“As soon as the mind is directed toward a goal, much comes to meet it” (Goethe). Innovation, medium-sized companies, and sustainability are interesting topics for investors in the usual value-versus-growth discussion. Markus Hill spoke for FONDSBOUTIQUEN.DE with Marc Siebel, Managing Director of Peacock Capital GmbH, about “tried-and-tested” professors, DCF models, and the enthusiasm for value investing. In connection with this investment style, topics such as ESG & taxonomy in small caps, investments in technology, and the art of archery were also addressed.
Hill: Where does your enthusiasm for small and medium-sized companies and value investing come from it?
Siebel: I spent part of my business studies in the USA. I was fortunate to find Prof. Dr. Bey, a renowned professor of finance, who, in a student investment fund course, “drove” me to set up my DCF models, conduct SWOT analyses of the business models, and then present these to an assembled team. The standard works of Benjamin Graham and Aswath Damodaran were on my desk as a basis. Back then I was “thrown in at the deep end”, which has shaped me to this day and made me a disciple of “value investing”. The satisfying thing about the exercise at that time is, since then I have been able to understand DCF models and, above all, to calculate them myself. It’s not important when you talk about the “fair value” of stock and are sometimes presented with questionable DCF models.
At the turn of the millennium, I started my career at the fund company of the former WestLB. There I directly experienced bursting bubbles on the stock markets and also lost money privately. Quite instructive. Since then, I no longer run after every “hype”. My time in London in the field of asset management and the cooperation with equity analysts on the sell-side have broadened my horizon, as the view of companies here is very different. I then concentrated on medium-sized companies, or “small & mid caps”. This meant extensive balance sheet analyses, studying extensive sector and stock publications by banks, and travelling to investment conferences in the various countries and the companies themselves (“site visits”). After a stopover at Bankhaus Lampe, where I set up and managed a small-cap mutual fund as well as WestLB, I founded Peacock Capital GmbH in 2013. It was good to be able to show a long-term and resilient track record for small caps. This is important to investors. To this day, my passion for second-line stocks has never left me. Our fund, the Peacock European Best Value Fund, is a European second-tier fund. It has the heart of a true “value investing” supporter.
Hill: Long-term thinking and sustainability also determine the thinking in medium-sized companies. What significance does the current discussion on ESG and taxonomy have for your investment approach?
Siebel: Starting in 2022, the EU’s Taxonomy Regulation stipulates that companies and providers of financial products will be grouped into different categories concerning their ecologically sustainable activities and investments. This will finally create sufficient pressure on the industry to take ecological criteria seriously in its business activities. Given dramatic images from the Antarctic and periods of drought in Europe, too, it is time to finally step on the gas. We already reacted to this at the beginning of the year and screened our companies in the portfolio in terms of a declaration of compliance with various ESG criteria. We have always used analytical questionnaires on the business model and balance sheets at our meetings with the members of the Board of Management. We have supplemented these with ESG criteria. We also use our network of analysts. Various partners in Europe now offer ESG conferences at which listed companies present ESG reports.
As critical investors, however, the focus on the “S” – Social and “G” – Governance should not be missing. As a critical “value” investor, it is not only the accuracy of the balance sheet that is important but
the quality of the management and supervisory board. As the Wirecard case shows, ignoring this quickly leads to serious financial losses. For us, the company has always been a red rag. The Management Board was too involved with the Supervisory Board, which always dismissed critical comments by renowned journalists as nonsense. As late as 2018, an investment bank proved that a large part of Wirecard’s e-commerce sales revenues could not exist. Two reasons that made all the alarm lamps light up. The fact that Wirecard also uses dubious practices to intimidate or monitor Wirecard critics, as reported by the Financial Times at the end of 2019, only makes an investment even more dubious. It is surprising how many companies do not fully comply with the German Corporate Governance Code, for example.
Small caps are particularly attractive for ESG investors. I have been concentrating on European second-tier stocks for almost 20 years. The trend toward sustainability is particularly impressive here. Remember the introduction of the Renewable Energy Sources Act in 2000, where Germany pioneered the way for the renewable energy sector, and where “pure plays” have emerged in great numbers. Nordex and Vestas are well-known names, but things get more exciting in the second and third rows when it comes to hydrogen, solar, wind, raw materials, and electric mobility. This starts with Italian IT software companies, continues with our long-standing investment in Corticeira Amorim, the market leader for cork, and ends, for example, with the electric charging station manufacturer Compleo, which recently celebrated its stock market debut in Germany. Many companies here offer unique selling points and a strong “economic moat”, which are otherwise only attributed to companies like Google or Apple. Together with our partners and analysts in Europe, we have already created a “Green Deal” list that includes these “Pure Plays”.
In the Best Value Fund, we follow these guidelines. Because of the large number of innovative “pure ESG plays” in small caps, we are also considering a “PURE ESG” fund, which can probably only be formed into a high-growth product with innovative small caps. The focus on second-line stocks with close contact to the management ensures that the fund manager acts in a focused manner and is always well informed.
Hill: How do you see the discussion about “value vs. growth”? Is it more or less a “tired” topic or does it still have significance in the categorization of investments?
Siebel: Well, the topics of “growth” shares and “value” shares have been effectively exploited by various providers – mostly by those who invest permanently and mostly in technology companies. No wonder, because in recent years “Growth” stocks have beaten “Value” stocks. Thanks to Corona, growth-oriented digitization winners have made further significant gains. Some companies will also profit permanently from this paradigm shift. However, many companies seem to be “hyped” once again. After all, economic theory has proven one thing time and again: Competition is increasing rapidly in areas where a lot of money can be earned through innovations and new market fields. A good example is the online conference providers Microsoft, Google, Zoom, and Teamviewer. Many investors look risky here only at sales growth, and hardly anyone prepares cash flow statements. And that is where the problem lies. Cash flow is defined not only by sales growth but also by capital expenditures, changes in working capital, and margin development. And it is precisely these factors where investors systematically overestimate the prospects of young companies in particular. Until the first profit, the warning comes along and the share price falls into a bottomless pit.
We think a little differently. We are much more cautious, especially when it comes to forecasts of margins and underlying product prices. No matter how innovative a company is, it can still create innovative products. If there is strong competition, the sales prices tumble faster than you can look.
Second: Many growth stocks buy heavily, mostly at horrendous prices. This is a warning signal and later leads to so-called “impairments”, write-offs on the value of the company, which then hail the balance sheet. We prefer companies that grow organically and structurally, preferably in double figures. Because from a dynamic point of view it is clear: Where no growth, there no value. Warren Buffett already said that the dull drawers “value” or “growth” simply don’t fit.
Hill: Do you see a contradiction between classic “value investing” and investing in modern technology companies?
Siebel: Our portfolio currently contains more than 20% technology stocks, but they are valued much more favorably than the usual suspects. In terms of the solidity of their business model, by the way, they are in no way inferior to large blue-chip companies. On the contrary. They are often much more credible because the management is often in the same boat as the investor or the company is family-run. Besides, when investing in technology, we make sure that business models are halfway tried and tested and yield a reasonable return on investment. RoCE (Return on Capital Employed) is a good indicator in this respect. The formula is based not only on after-tax profit but also on the capital employed. This includes careful handling of investors’ capital, especially working capital. Studies have shown that companies with permanently high RoCE are indeed among the best “performers”. In our view, simply relying on “great stories” and buying market leaders without any valuation rationale is risky. A company must show that it is profitable. Many of the companies we hold manage their business according to RoCE criteria. This is rather the exception. The supposedly “static” RoCE indicator is therefore excellent for distinguishing good business models from risky ones. And if the price is right – EV/IC is the right indicator – then we’re ready to strike. By the way, “favorable” in the dynamic sense also has a nice side effect: because small second-line stocks are usually particularly readily swallowed by the big fish when they are available at a reasonable price. As a result, the investor then profits from a handsome takeover premium.
Hill: Which investor fits your investment style? Who do you feel understood by, who are you “open doors” to?
Siebel: That’s not a very simple question. The more you are a “stock picker”, i.e. the more you rely exclusively on the development of individual companies, trends and the volatility of the markets themselves fade into the background. Entrepreneurial investors must be able to withstand even weak market phases. Our goal is not to suddenly pull out of stocks at the right time in volatile markets and then find the right moment to get back in again. Experience shows that it is precise with such decisions that money is left lying in the street. We also see no alternative to shares or second-line stocks. For example, we do not hold a gold position because gold has no real value or intrinsic value and is macro-economically or emotionally driven – a haven in times of crisis, it correlates to the US dollar.
We want to act entrepreneurially, take long-term stakes in unique companies, ultimately like a private equity investor. Our favorite investors are therefore those who go this way with us and know that, for example, interesting investments in special situations such as restructuring need time to achieve the desired return. With a little patience are so
to weather even difficult phases on the stock market. This also applies to the question of whether “value” or “growth” is on the upswing again. The investor should understand that we in particular are buying “pearls from the second and third-row” that do not immediately start to boom a week later. The investor should also know that second-tier stocks with a risk-return profile are more advantageous than blue chips. The evidence for this is now more than resilient and clear over the years. So second-line stocks should be seen as a core investment and not a “second-line” war zone. Even if second-tier stocks have been following the blue chips for several quarters. It is precisely then that it is more important to enter the market.
Hill: Independent asset managers “burn” for your cause. Variety often broadens the view. What do you do when you are not managing your fund?
Siebel: Goal orientation and focus are, I think, qualities that investors look for in fund managers. As a child, I already started with the sport of archery. At that time I had built up a consistent practice course with my brother. Wild animal pictures on pieces of cardboard. We set them up and practiced on forest property. Until 20m the hit rate was still quite good. It became difficult from 40m on. Even gusts of wind can spoil the fun. The sport demands concentration and calmness until the last second of the shot. A good exercise for me, because I am rather busy. The sport has fallen apart a bit. Another appealing task that gives me balance and relaxation is sailing. I am currently introducing my son to dinghy sailing, which is great fun. I am no longer allowed to hold the tiller. He is now the boss.
FUND BOUTIQUES, SMALL CAPS & DÜSSELDORF (PEACOCK CAPITAL GMBH):
- Family Offices, Think Tanks, Economics & “Manias, Panics, and Crashes” (Interview – Martin Friedrich, Lansdowne Partners Austria GmbH)
- Value versus Growth, Commodities, India, Youth and Inner Peace (Interview – Alex Rauchenstein, SIA Funds AG)
- Dividends, Value versus Growth, Foundations and “Asia 2030” (Interview – Bernd Maisch, TRESIDES)
- Value Investing, “Value versus Price” and the Importance of Family Offices as Investors (Interview & Webinar, 7.5.2020 – Stefan Rehder)
- Value Investing, Aristoteles, Fund Selection & Ownership Approach (Interview & Webinar, 23.4.2020 – Dominikus Wagner)
- Comment: Value investing, asset management and independence: “Triumph of patience” as a success factor