Setanta Under the Bonnet 21.06.12 Final€¦ · Value is more than a number 1. Bruce Greenwald: Biography Source: First Eagle Funds Greenwald 1 How do we invest? In conversation with

www.setanta-asset.com Value is more than a number

Setanta under the bonnet

21st

June 2012

Subject Section Page Description

Value Investment

Philosophy

Greenwald 1 2 How do we invest?

Klarman 1 3 Value Investment Philosophy.

Buffett 1 5 What makes a great investor?

Smith 1 13 Smith describes the value investment approach and how

he applies it in Setanta.

Buffett 3 6 Buffett talks about competitive advantage and mistakes.

Buffett 5 6 Buffett highlights value investment thinking on

residential property.

McLennan 1 9 McLennan talks about uncertainty and owning scarcity

to preserve purchasing power.

Risk Klarman 2 3 Value Investment Philosophy and Risk.

Buffett 2 5 Buffett talks about volatility.

Whitman 1 7 Whitman talks about Definition of Risk.

Macro Economy Munger 1 4 How Munger and Buffett think about the macro

economy.

Greenwald 2 2 Greenwald discusses government debt and method to

hedge against deflation and inflation.

Buffett 4 6 Buffett talks about countries debt, inflation and the

dollar.

Marks 1 8 Marks talks about using second level thinking on Europe.

Time and timing Ackman 1 11 Ackman talks about Investment horizon.

Klarman 3 4 Philosophy of Timing. When do you buy?

Chou 1 10 Chou shows how even the best underperform.

Overconfidence

and Hubris

Marks 2 8 Marks talks about danger of overconfidence and hubris.

Value Bonds Blaabjerg 1

12 Blaabjerg discusses the case for Value Bonds.

1


1. Bruce Greenwald:

Biography Source: First Eagle Funds

Greenwald 1

How do we invest? In conversation with John Authers from the FT

Time: From 1min to end

Link: http://www.youtube.com/watch?v=YRWhEMEhVwI

Learning Points:

• Focus on unloved stocks

• There are behavioral reasons people don’t behave rationally

• Average return for all investors will be that of the market

• Have to ask: ‘What is this stock worth?’

• When valuing stocks look for things you know

Greenwald 2

Greenwald discusses government debt

and method to hedge against deflation

and inflation.

Interview

Time: From time 0 to 3.20mins

Link: http://www.youtube.com/watch?v=pA96TLL4msc&feature=related

Learning Points:

• Main macro risks are Inflation and deflation

• Quality stocks will raise prices in deflationary environment and inflationary environment

• ‘(US) Government debt poses a high risk of permanent capital impairment’.

2


2. Seth Klarman

Klarman 1

Value Investment Philosophy Harvard Business School Video

Time: Total Video 1.30mins

Link: http://institutionalmemory.hbs.edu/leadership/investment_philosophy.html

Learning Points:

• Value driven philosophy

• Stay away from the mainstream

• A good investor is cautious

Klarman 2

Value Investment Philosophy and

Risk

Richard Ivey Business School - Ben Graham Centre for Value Investing

Time: From 1.57mins to 3.28mins

Link: http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2009/Klarman_2009.htm

Learning Points:

• It makes sense to think risk first, return second.

3


Klarman 3

Philosophy of Timing. When do you

buy?

In conversation with Charlie Rose

Time: From 30min to 31.14mins

Link: http://www.facing.org/video/klarman

Learning Points:

• Does not believe he can time markets

• Always recheck your work

3. Charlie Munger

Source: Buffettsecrets.com

Munger 1

How Munger and Buffett think about

the macro economy.

In conversation with Becky Quick University of Michigan (2010)

Time: From time 9mins until 10.02mins

Link: http://www.youtube.com/watch?v=K6RS_PqudxU&feature=related

Learning Points:

• Adopt the other system

• Plan to play game for long term

• Illusion to outguess macro economic cycles

• Swim as competently as you can – over long life you will have your share of good tides and bad tides

4


4. Warren Buffett

Source Wikipedia

Buffett 1

What makes a great investor? Interview with students in India


Link: http://www.youtube.com/watch?v=4xinbuOPt7c&feature=related

Learning Points:

• Need to be able to detach yourself from the views of others

• Come to own conclusions based on facts – otherwise walk away

Buffett 2

Buffett talks about Volatility Interview with students in India


Link: http://www.youtube.com/watch?v=4xinbuOPt7c&feature=related

Learning Points:

• Volatility is the friend of an investor

• But you can turn it into your enemy

5


Buffett 3

Buffett talks about competitive

advantage and mistakes

Interview

Time: From 0 to 2.5mins

Link: http://www.youtube.com/watch?v=VdYxVx3PHxk&feature=related

Learning Points:

• If you have a wonderful business it is like having an economic castle

• Need a castle with a moat around it

• Looking for an institution

• ‘Have to go into the rough occasionally to make the game interesting

Buffett 4

Buffett talks about countries debt,

inflation and the dollar

Interview


Link: http://www.youtube.com/watch?v=VdYxVx3PHxk&feature=related

Learning Points:

• National debt in the range of GDP seems fine

• It doesn’t make sense to burden future generations with debt

• Country with large amount of external debt will have temptation to inflate

• Dollar likely to depreciate over time

Buffett 5

Buffett highlights value investment

thinking on residential property

Interview


Link: http://www.youtube.com/watch?v=58-GHsG_ydw&feature=related

Learning Points:

• Highlights value investment thinking extends to other asset classes

• Purchase of single family homes very attractive

• ‘When financed with cheap 30 year mortgage this is as attractive an investment as you can make’

6


5. Marty Whitman

Whitman 1

Whitman talks about Definition of Risk Interview


Link: http://www.youtube.com/watch?v=uwbToH2TAco&feature=related

Learning Points:

• Financial textbooks refer to market risk. Third avenue strive to avoid investment risk

• Risk reward ratio only relevant when prices are in equilibrium

• The lower the price the less the investment risk

• Whitman believes you need to put an adjective in front of risk

7


6. Howard Marks

Marks 1

Marks talks about using second level

thinking on Europe

Interview


Link: http://vimeo.com/43452917

Learning Points:

• Has price declined sufficiently relative to reality?

• An investor must think on one hand price and on the other reality.

• If you don’t have superior insight how can something be to your advantage?

• Hard to be consistently above average regarding macro.

Marks 2

Marks talks about danger of

overconfidence and hubris

Interview


Link: http://greatinvestors.tv/video/howard-marks-on-the-twin-pitfalls-of-overconfidence-and-lack.html

Learning Points:

• Highlight the dangers of hubris

• Better to invest scared

• Most dangerous thing is to think you have it figured out

• Must have a strong enough ego to stand out from the crowd

• Charlie Munger ‘Anyone who thinks this is easy is stupid’

• Some people get it, some people don’t

8


7. Matthew McLennan

McLennan 1

McLennan talks about uncertainty and

owning scarcity to preserve purchasing

power.

Interview


Link: http://www.executiveinterviews.com/delivery/v1/mini/default.asp?order=U14477a

Learning Points:

• Owning supply constrained dominant business is way to protect from printing press.

• Own business model that is hard for a competitor to replicate.

• When you own scarcity you are going to preserve purchasing power over the long term, providing

you bought at the right price.

• Long term treasuries are priced to deliver a negative real return

• Our crystal ball is foggy at best.

• If only certainty is uncertainty go back to first principles.

9


8. Francis Chou

Chou 1

Chou shows how even

the best underperform

Interview


Link: http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2009/Chou_2009.htm

Learning Points:

• Even the best investors should expect to underperform between 25 – 50%

10


9. Bill Ackman

Ackman 1

Ackman talks about investment

horizon

Interview on CNBC

Time: From 10mins to 10.40mins

Link: http://www.youtube.com/watch?v=2WRuSCCChek

Learning Points:

• Don’t think month to month or quarter to quarter

• The long term is important

• Important thing is what you are paying versus what the business is worth

11


10. Klaus Blaabjerg

Sparinvest, originating in Denmark, is an independent provider of investment management and advisory services.

Sparinvest’s products are aimed at institutional and private investors, and offered through an ever-increasing

number of European-based financial institutions, banks, savings banks asset managers, etc. Sparinvest main priority

is to generate added-value to investors through consistent performance, rather than placing emphasis on asset-

gathering or enhancing distribution. The clear objective is to continue to deliver investment products ranked among

the top third of the market. Klaus Blaabjerg has formerly worked as Risk Manager at Realkredit Danmark where his

job was to do modelling of real credit bonds and risk management of RD's bond portfolio. He has also worked at

Dansk Portfølje Bank, where he was responsible for credit bonds and macroeconomics.

Blaabjerg 1

Blaabjerg discusses the case for

Value Bonds

Sparinvest Interview

Time: From 0 to 9 mins

Link: http://www.youtuberepeater.com/watch?v=seVh1XV1PJY&name=Sparinvest+High+Yield+Value+Bonds+Strategy

Learning Points:

• Target same criteria successfully used in the stock market

– Value investing (Setanta firm ethos)

• Target strong balance sheets

– Reduces default risk (e.g. low net debt to equity / low price to book)

• Rating agnostic

– either Setanta like the name or we don’t, a rating does not equal value (e.g. offers value with

smaller companies)

• Long term bias

– Pull to par (happy to hold name to maturity if metrics remain favourable)

• Target strong covenant protection

– increasing margin of safety (e.g. buybacks on change in control / limitations on leverage

12


Rowan Smith

Smith 1

Smith describes the value investment

approach and how he applies it in

Setanta

Interview


Link: http://vimeo.com/28654782

Learning Points:

• Value investing all about helping skew the odds in investors favor

• Advantage of style is it forces you to be patient

• Business value is dependent on long term performance of the business

• A disciplined approach applied consistently is an advantage

• Risk as a concept is misunderstood

• We subscribe to the mantra that you should always be learning

• Focus 15 is relatively unconstrained – we look for low risk stocks which fit with value criteria

Compiled by: Paul McNulty CFA & Sarah Blom

Rowan Smith – Portfolio Manager

Rowan Smith joined Setanta in 1998 and has 14 years experience in the asset

management industry. Rowan is responsible for the Global Healthcare sector and

has managed other global sector portfolios in the past. Rowan co-manages Focus

15, the European fund and the EAFE fund. He gained his BA in Accounting from

the National College of Ireland in 1998 and completed the professional

examinations of the Institute of Investment Management and Research in 2001.

Setanta Asset Management Limited is regulated by the Central Bank of Ireland, PO Box 9138, College Green, Dublin 2, Ireland. This

information is NOT a recommendation to buy or sell any securities. This note, which is for information purposes only, does not form

part of any contract. This is a marketing communication that (a) has not been prepared in accordance with legal requirements designed

to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination of

investment research. The information contained in this document is based on current legislation and is, therefore subject to change.

The contents are intended as a guideline only and should not be construed as an interpretation of the law. You should always seek the

advice of an appropriately qualified professional. Performance disclosures are stated on the front page.

WARNING: Past performance is not a reliable indicator of future results. The price of units and the income from them may go down as

well as up and investors may not get back the amount invested. The return may increase or decrease as a result of currency

fluctuations. Forecasts are not a reliable indicator of future performance.

13

Documents

Setanta Under the Bonnet 21.06.12 Final€¦ · Value is more than a number 1. Bruce Greenwald: Biography Source: First Eagle Funds Greenwald 1 How do we invest? In conversation with