Monthly Archives: September 2015

Vetoquinol SA – It’s a family affair

Vetoquinol is A French company specialized in “Animal health”, i.e. pharmaceuticals for animals. I came across the company more or less by random. The company went public in 2006 but the majority (~62%) is owned by the founding family, the current CEO is the 3rd generation of the founders. Some key figures:

Market Cap 450 mn EUR
P/B 1,6
P/E 16
Operating Margin (11 year avg) 11,0%
ROCE (11 year avg): 10,8%
EPS CAGR 8 year +4,0%
Debt: ~ 3 EUR net cash per share

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Book review: “Simple but not easy” – Richard Oldfield

I honestly never heard of Richard Oldfield before but in the UK he seems to be a well-known investment manager. He used to run Mercury Asset Management and now has his own company, Oldfield Partners.

The book is part autobiography and part investment philosophy, containing the wisdom of his 40 year career in investments.

I couldn’t really detect a structure in the book, but it is generally well written and contains a lot of wisdom. I liked very much that he started with his biggest mistakes. A couple of his thoughts mirrored my own to a 100% such as the fact that “armchair investing” might have a lot of advantages. He calls it “traveling narrows the mind” and gives some very interesting examples for this view.

Interestingly, the book was released in 2007, just before the financial crisis hit. I guess with his cautious style he clearly survived it but it is also clear that he didn’t see it coming. In one of the chapters he is discussing that the issues in the US housing markets were not as big as they were made in the press and he was invested in GM which went bankrupt a year later or so.

On the other hand, almost everything he writes reflects deep insight into investing. There is good stuff on how to select asset managers as well if and when to fire them.

One of the most relevant quotes for me was the one where he states that people who are good at stockpicking are usually not good in FX forecasting,, i.e. fundamental stock analysis and “macro” don’t mix well. He writes about an overlay hedge which killed a large part of the performance of a portfolio. This is an observation I made too and where I am currently suffering because of my TRY bet. Note to myself: Revisit the TRY bond position.

Overall I think it is a very good book and I might read it again because it is packed with good stuff and I maybe didn’t get everything for the first time.

I would explicitly recommend it to those investors who want some insight into “family office” like investing, but it is good reading both for beginners and professionals. Just don’t expect a “how to get rich in 12 month” type of book.

FBD Insurance Update – Prem Watsa to the rescue….

FBD, the troubled Irish insurer issued an interesting press release last week. In one of my last posts on FBD, I mentioned that their plan for capital raising was still unclear.

This clearly shows that FBD is extremely strained from a capital perspective. The biggest unknown in my opinion is how the proceeds of the sold JV will be reinvested into FBD. They don’t comment on that 45 mn EUR at current prices (5,8 EUR per share) would be more than 20% of the company. I don’t know about Irish company laws, but this normally needs to be done on a subscription rights basis. Or the Farmers provide the subordinated capital ?

A few weeks ago, they were out in the market to raise a subordinated bond. Last week however, FBD came out with a quite surprising announcement:
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Some links

Great post from Nils Herzing on visiting Monish Pabrai’s Investor day. Monish seems to like Fiat a lot.

Barry Ritholz interviews Jason Zweig (WSJ)

A very good post on why and how to adjust EM company valuations for foreign currency borrowing plus thoughts on Chinese Banks

Check out this Japan focused value investing blog with some very high quality content: Undervaluedjapan

MUST READ: Fascinating article on how Berkshire closed the Precision Castparts deal (hint: initiative seemed to have come from Todd) (h/t valueinvestingworld)

MUST READ: Latest Memo of Oaktree’s Howard Marks called “It’s not easy”

Arcadis NV (ISIN NL0006237562) – One deal too many ?

Arcadis is a stock which popped up in my “BOSS score model” which I still use regularly to find ideas. It is a Dutch based Design, Consulting & Engineering company with global reach and a diversified business. Historically, they have consistently produced ROE’s of 20% and grown nicely.

Some key figures:
Market cap 1,7 bn EUR
P/B 1,7
P/E 19,5 (2014), 11,6 (2015 est)

The company trades at a ~20% discount to Peers like AF AB, Ricardo or SWECO.

What I did like about Arcadis at “first sight”:

+ consulting is capital light business
+ potential growth areas like infrastructure, water, urbanization
+ ROIC as relevant measure for compensation
+ organic growth as target for compensation
+ well-regarded in the industry

What I didn’t like so much:

– large project exposure
– China / EM Exposure (26%)
– Utility exposure (22%)
– big M&A transactions in 2014
– annual report focuses on adjusted numbers
– debt significantly increased, far above target

Hyder Consulting acquisition in 2014

In 2014, Arcadis did several larger acquisitions, the largest one being the UK listed Engineering company Hyder Coonsulting Plc. After the first bid, a Japanese bidder emerged and at the end they had to pay around 300 mn GBP for a company that earned around 6 mn GBP in 2014. This really looked expensive and is maybe one of the reasons why EPS in the first 6 months 2015 fell from 0,77 EUR to 0,70 EUR per share.

Looking into historic annual reports one can see that there was little organic growth for many years (page 15) and growth was driven by acquisitions:


Arcadis looks pretty much like your typical “roll up”, gobbling up competitors one after the other. However with the Hyder deal, it looks like that they made maybe “one deal too many”. Debt is now clearly above their own targets and business is not doing well. They acquired Hyder for their Asian presence which maybe looked like a good idea last year.

Management incentives: The reality test

When I did read the annual report 2014, I really like the fact that management seems to be incentivized on ROIC and organic growth. However, this is the score card they presented with their half-year numbers:

arcad sct

At first sight the source card looks, great, everything green, only organic growth “orange”. A closer look actually shows that the only target they hit was actually external growth which in itself is a pretty stupid target. All the other targets were either misses or not available.

This slide alone to me indicates that management doesn’t take its stated goals that serious. Yes, on paper it looks great but such a “target achievment assessment” is clearly a joke.


Although the “roll up” strategy seems to have worked for some time, in my opinion there is the risk that the 2014 acquisition spree was maybe too much. If they can make the acquistions work, the stock would be relatively cheap, but combined with the current debt load the stock is now much riskier than it was in the past. Bilfinger is a good example how a seemingly working “buy and build” strategy can implode over night.

It is also a good lesson in checking if a compensation system which looks good on paper is actually implmented and followed or if management just adjusts everything to look good despite not achieving the targets.

So I will watch this from the sidelines although I like the business and industry in general.

New investment: TGV Partners Fund ( ISIN DE000A0RAAW6)

Full Disclosure:
This is not investment advice or advertisement. Do your own research. The fund manager did not ask me to write this post, it was the sole decision of the author. The author is personally and with real money invested in the fund and knows the fund manager for many years. The author will get a symbolic “liquid commission” for any new investors coming through the blog which will be disclosed at the end of the post.

In March I already wrote a “prequel” to a potential new fund investment, listing the requirements I see for giving money to another investment manager. Now I have done it.

The fund is called “TGV Partners Fund” managed/ sub-advised by “MSA Capital”. The website of the fund and more information can be found here, the website of the sub-advisor can be found here: MSA Capital.

Back then I listed the following criteria which were important to me in order to trust part of my money to someone else::

1. The manager has to be trust worthy
2. The manager should have most of or even better all his money in the fund
3. the manager has a different skill set than oneself or just better skills or access to different assets
4. The manager should still be “hungry”
5. The fund manager is not only in for the money
6. The investment vehicle should be a “fair” structure

So let’s check the TGV Partners fund against it:

1. The manager has to be trust worthy
Well, I have an unfair advantage here as I have done “due diligence” on Mathias Saggau the fund advisor/manager for the last 8 years or so, constantly exchanging ideas and talking about everything (and drinking some cold beers together…). Mathias himself has a very good “credo” to ultimately decide if he invests into a company. He asks himself the question: “Would I trust my wallet for safekeeping to the CEO ?”. If there is the slightest doubt, he will not invest. Period. Would I trust my Mathias with my wallet ? Yes, absolutely.

2. The manager should have most of or even better all his money in the fund
That’s the case, Mathias invests all of his money in the fund alongside his clients.

3. the manager has a different skill set than oneself or just better skills or access to different assets
The thing I admire most is his ability to really dig really deeply into to companies and industries. I think he is very good in judging if there are competitive advantages in the long run. His deep research combined with a long time horizon allows him to have very high convictions and run a concentrated portfolio. Personally, I think I can pretty well identify what doesn’t work, but I am less able to identify what actually works, so I do think it makes sense to “outsource” some money to someone who has this skill. We do have some overlaps but I can live with this …..

He is also connected to other great investors via the “Investmentgesellschaft für Langfristige Investoren TGV” which contains an enormous amount of investment wisdom. I know all the people there personally as well and had the privilege to attend some of their events such as the 2 day conference in Omaha before the annual meeting of Berkshire.Rob Vinal from RV Capital works under the same “roof” and with a similar structure.

4. The manager should still be “hungry”
He is just starting the fund and will “work his but off” to succeed. I know that he is thinking about stocks most of the time, including weekends…..

5. The fund manager is not only in for the money
I know that Mathias has transformed his hobby into his job. He is an absolute “stock maniac” in the most positive sense.

6. The investment vehicle should be a “fair” structure
The TGV structure is a rarely used structure, sometimes it is called the “German Hedge Fund structure” even though it is open for public investors and similar to a Sicav. One of the key features is that the fund’s interesting share class is open only on a quarterly basis. Many investors might feel uncomfortable with this. But if you run a concentrated portfolio with potential illiquid stocks, you definitely don’t want someone to call and ask for his money back the next day, especially in bad market environment. Also as an long term investor, investor you want to make sure that the manager doesn’t have to dump his shares cheaply just because another investor gets nervous because this hurts all investors. I also know the main seed investor personally and he is in for the long-term. It also helps enormously NOT to see daily movements in the value of investments.

The TGV structure allows more flexibility than normal funds, especially with regard to instruments (shorts, derivatives) and more importantly, more concentrated portfolios. One of the major disadvantages for the fund manager is the fact that this structure is much harder to sell to investors such as fund-of-funds because of the unfamiliarity and lack of instant liquidity. As an investor I find this positive because you can be pretty sure that if someone choses this structure, he will not be in for pure “asset gathering” but for performance.

Portfolio & Investment style

The portfolio composition as of 30.06.2015 can be found here. The largest position is Google with a 15% weight followed by National Oilwell Varco (11%) Distribution NOW (9%) and Verisign (7%). As one can easily see by looking at some of the stocks (Amazon, Morning Star etc,) this is clearly no Graham style “deep value” portfolio. I would describe his investment style as “Munger meets the 21st century with a contrarian angle” kind of investing which means using the underlying framework of competitive advantages (“Moat”) and good management but transporting it into relatively new sectors such as software or internet related companies. As Mathias is still in a relatively early stage of his carreer I expect that his investment style and “circle of competence” will further evolve and he will become even better than he is now.

For any further information I can only recommend the freshly published shareholder letter (Englisch, German). He discusses his philosophy and three specific stocks: Admiral, Amazon and TGS Nopec.

Let’s talk about “commissions”
Normally I don’t take any kick backs etc. for recommending something on my blog. But in this case and based on my special relationship with Mathias, I had to make an exception. The deal is the following: For every new investor who mentions my blog before (or after) investing with him, I will receive one “Kölsch” (0,2l) at a bar of my choice in Mathias hometown, independent of the amount invested.

Just to be clear: Mathias has to pay this out of his own pockets (not from the fund) and neither Mathias nor I will receive or pay any other “commissions”.

Portfolio transaction:

For the portfolio, I assume I have bought a 4% position at the price of 30.06.2015. As this is a “special” position, it does not count towards my 1 transaction per month limit.

Some links

A TED interview with HF legend Jim Simons

James Tisch (Loews) on value investing in cyclical industries

Geoff Gannon with a kind of rebuttal of my “Cheap for a reason” post

The Brooklyn Investor likes Charles Schwab

A good write-up on Interactive Brokers. I you compare that with Schwab, IBKR seems to have significant competitive advantages

Highly recommended: A great post why writing down one’s thoughts (“Journaling”) is a fantastic decision-making tool