Avenir Capital Quarterly Investor Letter; Fund up 2.8%

5th February 2016, Avenir Capital

The Avenir Value Fund (the “Fund”) increased 1.1%, net of fees and expenses, in the December 2015 quarter leaving the fund up 2.8% for calendar year 2015. The ASX All Ordinaries (including dividends) increased 3.8% for the year while the S&P 500 delivered 1.4%.

It was a rather frustrating year for our research driven, value-based approach. The companies we own continued to deliver against our investment thesis, solidly increasing underlying value throughout the year. Despite this, the market price placed on those companies showed little forward progress at best, or, in some cases, substantial declines. An investment strategy based on the simple principle of investing only when one is able to do so at a material discount to a conservative assessment of underlying or intrinsic value (broadly known as value investing) has suffered an unsatisfying few years.

Momentum investing, on the other hand, based on following trends without regard to fundamental value has worked all too well. As Seth Klarman, the famed Boston based value investor, noted in his recent 2015 letter for his Baupost fund:

“Momentum investing…worked brilliantly in 2015…buy what’s been performing well and watch it go even higher…By contrast, bottom up bargain hunting – which requires fastidious research, endless patience, pattern recognition skills derived from hard won experience and the application of sound judgement – didn’t prove profi table for us last year.”

Like many value investors, the public equity portfolio within Klarman’s $27 Billion Baupost fund suffered, declining 6.7% in 2015.

Now, it is not new to suggest that value investing does not deliver strong results in all periods. Value investors are known to require deep reserves of patience and discipline and can go for long stretches of time with no positive market affirmation of investment decisions. As Klarman says: “You don’t become a value investor for the group hugs”. It is this very fact however that makes value investing so powerful. If it worked all the time then it wouldn’t work over time because everyone would do it. Because only a few have the necessary temperament and operate in a business structure that allows them the luxury of acting consistently through the good times and the bad, the opportunity to make money by following a value strategy will always persist.

So, why have the eclectic, value-laden and increasingly valuable companies we, and other fundamentally based investors, own not yet been recognised by the market in a manner we feel appropriate?

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