Universal-Investment: Could you provide us some insight on Maj Invest?
Kara: Maj Invest was a spin-off of an old Danish government-sponsored pension fund called LD Pension. I came from Danske Bank, where I previously had worked with Maj Invest’s CEO and I asked Ulrik Jensen, whom I knew for some years prior to the Maj Invest launch, if he would like to join me. The pension fund has reduced their ownership over the years and today we are a fully employee-owned, independent asset manager.
Universal-Investment: Let’s talk about your way of managing funds. We like your expression “value investing is a mental framework”.
Kara: The first thing Ulrik and I talked about, before we even started the Global Value Fund, was how to define value as an investment philosophy. Value investors were probably focusing too much on financial metrics and less on what they were buying. The way we define it was that for us it is that we buy businesses where we believe the value of the business is higher than the market value with a high degree of certainty. This conviction is of key importance. Let me give you an example. Johnson & Johnson grows organically 3 – 6 % per annum. If you look at electric vehicle producers in comparison, the growth rate estimates are very high, so is the high level of uncertainty. This is the magic formula: Do we know things with a certainty or not? If you make an investment into a company where you have some estimates with high uncertainty, you are not investing, you are betting.
Universal-Investment: One of the most interesting slides of your presentation is the one which you called the area of competence: “Only look at the important things you know.”
Kara: If you know things, there is a higher degree of certainty around estimates. Certainty around the estimates matters. If you move from certain to uncertain, it becomes a gamble and is no longer an investment. The important things we know are annual reports, valuation metrics and business models.
Universal-Investment: What are the less important things in your process?
Kara: A company CEO. He is very important, but meeting the CEO is not important to us. It is not necessary as we look at the track record of the CEO by reading annual reports. Meeting the CEO can imply a psychological bias in investment decisions. This can lead to errors. There are many examples of CEOs who where very charming and charismatic, but very dangerous to invest in. For us a CEO meeting doesn’t add any value.
Universal-Investment: What are the other important features that distinguish you from your peers?
We work with a proprietary software to make sure that we are not exposed to a high degree of systematic or factor risk.Kurt Kara
Kara: Besides the way we define value, the second most important difference is the way we manage risk. There are two sorts of risk. The first risk is systemic. It comes from the outside, currencies, interest rates, oil prices and the overall market. The other risk component is what we call idiosyncratic risk. It comes from stock selecting. We have basically eliminated everything that comes from the outside, the so-called factor risk. In other words: The Dollar may go up or down, it is not going to affect our creation of excess return. We work with a proprietary software to make sure that we are not exposed to a high degree of systematic or factor risk.
Universal-Investment: Is this always possible? Do you know all on single stock risk factors?
Kara: We don’t know the influences on a single stock, except historical prices. We take the portfolio with the current weights and simulate how it behaves in certain scenarios. We apply a sensitivity analysis towards exogenous factors on a portfolio level. If the portfolio doesn’t behave like we want it to, we adjust the weights accordingly. We perform that analysis weekly to monthly, depending on the market situation.
Universal-Investment: If you see influences of the oil price or currencies, what will be the consequences?
Kara: If there is a sign that our excess return is sensitive to oil prices, we reduce this sensitivity either by reducing companies that are oil sensitive or we increase those negatively sensitive to oil.
Universal-Investment: You have a very concentrated, high-conviction portfolio – only 25 to 35 companies. Is this enough to eliminate unknown market risks?
The way we manage is to avoid investing in companies with high risks in their business model.Kurt Kara
Kara: There will always be unknown risks which we don’t know or have not identified yet. The way we manage is to avoid investing in companies with high risks in their business model. You can’t diversify away from all these risks. You need to avoid companies that have weak balance sheets in general.
Universal-Investment: We talked about process and risk management. Have there been any adjustments to the process since launch of the fund?
Kara: Not really. We think that we are loyal to the mental framework that I mentioned earlier. What we do is to try to identify some of the subcomponents in our system, to introduce new exogenous variables, which we want to analyze going forward. In connection with Brexit, we added the British pound and the FTSE Index to see if we are in any way affected by Brexit. From that point of view, we evolve, but the model, the scoring system, risk management and the team are the same. We try to get a little bit smarter every year, by reading books, literature as well as performing research.
Universal-Investment: We live in a very political world. Do you also consider how political decisions influence capital markets or isn’t it necessary for your investment process?
Kara: I think it is important from a risk perspective. If you have trade wars or if you have a Cold War 2.0, a digital cold war, it affects a lot of things. It is basically that you don’t want to buy components from each other because you assume that the counterparty is going to do something nasty. You could raise digital walls, so it’s no longer the Berlin wall, it is a digital wall and it is against China. These things need to be considered. This can lead to divestments. If we see a Chinese semi-conductive product that appears as interesting, we may be reluctant to buy it, simply because we see digital walls being raised right now. This is the new world we are living in.
Universal-Investment: Finally let us have a look at the current markets: Where do you see the best opportunities? Any recent decisions or new investments?
Kara: Telecommunication is an area in which we have not been invested for quite some time, but it looks interesting now. We invested in AT&T and NTT. Both are very cheap and trading at 9-10 times earnings now. AT&T has roughly a 7% dividend and NTT is giving us a 4% dividend as well as a 4% share buy-back yield. That’s 8% in total. Adding some organic growth we will get 10% p.a. Another opportunity are some airlines. We have Southwest Airlines, which is the most profitable airline in the history of mankind. They never lost money, which is by itself a fantastic phenomenon. It is outstanding for any company not to have a single year with negative returns. Southwest have had 30-40 years with positive return on equity.
The stock is under pressure because of the Boeing 737 Max grounding. Our calculation demonstrates that the company will probably hit 3% on total earning per-share, but not more. This includes the assumption that the 737 Max is grounded the entire year, which is probably not going to be the case. That is how we assess the situation and we get the stock very cheaply.
Author: Kurt Kara, Maj Invest
Date of issue: 5/3/2019
Danish investment boutique Maj Invest is committed to classic value investing. The guiding principles of Benjamin Graham and David Dodd are the most important base for any investment. Talking to...
Author: Kurt Kara, Ulrik Jensen and Timo Lüllau-Mortensen
They are fast, unstoppable and they have their finger on the pulse of new technological developments: digitally driven companies such as AirBNB, Amazon and streaming services such as Spotify are...
Author: Dr, Hendrik Leber and Yvonne Raßbach