The strategy continues to demonstrate its steadfastness in sharp contrast to the widespread indecisiveness evident in the global financial markets due to headline macroeconomic and geopolitical concerns. We believe that the investment philosophy laid out by our academic and professional role model Benjamin Graham, crafted during the Great Depression years of the 1930s, serves us particularly well in the current difficult investment environment.

Analytical approaches for the enterprising investor

Benjamin Graham first published The Intelligent Investor in 1949, serving as a practitioner’s handbook in sequence to the previously issued academic tome Security Analysis (1934). In it he proposed three areas in which the so-called “enterprising investor” may find profitable investment opportunities, namely (1) “the relatively unpopular large company,” (2) “bargain issues” and (3) “special situations.” We have always found these categories to be extraordinarily helpful in streamlining and sharpening our analytical thought process. Hence, we are accustomed to assign the particular investment situations we uncover to one of these three buckets, defining and filling them according to our particular modus operandi.

The first bucket we call “compounders.” Historically they have made up around a quarter to a third of the Fund’s portfolio. The category includes fairly well-known firms that have fallen out of favor in the stock market, mainly for the following reasons: [1] their revenue growth rates may have been decelerating because of signs of market saturation; [2] their corporate focal point may have shifted from high rates of reinvestment to cash flow maximization and higher dividend payouts; [3] they may have experienced company-specific strategic or operating mishaps which have led to temporary earnings setbacks; [4] and/or they may have been afflicted by externally caused macroeconomic and geopolitical crises or force majeure events such as natural disasters.

The second bucket, bargain issues, has always comprised the bulk of overall portfolio allocation with well over half the capital invested. It encompasses four main areas of impediment which have rendered the stocks in question trading significantly below our objective assessment of intrinsic value. [1] They may be neglected or ignored by the market because they are not well known due to their size (e.g., of small or medium market capitalization) or position in the supply chain (e.g., the production of intermediate goods) or because they have a subdued earnings profile due to modest revenue growth and/or profit margins. [2] Investors at times may be concerned or even fearful about their prospects, oftentimes due to impending signs of a broad-based cyclical downturn or industry-specific reasons such as temporary production overcapacities. [3] They may be too complex or unwieldy to analyze for most market participants (e.g., conglomerates, holding companies or otherwise widely diversified businesses).  [4] It may be difficult to access management and exert influence as a minority shareholder (e.g., in the case of companies without a need to tap outside financing sources, thereby lacking the incentive to engage in investor relations and volunteer additional information that goes above and beyond that required by regulatory reporting requirements).

The third bucket, special situations, usually contributes the remaining and smallest share to the portfolio. It primarily includes [1] asset plays such as discounts to readily assessable market value (such as net cash or other liquid assets and long-term holdings such as prized land and natural resources which are accounted for using historical book values); and [2] other particularities such as substantial exchange-listed or stand-alone unlisted subsidiaries, cross-shareholdings, joint ventures or companies involved in M&A and other corporate finance transactions.

The above discussion on the analytical approaches for resourceful investors proposed by Ben Graham and the way we incorporate them in our daily work illustrates how deeply his philosophy permeates our investment style. Graham was an inspiration to us on many fronts, one of the most important being his mental fortitude that allowed him to remain industrious and constructive to find profitable investment opportunities with calculated risk even in the face of great stress in the financial markets. We are grateful to have been able to draw on his wisdom to continuously refine and improve our own investment endeavors.

Sincerely,

Gregor Trachsel

Chief Investment Officer SG Value Partners AG