Universal-Investment: Mr Profitlich, Mr Schmidlin, as pure stock and bond pickers, you invest exclusively in securities that you understand, as well as those that stand out due to an attractive valuation and also have a specific value driver. How do you select the appropriate securities?
Marc Profitlich: There isn’t one single algorithm that identifies good companies at low prices. We have a watch list for companies that we know and like. We also screen occasionally on the basis of particular key figures. Thirdly, an investment idea sometimes arises from the exchange of information with a few select investors. But, at the end of the day, it is vital to constantly pore over annual reports and bond prospectuses.
Universal-Investment: Can you give an example of a specific value driver?
Nicolas Schmidlin: We invest in companies that we can understand. This already narrows down the investment universe considerably. A security must also be undervalued. On top of this, we try to identify a value driver that leads us to believe that the undervaluation will dissipate over time. This can, for example, be a technical factor, such as the cessation of surplus share selling. For instance, we invested in the Belgian postal service in mid-2014 because one of the major stockholders there was under pressure to sell, which temporarily weighed on the share price. Other value drivers could be changes in the shareholder structure or in management’s incentive structure (as was the case at Rolls Royce and Vivendi, for example). The future allocation of capital and the dividend policy of a company can also play a role.
Universal-Investment: You frequently detect securities that not very many investors have on their watch list. Which equities and bonds brought you particular success most recently?
Marc Profitlich: In January and February, we built up a position of more than 10 percent in hybrid bonds issued by Deutsche Postbank and Deutsche Pfandbriefbank, both of which had come under heavy pressure amid the concerns about European banks. Both bonds will lose their regulatory eligibility completely in 2017. In addition, both institutions have a solid business and adequate capitalisation. The bonds recovered quickly. We have already realised the capital gain on the Postbank bonds in full. In terms of equities, our stakes in Vivendi and Sunrise proved to be stable, as expected. Since the beginning of the year, the best performers have been Exova, the provider of testing services, and DNOW, the distributor of equipment and spare parts for the oil industry, each with stock price gains of more than 20 percent in euros.
Universal-Investment: Which equities and bonds are you focusing on in the portfolio at the moment? What are your largest equity and bond positions right now?
Nicolas Schmidlin: One of our biggest positions continues to be a stake in Regus. The owner-operated company offers flexible office solutions, among other things, in about 3,000 business centres around the world. After the company managed to reduce the capital intensity of expansion by collaborating with office owners, the annual expansion rate of more than 15 percent can be maintained. Likewise, one of our biggest positions is held in the Swiss telecommunications company Sunrise. The company could emerge as the great beneficiary of a consolidation in the Swiss mobile phone market. Recently, we saw our considerations confirmed with the purchase of a 25 percent stake by Germany’s Freenet. As far as bonds are concerned, we continue to hold a large position in Deutsche Pfandbriefbank’s hybrid bonds, which we already mentioned.
Universal-Investment: You always emphasise that nobody should let market sentiment influence their decisions. But no professional investor is completely free from market developments. Otherwise all investments would have to work out somehow. How do you distance yourself with your investment strategy? How do you free yourself from macroeconomic developments?
We don’t want to surrender ourselves too much to any of these macroeconomic factorsMarc Profitlich ,
Marc Profitlich: I think it’s important that you don’t let emotions in the capital markets control you too much. It is certainly also advantageous not to be surrounded by too many colleagues in the office. Likewise, it’s also good to work in, say, Cologne instead of Frankfurt. I consider it important to think carefully about which people you are exchanging information with. We try to block out as many influences as possible and limit ourselves to exchanges with a few other value investors with whom we foster trustworthy relationships.
As far as dependency on macroeconomic factors is concerned, you are right: We can’t escape them either. Therefore, it is our approach within the context of the portfolio not to allow great dependencies on individual macroeconomic factors to emerge, whether it’s the development of the Chinese economy, for example, or the level of interest rates. We don’t want to “surrender” ourselves too much to any one of these factors. It is important that our investors understand what they can and can’t expect from us. We don’t hedge the portfolio and don’t engage in market timing. We won’t deliberately make profits from interest rate or currency movements. Instead, we assemble a portfolio that is diversified to cover various macroeconomic factors and includes securities whose value drivers can occasionally push general market developments to the background. For example, our bond portfolio focuses on special situations that are, in general, minimally affected by interest rates. As a result, we haven’t benefited from the steady decline in interest rates in the past, but we also shouldn’t be influenced too much by a rate increase.