Dear Friends,

For the first quarter of 2019, Andvari was up 28.1% while the S&P 500 was up 13.6%.¹ The table below shows Andvari’s composite performance figures against three benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.

Andvari’s performance in the first quarter was excellent for several reasons. First, we had the benefit of starting from a low base given the negative performance in the fourth quarter of 2018. Second, many of Andvari’s holdings experienced a confluence of positive news and results. Finally, for some of the taxable accounts Andvari manages, we took on leverage to invest in several companies whose share prices had fallen far too much. Most of these accounts are up 36% in the first quarter.

Andvari’s Holdings

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The Hidden Cost of Friendship

Over the last decade, I’ve spent a lot of time to find and research companies that have the potential to produce great returns for Andvari clients. Markel is and was one of those companies. Following a similar strategy as Buffett’s Berkshire Hathaway, Markel has focused on underwriting profitable insurance and then using that float (the money that an insurance company holds onto between the time customers pay premiums and the time they make claims on their policies) to acquire non-insurance companies and to invest in publicly-traded securities.

I purchased my first block of shares in 2010 and a few current Andvari clients acquired shares soon after. I’ve traveled to Richmond, Virginia half-a-dozen times to attend the annual Markel shareholder meeting. It’s been awesome meeting directors and senior management of Markel over the years. I’ve also enjoyed meeting and chatting with other fellow shareholders, some of whom have become great friends. There are many positive associations I have with this company.

However, as an adviser charged with providing my clients the best returns possible per their guidelines, I know that becoming “friends” with an investment has the potential to cloud my judgment. It could delay or prevent me from seeking out better opportunities to the detriment of myself and Andvari clients. In most circumstances when it comes to money, the less emotion involved the better.

Andvari started selling Markel shares in 2016 and accelerated the selling in 2018. We are down to less than thirty shares in a handful of taxable accounts. So why sell shares of a great company that has gone from $330 per share in 2010 to $1,200 per share in 2018?

My primary reason for selling was the “talk-to-walk ratio” of Markel management becoming noticeably out of whack. I score them very highly on sincerity, honesty, thoughtfulness, having a willingness to accept blame for mistakes, and a willingness to do whatever it takes to fix a problem. Markel is head and shoulders above almost every other public company in terms of telling a great, pro-shareholder story. But when a company like that fails to deliver long-term returns to its shareholders that are no better (or not much better) than a market index, one should ask “What is up with that?”

First, Markel’s program of buying non-insurance businesses (known as Markel Ventures) has occupied far too much time of senior management for the level of benefit it has provided shareholders. More specifically, a few problems have surfaced over the last two years. First, in the second quarter of 2018, Markel recorded $33.5 million in expenses related to an investigation and remediation of one of their Ventures businesses. In connection with this same business, Markel recorded a goodwill impairment of $14.9 million, which eliminated all the remaining goodwill. Markel never said exactly which Ventures business caused these problems, but I believe a now-former CEO at one of the manufacturing businesses deceived several customers to induce purchases of its products. These customers discovered the lie and now this company (and Markel) has been on the hook financially and reputationally.

The second and most recent snafu is regarding CATCo, a specialized asset management firm which Markel acquired in 2015. In the latter part of 2018, Markel announced that CATCo was under government investigation.  In January 2019, Markel then told shareholders that—in the course of its own investigations—they had discovered an undisclosed personal relationship between CATCo’s founder/CEO and another CATCo executive. These two executives were fired. Finally, Markel announced in February they had written the goodwill of CATCo down to zero, which resulted in an impairment charge of $179 million.

My conclusion is Markel is not as good at acquiring companies (and appropriately monitoring them post-acquisition) as I once believed. Markel has written down all the goodwill of two acquisitions and has spent money and precious time investigating and remedying these matters. However, to be fair, let’s put these mistakes into context. Several hundred million of write-downs and expenses is an absolutely large number, but it’s not even three percentage points of Markel’s $9 billion of shareholder equity at the end of 2018.

Fortunately for Andvari clients, we had already sold most of our shares by the end of 2018. As of April 10, Markel’s share price has entirely missed out on the market rally: Markel is down 5.6% while the S&P 500 is up 15.2%. Shareholders have correctly placed the company in the penalty box.

Clients do not pay Andvari to become friends with companies or the management of companies. They pay Andvari to produce good returns while adhering to their investment goals. As such, I will always strive to be unemotional when it comes to investing the money entrusted to me. I’m in a good position to do this given most of my net worth is invested in the same securities owned by Andvari clients. Despite Markel being a good company with some of the kindest and most able managers, I’ve concluded there are better investment opportunities out there.

Summary

I’m very happy with Andvari’s recent performance. We were lucky to have a handful of positive events occur in the same quarter following a quarter of negative performance. Most satisfying is Andvari’s net performance over the last 6¼ years has beaten multiple, passive indexes. Andvari has also hit a milestone of greater than $10 million of assets under management. I could not have achieved these results without the trust and confidence of Andvari clients. I am eternally thankful to them for the privilege of managing a portion of their hard-earned savings.

Sincerely,

Douglas Ott

¹ Performance data quoted represents past performance and does not guarantee future results. "Andvari Total" represents all of Douglas Ott's investment accounts and all the discretionary accounts Andvari manages where it takes an active role in picking individual stocks and receives a fee. From 12/31/12 to 4/12/13 results included only Ott’s personal and retirement accounts—the first Andvari clients transferred their accounts on 4/12/13. Andvari believes including Ott's performance figures for the first 4 months of 2013 is fair as he managed those assets similarly to later clients. Results are net of management fees (1% per annum), time-weighted, and includes all cash and other securities. The indexes are listed as benchmarks and are total return figures and assumes dividends are reinvested. The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. The Russell 2000 Index is an index of 2,000 U.S. small-cap stocks. It is not possible to invest directly in an index. Because Andvari is non-diversified, the performance of each holding will have a greater impact on Andvari's results and may make them more volatile than a more diversified index.

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IMPORTANT DISCLOSURE AND DISCLAIMERS

Investment strategies managed by Andvari Associates LLC ("Andvari") may have a position in the securities or assets discussed in this article. Andvari may re-evaluate its holdings in such positions and sell or cover certain positions without notice.

This document and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This document contains information and views as of the date indicated and such information and views are subject to change without notice. Andvari has no duty or obligation to update the information contained herein. Past investment performance is not an indication of future results. Full Disclaimer.

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