Exclusive Interview with John Heldman

We recently had the pleasure of interviewing fellow value investment manager John Heldman, President of Newport Beach, California-based Triad Investment Management. The firm was established in 2008 and has $117 million in assets under management. John brings decades of experience to the management of investment portfolios. Prior to founding Triad, he was a Senior Vice President and Portfolio Manager with Neuberger Berman. John has also managed investment portfolios for Deutsche Bank, Scudder Investments and Bank of America, including managing equity funds and serving on the Equity Strategy Committee. He obtained his BS degree in Finance and MBA from California State University, Long Beach. John is a CFA charterholder.

The following transcript of the full conversation has been edited for space and clarity.

The Manual of Ideas: Please tell us about your background and the genesis of your firm. What motivated you to set up Triad and what operating principles have guided you since then?

John Heldman: I have been in the industry over 27 years, having worked at a handful of large firms, including Bank of America, Scudder Investments, Deutsche Bank, and most recently, Neuberger Berman, which I left in early 2008 to form Triad Investment Management. It was the best career decision I’ve made, not just for me but also for our clients. I appreciate the opportunity to be entrepreneurial and the autonomy of running my own firm. We have much greater investment flexibility. And we have terrific, loyal long-term relationships with clients who give us the latitude to do what’s best and have the necessary patience to allow our process to work. Our principles are staying focused on the investing process, keeping other distractions to a minimum, and communicating clearly and candidly to our clients.

MOI: How do you generate investment ideas?

Heldman: We annually review thousands of companies by reading corporate annual reports, SEC filings, and reviewing Value Line reports. In addition, we subscribe to an extensive number of newspapers, magazines, periodicals, etc. We read extensively including general publications to understand broad economic trends and specific periodicals to deepen our understanding of certain industries. We are always looking for businesses that meet our criteria with the understanding that one day we will likely get an opportunity to invest in the business. So we have accumulated a body of knowledge about a wide range of businesses. If we can understand the business, it demonstrates growth and durability, has above-average profitability and shareholder-oriented management, it becomes part of our roughly 250 company universe. Once a business makes the qualitative cut, then we focus on valuation.

MOI: What are your key stock selection criteria, and what types of businesses have you favored historically?

Heldman: We favor understandable businesses with durable, well-protected moats, where we can understand how the moat was created and what is likely to sustain it. Evidence includes high profit margins, relatively low competitive intensity and usually free cash flow generation. Once we identify companies that seem to have the right characteristics, we read five to ten years of annual reports, 10-K’s, company presentations and other materials that can provide further insight into the competitive strength and durability of a business, along with management capability and culture. We must feel comfortable with the long-term economics of the business, which means the company occupies a reasonably strong competitive position and will get a fair share of industry growth over the next three to five years. We develop an estimated three-to-five-year price target and daily rank each stock on that basis. Subject to a reasonable level of sector/industry diversification we select 20 to 30 companies with the greatest potential.

We prefer businesses that aren’t subject to heavy government regulation, so we avoid many areas of healthcare, and almost all utilities and telecommunications. We also favor capital-light businesses that don’t require high mandatory capital investment for plant and equipment, inventories and accounts receivables. We seek businesses where the cash flow that’s generated is in excess of what is needed to maintain and grow the business. We also like recurring revenues and fee-based businesses where customers are locked in contractually or otherwise for long periods of time. And we like certain cyclical businesses because many investors have difficulty valuing them when earnings are temporarily depressed, or where patience is in short supply, creating long-term opportunity for us.

MOI: How do you assess the quality and incentives of management, and what CEOs do you admire most?

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