Specialization in asset management, „skin in the game“ and independence in investment decisions are factors that make fund boutiques interesting for many institutional investors. Family offices, insurance companies, and pension funds often look at different talents in different asset classes. Markus Hill spoke for FONDSBOUTIQUEN.DE with the author of the book „Strategic Logic – The Sources of Long-Term Corporate Profitability“ Prof. Dr. J. Carlos Jarillo about value investing, liquid fund concepts versus private equity, investments in commodities as well as investor dialogue and the SRI factor in investments. Some of these points will be discussed more intensively by Prof. Dr. Jarillo in his lecture „Strategic Investing“ on October 16, 2018, in Munich.
Hill: You are the author of the book „Strategic Logic – The Sources of Long-Term Corporate Profitability“. Which topics did you deal with in more detail there?
Jarillo: I look at the world of companies and fund management through the eyes of a teacher and practitioner with an ownership approach. Strategy and long-term thinking are factors to which I have always attached particular importance when evaluating corporate concepts. The book contains my accumulated experience as a former professor and holder of the Chair of Corporate Strategy at the University of Geneva. I have also taught at IMD in Lausanne, at the IESE Business School, the University of Navarra and the Instituto de Epressa in Spain. The formative years for my thinking can be found in my time as a Senior Research Associate at Harvard Business School with Michael Porter. Many of my thoughts on the evaluation of business concepts, competition analysis, and also on the topic of „Economic Moat“ and Value Investing can be found in a condensed form in my book. It was important for me to use many practical examples, especially since I was also active in management consulting for many years.
Hill: What were your next steps after you became a professor and author?
Jarillo: The step from theory to practice came about when I became the founder and managing partner of my company „Strategic Investment Advisors“. My conviction has always been that a good corporate strategy has a long-term impact on the profitability of a company. In 2002 I launched the „Long Term Investment Fund Classic“. Since then, the fund has generated an average performance of 9.2% p.a. Admittedly, one reason for the launch was also that I was somewhat frustrated by the behaviour of many of my students, who, after my lectures, were given a good basic framework for building a successful corporate strategy, but often „forgot“ many of the theoretical things again after entering the real world. With my fund, I wanted to prove that my considerations are also relevant and feasible in practice. Two years later, co-manager Alex Rauchenstein, a former participant in my MBA executive courses, also joined my team. Especially with projects like these, it is important to retain the right people in the company. Over the years it has been very interesting for me to see how my thoughts and conclusions from the book can be transferred to portfolio management.
Hill: How would you describe your investment approach?
Jarillo: We would describe our approach as Strategic Value Investing. We are clear bottom-up stockpickers. The current stock market situation is not very important for us. We think long term, we evaluate business concepts, strategies and look for special stocks with expected high returns at moderate or low risk. For this purpose, we have our own system with risk levels. Over the long term, we aim to generate a performance of between nine and ten percent per year. If you manage to filter out the right companies over the long term and, as with private equity investors, ignore the daily, often irritating „noise“ of the stock markets, then these results can be realistically achieved on average. We live the ownership approach in the fund, so to speak. In contrast to classic private equity funds, we benefit on the one hand from the daily liquidity in our mutual fund, although we view investments in companies in a similar way to a private equity investor. In contrast to classic private equity fund managers, however, we feel the „whip of transparency“ here in a timely manner.
Hill: Your team also manages a commodity fund. Value investing and commodities – how does this unusual expertise come about?
Jarillo: We look at business models that are designed for the long term. In our value fund, for example, we have also had oil production stocks for some time now, after consideration by our risk management system. Some time ago Urs Marti from asset manager Felix Zulauf joined us with his expertise in commodities. With our team, we can bring our special expertise in commodity stocks, which are also included in the Value fund in small quotas, to bear even more strongly. I am also supported here by Alex Rauchenstein and Marcos Hernandez. The fund (Long Term Investment Fund Natural Ressources) is currently ranked 4th out of 139 commodity funds by Citywire for 5 years and has 5 stars by Morningstar. At SIA Funds we are always looking for opportunities to pool our expertise and networks. We have been in good contact with Urs Marti for many years and had a fruitful exchange of ideas, sometimes certain things come together. Long-term thinking is in the foreground. After all, we are invested in our fund with our own money.
Hill: Are there investors who particularly appreciate this rather patient investment style?
Jarillo: We have investors in various groups. Pension funds, banks, foundations, insurance companies would be those with a more institutional view. There are also value investing fans here. Our most loyal clients are often family offices, and we have noticed this more and more over the years. Perhaps this is due to our long-term thinking and our affinity for entrepreneurship. This is also where we come full circle with our company. We are also characterized by the ownership approach: a personal commitment of employees to the company, often combined with short decision-making processes and their own money in the fund. This often leads to an alignment of interests between fund managers and investors. Like so many other independent fund boutiques in the value sector, this is one of the reasons why people often take a closer look at us. Since we do a lot of research and hold many professional discussions with companies and fund management colleagues, many of our investors also value us as a sparring partner for investment decisions. Especially in our segment, we are often told how much people appreciate fund managers who know their companies well when it comes to concentrated portfolios. Of course, this also applies to many independent asset managers and HNWIs. Many investors like to combine our funds with funds from smaller, independent asset managers. Independence, specialization, and the skin-in-the-game factor are highly valued here.
Hill: What are you currently working on more intensively?
Jarillo: Of course we are concentrating on portfolio management. As I said, we appreciate the dialogue with investors. That’s why we have currently launched a value fund for investors from the surrounding area based on an existing mandate that we have been managing for six years. The special feature of this public fund is that we are supplementing our traditional strengths in the value area with SRI aspects in the selection of securities. For six years now, we have been organising short events twice a year with investors who find fund boutiques and value investing interesting. In April this year we were in Frankfurt, on 16 October 2018 we will again have a presentation with lunch and exchange of ideas in Munich. It is an event for investors, if you are interested please contact us.