Assessing management’s skill and integrity is a process that defies quantification. We have invested hundreds of hours reviewing proxy statements over the years. Many capable investors can and do get it wrong (we are guilty as charged). Our experience tells us the best protection from a poor management team is to ensure their compensation incentives are aligned to produce good results for shareholders.
For the full year of 2020 Andvari is up 31.1% net of fees while the S&P 500 is up 18.4%.[i] We are proud to finish another year of composite outperformance against the market. The numbers also do not tell the full story. Andvari manages separate accounts for individuals and institutions with diverse needs. Many clients require fixed income exposure and less concentration relative to other accounts Andvari manages. These factors all impact the firm’s aggregate performance.
Websites that have taken the place of classified newspaper ads can earn extraordinary EBITDA margins of 50% to 70%. Think of eBay (used items), StubHub (market for ticket exchange and resale), or Apartments.com (property listings for renters). Each platform's ability to generate extraordinary profitability, however, depends strongly on the level of market share it has relative to its next closest competitor.
For the first nine months of 2020, Andvari is up 13.0% net of fees while the S&P 500 is up 5.6% (see Disclaimers at bottom). The table below shows Andvari’s performance against two benchmarks while the chart shows the cumulative gains of $100,000 investments.
The servant leadership culture at Waste Connections (WCN) is a compelling case study for its effectiveness in empowering employees. This concept also allowed WCN to continue its rapid growth via consolidation of the solid waste industry. WCN shareholders since 2004 have enjoyed 10-bagger returns.
Investors may not remember Larry Bossidy, but he is one of the great business leaders of the 20th century. Bossidy worked at General Electric for over three decades where he ultimately became Vice-Chairman. He left GE in 1991 to become CEO of Allied Signal, a manufacturer that badly needed help. His story offers tangible evidence on the power of building strong internal culture, which is a practice we value at Andvari.
Tyler Technologies possesses many qualities that make for a high quality business. The first (and often loudest) criticism we hear about Tyler is related to Valuation. We agree it does have optically high valuation multiples based on current financials. There is also a narrow gap between Andvari’s estimate of fair value and market value. However, these facts mask the opportunity to earn good returns by investing in Tyler. At Andvari, we frequently emphasize that ‘expensive-looking’ stocks aren’t necessarily bad investment opportunities. This is often a function of one’s investment horizon, which, for us, is indisputably long.
Investors might think the purpose of a company is to continually maximize profits, but the process of deliberately lowering short-term profits to invest in a brand can sometimes create enormous value over a longer period of time. This “capacity to suffer” (a phrase I borrow from Tom Russo) during a period of heavy investment is also a sign of a differentiated management team, something Andvari is always eager to discover.
Large, growing markets present obvious appeal to business leaders and investors, but the pursuit of these shiny objects can be fraught with risks of lost time and money. The scenario reminds us what specific behaviors we value in our executives.
Within all industries there is the opportunity for companies to acquire their competitors or other companies in related markets. Some may naturally be better at it than others. Andvari acknowledges that M&A is unlikely to add value, yet we hesitate to say “all M&A” is bad. If a management team has the skills and track record of creating value through M&A, it’s a rare thing worthy of attention. Enter Constellation Software (CSU:CN), a brilliant example of a company that has become the acquirer of choice for owners and founders of software businesses.
For the first half of 2020, Andvari as a whole is up 4.2% net of fees while the S&P 500 is down 3.1%. Andvari clients, please refer to your upcoming reports for your specific performance.
Within a single FTC-forced divestiture, there’s potential to examine not one, but two investment opportunities. One is the company that must sell. If it was dominant enough to merit an FTC action, it's likely to remain the dominant one in its market post-divestiture. The other is the acquiring company because it might be picking up a high-quality asset at a cheap price. The forced nature of the sale is likely to make the price cheaper than it might be in market-driven environments (and, in reality, these types of assets would not come up for sale otherwise). In both cases, the forced divestiture can be fertile ground for finding excellent businesses.
Let’s imagine a contest between a relatively obscure company founded in 1969 and Google, both battling for supremacy in providing digital mapping services and software to enterprises. Google has the benefit of hundreds of billions in revenues and the ability to hire the best engineers in the world while the older company has zero recognition outside its industry and a fraction of the earnings power. Who wins and why?
For the full year of 2019, Andvari was up 48.0% net of fees while the S&P 500 was up 31.5%.1 The chart shows the cumulative gains of hypothetical $100 investments.
Yesterday, the Justice Department filed suit against S&P (owned by McGraw Hill) alleging that the largest U.S. rating firm "falsely" represented that crisis-era credit ratings on complex securities "were objective, independent" and "uninfluenced by any conflicts of interest." Deal Journal has some excellent excerpts from the complaint.
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