Nielsen FCP - Global Value

Transcription

1 Investment Manager`s LETTER TO SHAREHOLDERS Nielsen FCP - Global Value : Safety first

2 Dear Investors and Partners The net asset value per investment unit rose by 6.87 % in 2014 against a comparable return achieved by the general stock markets, measured by the performance of the MSCI World Index Local (MSCI WIL) which came out at 9.81 %. Based on a monthly average, 62.5 % of the Fund was invested during From the establishment of the Fund in December 2008 and till the end of 2014, the return averaged % per annum against an annual return of % achieved by the MSCI WIL during the same period. The relative return achieved by the Fund during the period is not satisfactory. However, it s worth bearing in mind that we achieved our return at a lower risk, as the investment ratio of the Fund was relatively low. My first priority remains the maximization of the Fund s average annual return in the long term, but the Fund s longterm success will depend on whether the Fund s full assets will also be able to generate a return in excess of the one generated by MSCI WIL. I thank you for your anticipation and confidence that that will be the case. Below I have provided a comparative overview of the Fund s returns and investment ratios over the years: Jahr Return Nielsen FCP - Approx. Investment Ratio MSCI WIL Return Global Value ,87% 63% 9,81% ,61% 65% 28,87% ,41% 84% 15,71% ,03% 86% -5,49% ,77% 85% 10,01% ,94% 73% 25,73% ,43% 60% 4,65% p.a. 10,98% 14,20% approximate accumulated return after costs of 140 % against 124 % for MSCI WIL, corresponding to an annual return of 15.5 % for the Fund s stock investments against 14.2 % for MSCI WIL. My bias towards conservatism, which influences the price that I am willing to pay for a company, also applies to the Fund s liquidity. Looking back, it s quite clear, though, that we would all have been better off, if the Fund had been fully invested for the period. I refer you to the Management Report for 2013 for my thoughts on holding liquidity. Our distinct safety orientation means that we do not join the markets in a hype. Investments I adhere to a concentrated portfolio and we have 12 companies in the portfolio. The five largest positions totaled 41.8 % of the portfolio, and the ten largest positions made up 61.6 %. With so few companies, the return of the Fund may vary significantly from the general stock markets (as measured by MSCI WIL) from one year to the next. Perhaps even for longer periods. Even though our aim is to generate an absolute return, I hope and trust that an accumulation of the discrepancies will prove to be in our favor in the long term. When adjusted for its liquidity ratio, the Fund s stock investments have generated an 2

3 I have listed below our ten largest positions and the percentage of the Fund that each individual company makes up: Company Sector Percentage of the Fund AMERICAN INTL GROUP INC Insurance 9,9% FAIRFAX FINANCIAL HOLDING Insurance 9,9% ADMIRAL GROUP PLC Insurance 9,6% RINGKJÖBING LANDBOBANK A/S Banking 7,4% ALLEGHANY CORP. Insurance 5,0% THOR INDUSTRIES INC Industry 4,7% NORDEA BANK AB Banking 4,5% BANK OF GREENLAND A/S (THE) Banking 3,9% CALBEE INC. Nahrungsmittel 3,4% CONZZETA AG Industrie 3,4% The five largest positions are: American International Group: leading international insurance company represented in over 130 countries. Since 2008, AIG has been going through a rationalization process selling off non-core activities. The management is focusing on cost reduction and restrained pricing of insurance risk with the objective of achieving a return on equity of between 10 % and 15 %. The company is priced at 0.72 times shareholders equity. Fairfax Financial Holdings: holding company for a number of insurance companies in North America. The members of the management team are shareholders in the company themselves, and it is a very owner-oriented company. Focusing on the float from the insurance companies and value-oriented investment with a firm eye on producing absolute return, management has on average increased its book value per share by over 20 % per year since Originally, we invested in Fairfax at a large discount compared to the company s equity and at an even greater discount vis-à-vis its intrinsic business value. Fairfax is now priced at 1.3 times shareholders equity. Admiral Group plc: Britain s most profitable motor insurance company. Admiral focuses on low costs, selling directly to the consumer, good customer service and high return on equity. Since it was established in 1993, the company has enjoyed very high growth with a market share rising from 0 to 11 %. Admiral is priced at 8.7 times cyclically low operating income. Ringkjøbing Landbobank: regional bank, which is Denmark s most profitable credit institution. The management focuses on very high credit quality in its loan portfolio and stringent cost management. Despite high solvency, the bank has produced a high return on equity. We ve invested at prices below shareholders equity, and the bank is currently priced at below 9 times estimated earnings. Alleghany Corp.: holding company with investments in insurance companies, including Transatlantic Holdings, which is among the world s ten largest reinsurance companies. Alleghany has the same business model as Fairfax and Berkshire Hathaway with focus on disciplined insurance operations and investment of the float from the insurance business with a view to achieving high return on equity in the long term. Alleghany is priced at 1.0 times shareholders equity. With a weighting of 50.2 %, it s clear that banking and insurance still make up a relatively large proportion of the Fund: four insurance companies totaling 34.4 % and three banks adding up to 15.8 %. Other industries make up the remainder of the portfolio, representing 16.1 % of the value, while cash and short-term money market instruments add up to 33.7 %. 3

4 As our portfolio is so concentrated, there may be situations where increases in individual companies stock prices or relevant exchange rates make us break the % rule. According to this rule, more than 10 % of the Fund may not be invested in one position, and the positions that individually make up more than 5 % may not total more than 40 % of the Fund s assets. Whenever this happens, the portfolio is adjusted. We have sold our position in Tokio Marine and reduced our position in Conzzeta. In addition, in order to observe the % rule, we reduced our position in Nordea Bank and invested the proceeds in the Admiral Group. We bought our first shares in Admiral in February and increased our position significantly in the second half of The Security I Like Best This was the title of an article published in the Commercial and Financial Chronicle on December 6, The author was entirely unknown at the time, but he has since become a household name: the investor Warren Buffett. The article was on the company Government Employees Insurance Corporation, these days better known by the abbreviation GEICO, which at the time was a listed and highly profitable motor insurance company in which Warren Buffett was an investor. Many years later and following a complete takeover in 1995, GEICO is now a subsidiary in Warren Buffett s holding company Berkshire Hathaway. The sentence The Security I Like Best includes three factors: a company, a financial instrument (security) and a price. There are many companies that I find interesting based on their business models and managements, and they are all listed and have therefore issued shares. Some of these we have already invested in. But most of the time, the third factor, that is the price, proves to be the stumbling block, as the price is higher than the level at which we want to invest. As you all know, our investment philosophy demands a low price in order to ensure that our investment has the necessary safety margin. There are high requirements for a share to become the Security we like best. We invested in the British company Admiral Group plc in Initially the size of our position represented just below 5 % of our Fund s total value, but later in the year, we doubled our position to just below 10 %. At the moment, I would describe this investment as The Security I Like Best. Strangely enough, Admiral is also primarily a motor insurance company, and even though Admiral also focuses on selling directly to the consumer without the use of agents, just like GEICO, then the business model is somewhat different. With a history going back to 1993 and the subsequent management buyout in 1999, Admiral had and still has the clear objective to focus on low prices and good service. The company concentrates on selling directly to the consumer without the aid of a network of agents. The management s view was and remains that over time the Internet would become an irresistible rallying point for consumers to compare prices of standardized motor insurance in Great Britain. Thus, the company Confused.com was established in 4

5 2002 with an internet website by the same name, where consumers could enter their personal data and get quotations from the motor insurance companies in the market. With its low prices, Admiral was thereby able to sell its products without using agents. The success of this business model has meant that Admiral has grown from having originally one brand, zero customers and 57 employees to currently having 3,940,000 customers, 15 brands, 7,000 employees and an income from premiums and other insurancerelated products generated from online sales totaling GBP 1,563 million as well as a market share in Britain of just above 11 %: growth that is beyond amazing! It s true that such tremendous revenue growth is wonderful. It s an indication of the company s sales success, and over time, it s proof that customers like Admiral s products. However, just as important as revenue growth is profitability. And this is where Admiral outperforms the rest! While the majority of Admiral s competitors in the British motor insurance market has an expense ratio of around 30 %, Admiral operates with an expense ratio of only 15 %. Where Admiral s competitors are only able to achieve combined ratios (claims and administration costs in relation to income from premiums) of, on average, just over 100, Admiral has demonstrated combined ratios, over time, of just below 84. For the last 11 years, Admiral s average profit margin after tax has come out at just below 32 %. Admiral reinsures 75 % of its business and the level of tied-up capital is therefore not very high. In this way, Admiral has been able to grow at an amazing rate and also pay out a large proportion of profits to shareholders. Over the last 11 years, the return on equity has been just above 55 % per annum without interestbearing debt on the balance sheet. The management attaches great importance to employee motivation. They actually implement the self-evident idea that a happy employee is more productive which is why they consistently prioritize employee motivation. For several years on the trot, Admiral has been voted among the best companies to work for in Britain. Not just managerial staff but all employees are shareholders in the company. With the existing business model, Admiral will be able to grow further in the British market and I fully expect that it will. But management has invested in applying the same business model in markets outside Britain. In 2006, Admiral established a motor insurance company in Spain and launched a Spanish price comparison website similar to Confused.com. Later similar initiatives followed in France and Italy. And most recently, Admiral established subsidiaries in four states in the USA together with a website for comparing insurance prices. If Admiral 5

6 will be able to replicate the success of its business outside Britain, the company can look forward to many years of profitable growth. When that s said, it s worth bearing in mind that it ll take the subsidiaries some eight to ten years to achieve break-even. Finally, towards the end of 2012, Admiral started selling home insurance in Britain according to the same principles. Insurance business, including motor insurance business, is cyclical in nature. The prices of motor insurance in Britain fluctuate, and the British market has experienced falling prices for the last two years. Admiral reacted by easing its foot off the pedal, so to speak, in order to reduce the growth in number of new customers, and then when things pick up and the market once again will begin experiencing rising prices, Admiral will lack price increases on its products and accelerate the increase in new customers. This means that for these couple of years, Admiral will achieve cyclically lower prices, which in turn will have a negative impact on earnings. Net earnings for 2013 was GBP 287 million, but the same figure will be lower for 2014 and maybe for However, it did look as if the falling prices stabilized towards the end of We must also bear in mind that Admiral s activities outside Britain reduce the overall result somewhat, as investments continue to be made in these activities, which have not yet reached the break-even point. As mentioned earlier, Admiral does not have the level of tied-up capital as a typical insurance company. In addition, Admiral has a history of generating high profit margins. Finally, Admiral has other business income on the side. Therefore, its right to assess the company in a slightly different way compared to a typical insurance company and adjust Admiral s market value by taking into account insurance-related allowances and accounts receivable as well as the company s cash and cash equivalents. Measured at the current adjusted market value of 8.7 times the 2013 operating income, a bad year for the industry and an operating income kept down artificially by the company s activities outside Britain, the market does not seem to pay for Admiral s huge earning potential. Liquidity I have never attempted to predict whether in the short term, the stock markets will rise, fall or remain unchanged. But I have difficulty finding companies that currently meet our Fund s investment criteria: companies based on good business models with highly competent, shareholderoriented managements which generate high returns on invested capital and which have market values that are significantly below their business values. We have sold some of our positions, and I haven t been able to replace all of these with interesting investment prospects. This is why our Fund s liquidity is also relatively high at the end of If we d not had to reduce our position in Nordea in order to make room for Admiral, our Fund s liquidity would actually have been about 4 % lower. Objective Our financial objective is to maximize the average annual long-term return on unitholders equity while focusing on low risk of permanent loss of capital. I don t measure our financial success by the size of the Fund s assets. My focus on value appreciation over time is to be met by investment in undervalued and well-capitalized companies, domiciled in Denmark and abroad. I strive to achieve this objective by investing in both high-quality and ordinary companies. I prefer a portfolio of high-quality companies, 6

7 as these companies will increase their intrinsic business values considerably in the long term. High-quality companies are characterized by being market leaders, generating high returns on invested capital; they are cash generating and have shareholder-oriented and highly competent managements. However, no matter the company, we must have a very high safety margin before we invest. It is not enough that a given high-quality company is traded at a relatively fair price. This means that it will take longer before I kick the ball, but other things being equal it will also mean a lower turnover rate for the Fund. If we ve invested with a high safety margin, I don t mind, if the market price falls further, as I add to our investment with higher safety margin. Ultimately, we ll benefit when the market price reflects the intrinsic business value. I don t worry about the quarterly or annual price development: we focus on what we can do today to maximize value in the long term. I thank our investors for the confidence that they have shown in the Fund and in me. I try to include in my reports both positive and negative aspects of my management of the Fund s assets. In the final analysis, however, it will be the results that will determine if I deserve your confidence. January 2015 Sincerely Nielsen Capital Management Fondsmæglerselskab A/S Ole Nielsen 7

8 Important Information The Fund s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Funds, and it may be obtained by visiting our website Read it carefully before investing. Mutual fund investing involves risks including loss of principal. Performance information quoted herein is unaudited, represents past performance and is not a guarantee of future results. The investment returns and principal values of investments in the Fund will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance information quoted within. Nielsen Capital Management Fondsmaeglerselskab A/S Eriksholmvej 40 DK-4390 Vipperoed 8 Nielsen FCP Global Value (Letter to Shareholders 2012)