Monthly Archives: February 2016

Book review: “Quality Investing: Owning the best companies for the long term”


“Quality Investing” is one of the growing number of books from Asset Managment firms where they outline their philosophy. I have reviewed already 2 of them, “Capital Returns” from Marathon Asset Managament and “Simple but not easy” from Oldfield Partners.

“Quality Investing” is about London based AKO Capital Management, a company with currently around 9 bn USD under management. The book itself was written by Lawrence Cunningham, a guy who is often described as a “Warren Buffet” expert.

As the title of the book says, AKO focuses on “High Quality” businesses which they intend to own for the long term. A “High Quality” business in their view is defined as a business which can earn high return on capital for a long period of time. In their view, such companies are often undervalued even if they are more expensive than market averages.

The book then walks through different aspects of how to identify “quality”. According to them they look for:

  • Capital allocation (Growth Capex, R&D, M&A, Dividends, buybacks, working capital)
  • Return on capital (asset turns, Gross profit margins)
  • growth (market share, geograhic expansion, Cyclical growth)
  • Management (Discipline, long term orientiation, communication)
  • Industry structure (Barriers to entry, Oligopol, rationality, obscurity)
  • Customer benefits (intangible, Convenience, customer types)
  • Competitive advantages (technology, network effects,distribution
  • Revenue type (Recurring, upfront, licenses, service model, subscriptions, network density)
  • the “friendly middleman”
  • Toll roads (gold standard, “Magic” ingredients)
  • Low Price plus (price vs.differentiation,scale, low cost squared)
  • Pricing power
  • Brand strength (Heritage, Trust & consistency, scale)
  • Innovation
  • Forward integration (own stores, Franchising, online presence)
  • Market share gainers
  • Global cpabilities
  • Corporate culture (trustworthiness, long term orientation, execution, family ownership)
  • Cost to replicate

Companies they like are:

L’Oreal, Diageo, Geberit, Assa Abloy, Handelsbanken, Unilever, H&M, Inditex, Luxottica, Rolls Royce, Atlas Copco, SGS, Intertek, John Deere, Syngenta; Wärtsilä, Kone, Chr. Hansen, Ryanair, Hermés, Novo Nordisk, Nike; Fielmann, Experian

What makes the book authentic is the chapter about “pitfalls” and some case studies where they made mistakes. According to them, the most important pitfalls are

  • cyclicality (flow products, customer cyclicality, long period swells)
  • technical innovation
  • dependency (Government, stakeholder concentration)
  • Shifting cutomer preferences (fashion risk, good enough substitutes)

They mention specifically Saipem and Tesco where they lost money and Safilo, Nobel Biocare and Nokia for “quality” companies who fell into those pitfalls.

The final section of the book looks at implementation of a “high quality” strateegy and especially the challenges

  • Long term compounding vs short term pressure (short term underperfomance)
  • qualitative judgements vs. “big data”
  • dull businesses
  • Top down mistakes
  • overconfidence
  • too much debt
  • “boiling frog” problem (owning companies for too long if things go bad slowly)
  • changes to the market place (Wincor Nixdorf)
  • Accounting red flags (Elekta)
  • Endowment effect (Emotional connection)

Overall I do think the book is quite good. I would recommend it especially for people who think about migrating from a more “Graham” based approach of value investing to a “Late Buffett/Munger” style.

For those investors who are already deep in “Munger territory”, the book will not present many new ideas but is maybe a good summary of many concepts. The book is also a great basis to build a “Quality check list”.

For me personally the chapters about industry characteristics and customer benefits were most interesting as I haven’t paid a lot attention to this.


The only quibble I have is that they claim in the books many times that quality companies are not trading a the premium that would be justified. However, they do avoid mentioning anything quantitative, i.e. what premiums they are looking for and how they calculate it.

Of course they need to keep some of their “secret sauce” in order to justify the fees they are charging but as it is the book to me is kind of incomplete. As it is, the book is basically more like a “check list” with explanations than a real “investing book”.


As described above, for anyone who wants to get into a more “late Buffett/Munger” style of investing, this is a very good book. Especially if you are looking to build a check list for assesing the quality of companies, this is a great start.

If you look for a “fully fledged” investment book, an important part (valuation) is missing. If I would need to decide between this book and Marathon’s Capital Returns, I think I would go for the latter.











Special situation quick check: Syngenta & ChemChina

Syngenta ChemChina offer

After the failed attempt of Monsanto to buy Syngenta last year, Chinese conglomerate ChemChina made an offer for Syngenta a couply of weeks ago. Other than with Monsanto, the Syngenta board already approved the take over.

The offer itself is as follows:

ChemChina will pay 465 USD. On top of that, anyone who buys Syngenta shares now, will receive the normal dividende of 11 CHF and a 5 CHF special dividend.

If we expect closing at the end of the year, the potential return would be (in CHF) at a current price of 400 CHF:

-400+(465*0,994)+11+5= +77,75 CHF or a potential 19,4% return for 10 months.

This looks very attractive. However the merger arbitrage/event  market is a very competitive one and those spread usually don’t come “for free”. So why is there such a large spread ?

US regulatory risk

I guess the most obvious reason is that investors fear that US regulators will try to kill the deal. Syngenta has a signifcant US business. There are several rumors around why the US authorities might challenge the deal, most recently some in connection with the Zika Virus.

The Committee on Foreign Investment in the US (CFIUS) will review the deal because Syngenta, through its US research and production facilities, plays a key role in the US food industry.

The Zika virus problem could force CFIUS’s hand, sources said.

“CFIUS focuses solely on whether an acquisition represents a national security risk,” a Beltway CFIUS expert not involved in the merger told The Post. “I certainly think Zika will be a factor.”

From what I found on the net, the problem is that the CFIUS never really explains their actions, so it is very difficult to judge as an “amateur” what the chances will be. A professional hedge fund clearly has the money to pay for advice, most likely from former members of the CFIUS. This is clearly an information disadvantage form me as small investor.

China FX issues

Another problem I could see is the fact that ChemChina needs to come up with around 44 bn USD in USD financing and this could be difficult if there would be really turmoil in China in the meantime.

They haven’t even refinanced their Pirelli bridge loan yet and at least in the Pirelli case they don’t seem to guarantee those loans:

The new refinancing will be non-recourse to ChemChina, but will have elements of support from Pirelli’s Chinese owner, bankers said.

So I guess the ~20% discount is basically a mixture of regulatory risk and financing/China turmoil risk.

On the plus side, even if the ChemChina deals would fall through, there still could be other players interested such as German chemical Giant BASF.

Is Syngenta then an interesting special situation investment ?

What is bothering me is the following: As I said before, this area is very competitive and Syngenta is a liquid stock (50-100 mn CHF a day) and I do not have any special insights into the situation.As discussed before, I guess I have even an information disadvantage.

The potential downside for a failed bid is at least -25% when we look at what happened after the Monsanto bid:


So if I assume a simple 50/50 probability, my expected value is negative.

Every “event driven” fund is clearly looking at Syngenta which in turn means that they seem to price the risk at the current price and assume a slightly better chance than 50%.

However I clearly have no basis to assume any higher percentage for a succesful outcome.

All in all, in the past it never had paid out to invest into such a situation with an information disadvantage, so I will stay away from this one.













Koc Holding & few thoughts on Turkey

Koc Holding

On Monday, Koc Holding released 2015 results. As always, they have a very decent presentation which nicely summarizes what happened.

Consolidated net income went up +32% in 2015 in local currency. Even including the 2015 depreciation of around -12%, for me as EUR based shareholders, profits increased significantly.

Based on 2015, Koc now trades at around 8,5 times P/E. The discount to a “sum of part” calculation is around 20%, a value which has been relatively stable over the last 2-3 years.

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Some links

Graham & Doddsville Winter 2016 issue (Edit: the Craig Effron interview is a MUST READ)

TGV Partners Fund 2015 letter  explaining the Mutui Online investment plus thoughts on Tech stocks and Oil & Gas from a value investor perspective

Cliff Assness vs. Eugene Fama (on momentum)

Pipeline companies, distress, long term contracts and more

The “indiscriminate” sell-off of European Banks (WSJ, google for Headline)

AIG vs. MetLife from Aleph blog

Some fun with probabilities and Russian Roulette


Gaztransport (GTT), Cheniere (LNG), Swatch

Gaztransport – Dodged the bullet..

Well, that was quick. 2 weeks after I reviewed Gaztransport, they have dislosed the following:


Paris, 29 January 2016 – GTT (Gaztransport & Technigaz) announces that it received today a notification from the Korea Fair Trade Commission informing the company that an inquiry has been opened into its commercial practices with regard to its Korean shipyard clients.

The result: The stock price dropped  ~20% in two days:

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Guest post: Investment Theory: RoCE – some thoughts on a helpful, but sometimes misleading concept

I am happy to present one of the infrequent guest posts. This time a very interesting general post on RoCE (Return on Capital Employed) and Brand value by contributor Knud Hinkel.

Executive Summary:

The RoCE is an important ratio for value investors. However, as it regularly relies on balance sheet data, the concept is susceptible for at least two inconsistencies: (1) Items on balance sheet are not correctly reflected in the EBIT, and (2) items that contributed to EBIT are not reflected in the capital employed. My hypothesis is that the RoCEs of industries with significant self-created intangibles like consumer and software companies are subject to a systematic upward bias and this might light lead to a wrong judgment of (1) the underlying company performance, (2) acquisitions, and (3) the capital intensity of the business model.

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