagaries of the global economy. Just as railway loadings yield insights for Berkshire, so too does Brookfield’s collection of ports, railways, toll-roads and renewable energy assets. The operational expertise acquired as a result is an invaluable resource when the inevitable market dislocations occur.

Asset Management

As impressive as Brookfield’s collection of real assets is, the crown jewel of the business is the company’s asset management division. Around a decade ago, Brookfield realized that the economics of owning hard assets could be increased by managing assets for other investors as well. Rather than just manage assets for its own portfolio, Brookfield now earns a fee stream for managing the capital of others. Fee related earnings and carried interest totaled $843 million over the last 12 months and have grown at a compound annual growth rate (CAGR) of 37% over the past five years. Demand remains strong for Brookfield’s investment management services due to strong results. The company currently manages over $113 billion in outside capital and we expect this number to rise materially in ensuing years.

Brookfield’s asset management business is comprised of four publicly traded partnerships: Brookfield Property Partners (BEP), Brookfield Renewable Partners (BEP), Brookfield Infrastructure Partners (BIP) and Brookfield Business Partners (BBU). The four publicly traded investment vehicles provide Brookfield with a perpetual flow of cash, which should grow above the rate of inflation. Brookfield earns a 1.25% annual management fee based upon the value of the listed entities and generates a performance fee of 15-25% depending on the level of the dividend payout. The arrangement is attractive with Brookfield poised to extract significant future value from its partnerships even without contributing any additional capital. But there is a tactical advantage as well, since approximately half of the capital invested in Brookfield’s publicly traded partnerships is permanent. This provides the company stable funding during market upheavals and enables a long-term investment horizon.

Early Innings in Infrastructure Investing

After years of chronic under-investment in areas such as power grids, water distribution, ports and transportation there is substantial scope to increase funding for infrastructure. The need is particularly acute in emerging markets where growing populations, coupled with tighter integration within the global economy, are straining existing assets. A study by McKinsey suggests annual spending of $3.3 trillion dollars a year is needed just to maintain existing rates of economic growth with $57 trillion needed by 2030 to account for economic growth.

Given the sums involved we expect governments to increasingly turn to institutional investors to close funding gaps. It is a good match. Institutional investors are wary of fixed income after a 30-year bull market in bonds and are looking for a new asset class with a similar risk profile. Infrastructure offers high visibility due to long-term fixed cash flows and typically provides strong protection against inflation due to contractual escalators in pricing. Investors are also fond of infrastructure investing due to its high barriers to entry and focus on essential services.

The case for infrastructure investing is compelling. The inputs are in place for a multi-decade ramp in spending and perhaps no one is better equipped to benefit from the opportunity than Brookfield. Brookfield has a formidable head-start in the sector and possesses the finest infrastructure investment business in the world. It’s ability to conduct operations across the globe and sterling reputation leave it well-positioned to capture a substantial share of the economics. Further, Brookfield’s network of relationships with 450 sovereign wealth funds, pension funds and endowments provides it ready access to capital. Last year, Brookfield raised $14 billion in capital earmarked for infrastructure investment, nearly a quarter of all the funds Wall Street committed to infrastructure last year.

Valuation

For the last twelve months, Brookfield’s funds from operations (FFO – FFO is akin to a price/earnings equivalent for the REIT industry. Although Brookfield is not a REIT, its holdings of real assets make REITS a suitable comp) were $3.15 per share for an FFO multiple of 12.4x. This compares to an average REIT multiple of 18x. We think this is an average price for an exceptional business. The FFO measure is imperfect, and much like Berkshire prefers book value (also imperfect) as the best measure of its business, Brookfield believes FFO best captures the progress of its business.

Another way to think about valuation is to add the International Financial Reporting Standards (IFRS) equity value attributable to Brookfield and separately value the asset management business. As of the first quarter, 2017, Brookfield had $31 billion of its own assets invested across Brookfield vehicles. The asset management business generated $691 million in fee related earnings. If we apply a 15x multiple on Brookfield’s fee related earnings we arrive at a value of $10.4 billion. Together, with Brookfield’s investments of $31 billion, we arrive at a total valuation of $41.4 billion. This compares to a current valuation of $34.3 billion.

Bruce Flatt has built a winning culture at Brookfield focused on the long-term and partnering with shareholders. We believe Brookfield will be the partner of choice for an exponential increase in infrastructure investment opportunities. We also believe the scalability and negligible capital needs of the asset management business are poised to deliver attractive economics.

When asked in a Globe and Mail interview if he had any hobbies, Flatt answered “collecting shares” of his company. It is that kind of singular devotion that has enabled Flatt and his team to turn Brookfield Asset Management into a wealth creation machine. We are glad to be along for the ride.

download printable version

EnerNoc Case Study: Ill-fated, Mistimed, Wrong Investment Thesis

September 6, 2017 in Case Studies, Energy, Equities

This post by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.

Hazelton Capital Partners was researching the renewable energy sector when we discovered Enernoc, a provider of energy intelligent software and demand response solutions. From 2005 to 2014, Enernoc increased its revenues from $10 million a year to over $470 million, by participating in a niche segment of the electricity industry – Demand Response. Demand Response is a tool employed to reduce electricity usage during times of peak demand. For eight months out of the year, an electrical grid will operate around 60% of its peak capacity. However, from June through September that number will often spike up to and above 100% during periods of sharp demand (heat waves), making the grid unstable. In preparation for higher electricity demand, grid operators will conduct a yearly forward capacity auction. The auction brings together suppliers of electricity and companies like Enernoc, who are willing to provide a reduction in demand. Suppliers indicate how many megawatts of electricity they will add to the grid and at what price, while Enernoc will offer to reduce megawatt capacity at a specific price. When the grid operator achieves the number of megawatts needed (both from supply and demand reduction), a clearing price is set.

Knowing the exact amount of megawatts it will need to reduce when called upon, ENOC reaches out to its 6500 commercial and industrial (C&I) clients to see who is willing to reduce their electrical consumption, by how much, and for what price. During a Demand Response event, Enernoc will be contacted and told the start time, the number of megawatts of reduction and an approximate end time. The company will communicate with its clients and execute preestablished protocols (example: turn down lighting, shutting down elevator banks, reducing air conditioning usage to 70%). In total, demand response events take place between 5-6 times a year and last, on average, for less than three hours. ENOC gets paid both for agreeing to provide capacity reduction and for the actual reduction. The revenue earned is then split with Enernoc’s C&I clients. Since capacity auctions happen 2 years in advance, Enernoc and the market have clear optics into its future revenue streams. Having grown quickly over the past 10 years, Demand Response has become a mature market of approximately $1.4 billion and is expected to continue to grow by 6% a year. With its 35% market share representing 80% of its yearly revenue, ENOC began to diversify by expanding both internationally and into energy software.

In 2014, Enernoc, through acquisitions and organic growth, expanded its software solution programs into a newly launched Energy Intelligent Software (EIS) suite. This reconstituted EIS platform was designed as a SaaS (software as a service) subscription model focusing on how a company procures its electricity, how much it procures, and when it uses the electricity. Energy software is approximately a $5 billion market in the US and $20 billion globally. Recognizing a similar growth trajectory to that of the early days of Demand Response, Enernoc decided to ramp up its offering and establish a strong foothold. Hazelton Capital Partners’ investing thesis was centered around the belief that Demand Response would continue to drive Enernoc’s revenues in the short-run, but within 4-5 years, EIS contribution would help double revenues by representing 50% of its revenues.

Unfortunately, Hazelton Capital Partners’ investing thesis was ill-fated, mistimed, and wrong. The expected EIS growth never materialized as software revenues declined in 2016. What was not fully appreciated in our investing thesis was the significant negative impact a sharp decline in energy prices would have on the EIS business model. Throughout 2015 and into the first quarter of 2016, both oil and natural gas prices declined to levels not seen since 2002. The reversal in energy prices made Demand Response less appealing and the need for EIS a much harder sell. Many of the companies that were already piloting Enernoc’s software in a limited number of locations decided to delay any further deployment. The steady decline in energy costs caused businesses to focus on improving sales and margins which have a more significant impact on their bottom line than upgrading energy procurement or monitoring usage. Prior to launching its EIS platform, ENOC ramped up its sales and marketing team in anticipation of the flurry of demand. By the end of 2016, facing the anemic growth of its software suite, Enernoc reduced its sales and marketing staff by 40%. Some of that decline was from overlapping roles from previous acquisitions, but the majority was right sizing the company’s current staffing needs.

Over the two years that Hazelton Capital Partners held shares of ENOC, the fund opportunistically bought and sold shares reflecting our lowered intrinsic valuation while improving our overall cost basis. However, given that our investment thesis was no longer valid, the Fund began looking for an exit strategy and found it on June 22nd, when Enernoc announced that it had agreed to be acquired by the Enel Group for $7.67/share. In total, Hazelton Capital Partners lost approximately 15% on its investment.

On Deep Work

September 6, 2017 in Letters, Reading Recommendations

This post by John Huber is excerpted from a letter of Saber Capital Management.

I recently read a good book called Deep Work. The book is about increasing productivity by prioritizing your time, trimming the “fat” out of a work day by avoiding distractions, and focusing more intently on important projects. Each year I set a few goals, but one goal that always is on top of my list is very simple: “Get Better”. I try to refocus each year on self-improvement, looking for areas where I can improve as an investor. The ultimate objective here is to expand my list of companies I follow (and sharpen the understanding of those already on the list). This increases my opportunity set for potential investments.

This year, my focus is to make a conscious effort to do more deep work – read more books, dig deeper into companies and subjects, minimize busy work, and cut distractions that tend to keep a lid on productivity and creative thinking.

One of the things I’ve always loved about business and investing is that they have something very much in common with other things I like such as athletics, music, and chess – and that common denominator with all of those endeavors is that there is always room for improvement. These are examples of crafts – and the way you improve your craft is by practicing.

And unlike Allen Iverson, I’ve always loved practice. Practice is where you get better, and I’ve always felt the greatest satisfaction comes not necessarily from the achievement (although that is the ultimate end-goal), but often from the noticeable self-improvement that happens from time to time along the way.

To summarize this concept with a more practical question: How does an investment manager best position himself or herself to achieve great results? One way is to do more focused practice – that is, engage in more “deep” work and less “busy” work.

Original disclosure: Returns are based on the “Saber Capital Portfolio”—a real money account that is managed alongside all other accounts. I also refer to this as Saber’s model portfolio. Performance data of this account is produced directly from Interactive Brokers. Returns are not audited. It is important to note that each client may experience slightly different results from the model depending on the timing of deposits, withdrawals, the opening/closing of the account, the fee structure specific to each account, and other timing issues. The valuations of your investments at the time of purchase may be significantly different than the valuations at the time of purchase in the model because of these timing issues. I expect the net results of the model account to roughly equal the results of client accounts over time, although there can be no guarantee because of the timing issues referenced above. The gross returns of the Saber Capital Portfolio are taken directly from Interactive Brokers. The net returns are estimated using a 1% management fee and 15% performance fee. Your net returns could vary from the model depending on the fee structure of your account. Your personal account statements with your account specific performance net of all fees will be coming in the mail each quarter, and can also be accessed anytime online. Please note that any performance fees earned during this year will show up in the following year’s 1st quarter statement. Also note that the time weighted return (TWR) on your account specific performance summary is net of all fees.

MOI Global