Many fund boutiques have distinct expertise and passion in the field of value investing: “Pleasure in work makes the work come out right” (Aristotle). Markus Hill spoke on behalf of FONDSBOUTIQUEN.DE with Dominikus Wagner, founder of the Bonn-based asset management firm Wagner & Florack, about the ownership approach, skin-in-the-game and also about the selection criteria of an asset manager when using boutiques in client portfolios. Topics such as balance sheet analysis, the “buffett moat” and the importance of Charlie Munger for value investments were also discussed.
Hill: There are many interesting approaches by fund boutiques in the value investing segment. How would you describe your investment approach?
Wagner: Concentration on the business essentials. That’s why we need to analyze and understand the business models and balance sheets of companies – both from an entrepreneurial perspective.
We take an entrepreneurial and long-term view when investing in the cash flow of strong, steadily growing companies. These companies always earn very well in the long term, even in a recession. It is important to us that the companies have to use little capital, have high reliable economies of scale, and create an outstanding return on capital. And the companies must have robust and stable competitive advantages, i.e. the buffett moat.
Hill: Where do you see the difference in other value approaches?
Wagner: We call our style “value investing according to Munger”. If a target we want to invest in is available at a price – including a safety margin – below the value of the company, we buy. By the way, low fair value less safety margin seldom means that we buy at supposed or actual lowest valuations, as Buffett’s teacher Graham once did, who was influenced by the Great Depression of the 1930s when many companies were valued well below their balance sheet book values. In his time without Munger, Buffett also often tried to find such (supposedly) cheap stocks. This was rarely successful, as Buffett admitted. Munger, on the other hand, learned from Fisher that supposedly lowest-priced companies are often rightly cheap. World-class companies with always low capital requirements and high economies of scale and therefore robustly high margins and high return on capital, with robust moats, strong brands, and pricing power will always be valued slightly higher or distinctly higher. Nevertheless, the price must be below the value. And sometimes the value of top companies is significantly higher than their price, e.g. in a bear market like the current one, or when analysts are “disappointed” by good business figures because they expected even more, and sell automatic trading systems, traders and anxious people. Munger has made it clear to Buffett that such companies are better investments in the long run than pure “Graham companies”. Value investing, according to Munger, is therefore not Graham investing, but rather focused, long-term investing in world-class quality companies that can be bought at a price below their value, and this price will usually be higher than for rightfully cheap stocks.
Hill: Who do you consider to be your competitors or your direct rivals?
Wagner: I only know competitive thinking from sport, otherwise it is foreign to me. We concentrate on ourselves. We must continue to do our homework consistently, then the rest will come naturally.
Hill: What is “homework” and what do you mean by “rest”? What are your goals?
Wagner: Reading annual reports, investor presentations, statements by good managers, then thinking competently about the business and the balance sheets of companies and their competitors. And both of these things must be done with a critical, entrepreneurial mind. Understanding business models, thinking about the risks of the business, and the moats and understanding how they change. We need to look closely at how a business performs in a recession and what other serious problems may arise. Moats are also changing, so thinking about what the consequences might be is crucial. In quantitative analysis, we only identify and look at those key figures that are relevant from a business perspective. Ultimately, you have to take an overall view of the business model and the entire balance sheet to be able to assess and evaluate a company sensibly. If I do my homework consistently and thoroughly, then the “rest” results – you avoid unnecessary mistakes, create a high level of investment security by investing in companies that always earn good money, and are rewarded with high performance in the long term because the companies not only grow reliably but also strong.
Hill: And what are the objectives for the fund in terms of volume?
Wagner: We are and remain very down-to-earth. But I would like the grip we bring to the road in terms of investment process and performance to be reflected in the volume. We are currently at a good 75 million after about 30 million a year ago, but so far we have done very little in terms of sales or external perception, but we are in the process of carefully changing that. We have patience in this respect, even if it is sometimes difficult.
Hill: The fund is intended to convince investors in the long term, especially in weak market phases; the current phase has been challenging for many value managers. Is it risk management, good timing, or what are the main reasons for success in this area?
Wagner: It is not the timing, we were and are fully invested in the corporate funds. And yes, risk management? Our risk management is the constant and thorough completion of the homework mentioned above. And: robust cash flow and a healthy balance sheet is the best downside protection or, in our opinion, the best risk management. Our portfolio companies are also not threatened by insolvency, while a considerable number of listed companies are latently “at risk of bankruptcy” in a harsh to a very harsh environment. We are therefore living up to our own, overriding objective, namely not to lose money in the long term.
Hill: Speaking of not losing money – are you invested in the fund with your own money?
Wagner: Yes, sure. 100% of my medium to long-term is available capital. Concerning the 100%, please keep in mind: The doctor or pharmacist also medicates himself a little differently than the patient!
Hill: Can you only deal with crises, or does the approach also work in times of friendly markets?
Wagner: We have shown that we outperform even in friendly market phases. And this will also have to be the case in the future because it is economically imperative. Companies with low capital requirements and high economies of scale have permanently high and almost always growing margins, a high balance sheet quality and a high return on capital, which is why their enterprise value and thus their share price MUST increase more strongly in the long run than the value of other companies.
Hill: You are also an asset manager yourself and you select asset managers. What criteria do you in particular pay attention to in fund boutiques?
Wagner: We, or rather our colleagues, do not only look for performance when selecting funds. It is important, but we have to look at how it was achieved. Simplified: Was it luck or was it skill? For example, we not only look at the alpha achieved but also when and how stable it was created. Most importantly, however, we need to understand the investment philosophy and the investment process and consider both to be plausible and promising for long-term success. We want to see that fund management knows its craft. And the respective investment style must be consistently implemented.
Hill: What else do you deal with – apart from your work – and what would you like to do?
Wagner: The focus is on work and family. Besides, I am involved in a foundation and do sports as much as time allows. I cultivate my good friendships, although at the moment I feel that this is more bad than right. I try to improve this and would like to pursue other passions in the future, such as music. But all in all, I am satisfied.
Hill: Many thanks for the interview.
WEBINAR WITH DOMINIKUS WAGNER (23.4.2020): Many boutiques are currently taking advantage of the opportunity for “digital communication”. AN EXAMPLE: Value Investing & Entrepreneurship (Dominikus Wagner), Quantum Approaches & Scenarios (Oliver Klehn), Risk Management & Market Cycle (Cyrus Moriabadi). DIGITAL & ANALOG – Both worlds complement each other but do not replace each other. There is still nothing like a cultivated personal exchange of ideas in autumn 2020!
FONDSBOUTIQUEN & BONN: