RaboDirect's Key Accounts & Investments Manager, Michael Courtney, sat down with Chris Swasbrook, Managing Director of Elevation Capital and Portfolio Manager of the Elevation Capital Value Fund to get you the details on the newest addition to the RaboDirect Managed Funds Platform.
A number of RaboDirect customers may not have heard the name Elevation Capital before, could you tell us a bit about the company?
Elevation Capital was established with a firm belief that the value investing philosophy is proven to outperform most other investment methodologies over the long term and that investors in general need to think global in their asset allocation. Our investments are premised on the concept of "Margin of Safety" which we believe reduces risk. This means we seek to acquire investments that are sufficiently cheap so that there is a margin of safety, which minimises the risk of incurring permanent capital loss. Therefore, it is unlikely you will ever see us investing in the "fashionable" areas of the market. The concept of "Margin of Safety" was first brought to investors by Benjamin Graham and David L. Dodd in the 1934 seminal book "Security Analysis" the core principles of which still hold true today. In determining our "Margin of Safety", Elevation Capital typically focuses on the company's balance sheet. This coupled with research into peer companies, corporate mergers, acquisitions and liquidations allows us to assess the "Margin of Safety" on offer. A review of Elevation Capital's portfolios will detail investments which exhibit one or all of the following characteristics: low price in relation to net asset value / intrinsic value (corporate net worth), low debt levels, as well as a consistent history of paying dividends or returning capital to shareholders. We understand our role as fiduciaries and have made our remuneration as Investment Managers transparent for all investors. All our directors and executives are invested in our fund to ensure a common interest with our investors. Our firm-wide funds under management have grown from NZ$ 8 Million at inception to approximately NZ$ 275 Million today, and we now manage investments on a global basis for both institutional and individual investors.
Can you explain your role with Elevation Capital and how long you've been with the company?
I am the Managing Director and Portfolio Manager – I founded Elevation Capital Management Limited with my fellow directors Andrew Harmos and Craig Stobo.
How long have you been managing the Value Fund?
I have been managing the Elevation Capital Value Fund since its inception in 2008.
Can you explain a bit about the strategy behind the Value Fund?
The Fund seeks to provide investors with long-term capital growth and income by directly investing in equities on a global basis, while adhering to a "Margin of Safety" investment philosophy. The strategy of the Value Fund is to primarily invest in equity securities trading at a discount in relation to their net asset value/intrinsic value, with low debt levels, and which have a consistent history of paying dividends and/or returning capital to shareholders.
When someone invests in the Value Fund, where is the money invested?
The funds are invested in businesses all over the world. The Value Fund is unconstrained by geography and instead focuses on buying fractional interests in businesses which are trading for less than what we believe to be their net asset value/intrinsic value/s.
How do you decide what the most suitable/appropriate investment options are for the fund?
See www.elevationcapital.co.nz for examples of a selection of companies the Fund has purchased fractional interests in.
What are Elevation Capital's views on the NZ, Australian and wider global economies at the moment?
We are currently cautious on both the New Zealand and Australian economies given the outlook for key exports of both markets. The Fund currently only has one investment in New Zealand – Skyline Enterprises - which is exposed to tourism, a key beneficiary of a weaker New Zealand dollar and one investment in Australia – Pental Limited - a manufacturer of household consumer products like Janola and Sunlight dishwashing liquid. We are more positive on the general outlook for the US economy and continue to find attractive global businesses there. The negative sentiments in Europe, (particularly in the last 6 – 12 months), allowed the Fund to acquire some great franchises at attractive prices. European domiciled companies account for 34.4% of the portfolio as at 30 June 2015.
Although this fund is a global equity fund, does Elevation Capital still pay close attention to what is happening here in NZ, and to what extent does the local situation impact the investment decisions the fund makes?
Of course, we live here so we have a deep interest in what is happening in our economy and society. However, while we pay attention to the macroeconomics and politics of any economy/country they are not the primary drivers of how we make an investment or a divestment. We are principally focused on the businesses we are purchasing a fractional interest in and the economics/financials of those businesses.
How would you describe the performance of the fund in recent times? And what sort of performance should customers expect from this fund going forward?
The long-term performance delivered by the Value Fund to its investors has been +7.73% per annum on a net basis since inception (as at 31 July 2015). When you look at the Fund's performance the single most important thing to understand is we have generated all of these returns with an average cash balance of 29.6% since inception of the Fund. This means we have held cash equivalent to $29.60 for each $ 100.00 customers placed with us to invest. So when you look at the returns and compare the Value Fund's returns versus other global managers or indexes you have to understand the Value Fund's returns have been generated in a very conservative fashion. We will continue to manage money in this way on a go forward basis and I personally believe this is a key feature of this Fund that is not always fully appreciated.
What specific performance objectives do you set for the fund?
Our primary internal performance benchmark is to deliver our investors outperformance above NZ CPI+5%, which means we are protecting their purchasing power and growing their capital at a conservative rate overtime. It is important at this point to table that we do not have a performance fee or a specific hurdle rate for this Fund, this is an internal benchmark that we seek to measure ourselves against as it is a benchmark which allows you to focus on the long term which is what we and our investors should really be focused on.
Could you explain your thoughts on the risk this fund carries?
We are very focused on risk in this Fund. We have always maintained large cash balances (relative to most global managers) as I outlined earlier. Additionally, the Fund has a maximum individual position size limit of 5.00%. You can see from our monthly factsheets and quarterly reports many more details and figures on the Fund, which are designed to provide investors with insights into the Fund and to enable them to quantify risk/s for themselves. We believe our factsheets are unique in this regard as they do provide a number of key metrics which are extremely useful for investors / potential investors. For example, portfolio turnover and active share.
What methods does the fund use to minimise foreign exchange risk?
The Fund is currently unhedged. We hold the view that certainly New Zealand investors should view the Fund as a means to diversify away from the economy where the majority of their assets and income generating assets reside.
Do you expect a level of cyclical fluctuation in the funds price?
Of course, the Fund will not be completely immune from market fluctuations albeit one would expect it to perform better during market downturns given the strength of the underlying companies in which the Fund is invested but also our large cash balance which provides both ballast and purchasing power during a downturn without the need to sell other assets.
Does this fund pay distributions? If so when?
The Fund pays an annual distribution as at 31 March each year. Historical distributions and reinvestment rates are detailed on our monthly factsheet/s.
Why should someone invest in this fund?
An investor may look to invest into this Fund if:
(i) they are seeking global investment exposure and do not have the time to undertake the necessary analysis themselves;
(ii) they are seeking a conservative way to access a global investment exposure;
(iii) they wish to learn more about the specific companies they invest in and can do so in an understandable and easily accessible way; and,
(iv) they seek transparency and an alignment of interest with the investment personnel and directors are all invested alongside and on the same terms as all other investors.
For someone who is new to funds, what are some important considerations to take into account before investing in the Elevation Capital Value Fund?
This is a global fund and anyone considering investing should do so with at least a five-year time horizon. Another consideration for potential investors is that the Fund only prices once a month (on the last business day of every month), which means that any buy or sell requests made by investors will only be processed once a month.
To the extent that any information, analysis, opinions or views provided above constitute advice, they do not take into account any person's particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons.