EVP: In Search of Value - Mark Bole

The last year has seen individual and institutional investors rethink their attitudes towards risk. Investors still want return on investment, but they also need better information on how their money is being invested, as EVP's Mark Bole explains to Jim Banks.

As if confidence in the financial markets had not been shaken enough by the sudden turnaround in the global economy and the squeeze on liquidity, the $50 billion fraud allegedly perpetrated by the Madoff firm has caused investors to become even more cautious about where they put their money. No longer just chasing the highest possible returns, many are now looking for security and risk control as much as for growth.

The market has realised that if something seems too good to be true, it probably is. Nevertheless, the change of priorities among informed investors has brought to light the proven track record of investment strategies that achieve a better balance between transparency, risk control and growth.

Funds that offer transparency have great appeal in the current climate and some forward-thinking investment managers have found the right formula to deliver capital preservation, open communication with clients and a clear focus on long-term results.

‘Our investment philosophy, our structure and our client communication are all based on full transparency. This is especially important with the concern in the market over opaque investment strategies and structures, which comes from the hedge fund fallout and the Madoff case. We haven’t done this because we think it’s what the market wants, but because we firmly believe this is the best way to operate for our clients,’ says Mark Bole, CEO of boutique investment firm European Value Partners (EVP).

‘We also have the right oversight to ensure the safety of our clients’ assets and the integrity of our products,’ he adds. The investment approach that defines EVP is known as value investing.

The investment team looks for assets with strong earning power that is significantly undervalued by the stock market. EVP seeks out listed companies that are undervalued by 40-50%, and that have the ability to generate strong discretionary cashflows.

A select group of companies is chosen, following a rigorous due diligence process and close communication with management teams, with a view to a three-to-five year investment.

More important than the potential to increase profit in the short term is the strength of a company’s business model and its ability to create a sustainable competitive advantage which ultimately will lead to superior returns over time.

There is no sector bias to the investments, although some industries are less likely to have meaningful positions in the portfolio because they rarely support the kind of fundamentals EVP is looking for. Oil and other bulk commodity producers, for example, do not feature significantly because they are typically too dependent on the development of the price of the underlying commodities. For obvious reasons there are also no banks in EVP’s portfolio at the moment.

Value investing is the methodology behind the EVP Polaris Equity Fund, which was launched in April 2008 and is backed by EVP’s own capital. So far, its performance has been exceptional.

‘It is now 20% better than average equity market returns. To launch a fund successfully during a strong market correction means managing it in the most flexible way possible,’ says Bole. The structure that affords that flexibility is the specialised investment fund (SIF).

Revenge of the SIF

SIFs are only for informed investors as defined by Luxembourg law. Consequently, Polaris is not available on the retail market. It is aimed only at institutional investors and high net worth individuals outside the US. For those investors it offers advantages over typical mutual funds.

‘Most equity mutual funds have restrictions on the amount of cash they can hold in the portfolio which means that they are less flexible in a downturn. The beauty of the SIF structure is that there are no such restrictions, so we can have full discretion over how and when the capital is invested,’ explains Bole.

The fund incorporates a typically tight group of stocks. All investments must have a high level of conviction to attract EVP’s investment managers Tom Stubbe Olsen and Léon Kirch, whose approach has already ensured that Polaris is performing well. Olsen and Kirch will not be too carried away with these short-term results, however, as their sights are always set on longterm value.

The fund’s performance is not due to riding trends in the equity market, but is dependent on the stockpicking skill of the investment team, which is based on an in-depth understanding of the companies it targets and a personal philosophy that prioritises capital preservation.

In analysing the value of a potential investment, Olsen and Kirch are looking for a company that can not only generate cashflow but also has sound operating structures, a resilient business model, visionary management and a distinctive portfolio of products and services. The end result is a clear understanding of the earning power of the various companies in the portfolio as well as those in their pipeline of potential investments.

While there is a strict method to their investment decisions which are rooted in the Graham and Dodd approach to investing, Olsen and Kirch must also call on their experience which is crucial in avoiding the many pitfalls often laying concealed in a downward market. EVP is fully focused on building wealth for their clients over time, but emphasise that they do not expect to have positive returns every single year.

‘We are prudent in the timing of investments, which is good for capital preservation. Some undervalued firms get hit in a recession, too. That said, there are more opportunities in the market now than there have been in many years,’ says Bole.

‘We only invest when it makes sense for us. It is early days, but the structure at EVP, our independence and our sole focus on investment management means that we can avoid many of the value traps in a falling market. We are not driven by any benchmarks, and we always look for our margin of safety,’ he adds.

That independence is also vital to EVP’s approach to client communications, as it ensures that there is an open dialogue in which investors are always aware of any change in the portfolio and can regularly check its performance.

The value of experience

The success of Polaris should come as no surprise given the experience on which EVP’s investment team can call. Olsen devised the investment style of EVP during his time in charge of value funds at Nordea, where he found a kindred spirit in Kirch. In the ten years since Olsen began managing Nordea’s European Value Fund they have a ten-year history of outperforming the market by an average of 400 basis points annually.

Furthermore, their experience encompasses many challenging periods in global financial markets, notably when Olsen managed Nordea’s Far Eastern Value Fund through the Asian financial crisis. That experience helped lay the foundation for the investment principles that now drive EVP.

The firm exists to do one thing – value investing in European equities. All of its efforts are geared towards doing that one thing as well as possible, whether that means a precise and clear execution strategy or communicating directly with clients on a regular basis to ensure that they know exactly where their money is invested.

Despite the impressive performance of the Polaris fund so far, EVP firmly targets its products at investors who share EVP’s long-term investment horizon. The aim is to stay with companies until their value is realised which typically takes three to five years. The intention is to balance risk and return through a structure that is flexible enough to allow Olsen and Kirch the freedom to apply the principles of their investment strategy to generate long term results.

‘We are focused on controlled growth. We are not asset gatherers. To build wealth you need patience and discipline, so we are very prudent with our assets, says Bole. EVP’s success so far is a validation of the principles of value investing when combined with a flexible and transparent structure. While EVP believes their approach is relevant in all market conditions, these difficult times serve to increase the appetite for investment managers who combine value investing with transparency.

Mark Bole Mark Bole, CEO of boutique investment firm European Value Partners (EVP).