{"id":7902,"date":"2023-08-08T15:09:56","date_gmt":"2023-08-08T13:09:56","guid":{"rendered":"https:\/\/hqam.ch\/asset-managers-homework\/"},"modified":"2024-01-04T15:51:17","modified_gmt":"2024-01-04T14:51:17","slug":"asset-managers-homework","status":"publish","type":"post","link":"https:\/\/hqam.ch\/en\/asset-managers-homework\/","title":{"rendered":"Asset Manager’s Homework"},"content":{"rendered":"\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t
\n\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t

Improvement through revision<\/strong><\/p>\n

Revising the results of past decision making is a part of the asset manager\u2019s routine. Everyone, who read Buffet letters to shareholders noticed how much space is being dedicated to his decisions leading to the unfavorable outcomes. We strongly support this practice and consider it to be an essential component of our investment process. We also believe that by sharing these analyses with the public we aim to increase the transparency of our operations and introduce certain learning element into the broader investment community. <\/p>\n

The results of previous reviews, latest of which were published two years ago (https:\/\/hqam.ch\/publications\/insights\/kurzer-blick-auf-vergangene-fehler\/<\/a>), have improved our decision-making, thus making a positive contribution to the performance of our portfolios. As such, we systematically avoid investments in state-regulated sectors, in capital intensive businesses and companies undergoing turnaround or in the early stage of the restructuring process. Now, more than ever, we scrutinize historical margin development to understand its consistency over the cycles and pay even more attention to the quality of corporate governance. However, suboptimal choices might follow as long as we invest; so, our main objective is to limit those to a minimum by figuring out what went wrong and how to prevent it from happening again. <\/p>\n

Overoptimistic management as a sign to be extra critical<\/strong><\/p>\n

When we look at an investment case, we carefully consider, among other things, the growth expectations outlined by company\u2019s management. Those are then put into the context of market estimates to see if those are significantly misaligned, which could signal that analysts are either overly bullish or, on the opposite, overly bearish when it comes to the future growth of the company. Sometimes, however, both sides can be overly optimistic, which usually results into a very harsh landing when reality proves to be far less rosy than anyone has expected. This is exactly what happened to PayPal and Align Technologies. <\/p>\n

We bought these companies when the future looked bright for both. PayPal was seeing massive expansion in user base and transaction volumes driven by spike in e-commerce, while Align was capitalizing on the growing interest in clear aligners that surged during lock-downs. The management\u2019s addressed growth plans and the historical development of the companies evidenced about fast development pace. However, the paradigm has changed as the products became more commoditized and their competitive advantage weakened leading
to our sell decision. Accelerated growth rates were exceptional rather than a new normal despite management beliefs. Hence, historical context matters, and we learned to appreciate \u201cunderpromise and overdeliver\u201d approach. <\/p>\n

Time is a tricky animal<\/strong><\/p>\n

We think many would agree that it is psychologically challenging to part with the stock after it has taken a significant dive, as \u201crebound mentality\u201d is a powerful force. We have gotten better at overpowering it, but there remains plenty of room for improvement. This was the case with Korean manufacturer of air and water purifiers, Coway, whom we sold in 2021 after holding it for almost seven years. Although our initial wait-and-see approach to stagnant operational momentum and problem with major shareholder deprived us of a more successful exit, we were more proactive this time. <\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t\"\"\t\t\t\t\t\t\t\t\t\t\t
Source: H\u00e9rens Quality AM, Reuters<\/figcaption>\n\t\t\t\t\t\t\t\t\t\t<\/figure>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t

Since exit, stock price continued its downward movement with no reversal in sight. Our major learning was to be more decisive and to critically evaluate the future potential of the company and to part with it in case of bleak perspective, regardless of the past performance.<\/p>\n

Since the exit, the share price has continued its downward trend with no reversal in sight. Above all, we have learned to be more decisive and to critically assess the future potential of the company and to divest ourselves of the companies if the outlook is gloomy, regardless of past performance. <\/p>\n

Being too slow in the decision-making is costly, but so is being too fast, as many investors experienced in 2011, when Steve Jobs announced he is taking a medical leave. There was a wave of selling of Apple\u2019s shares in August when he stepped down as CEO and in October after his passing as Mr. Jobs was perceived, by many, as critical figure for company\u2019s success. Apple, however, continued to execute its strategic priorities as usual and share price made a nice recovery.<\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t\"\"\t\t\t\t\t\t\t\t\t\t\t
Source: H\u00e9rens Quality AM<\/figcaption>\n\t\t\t\t\t\t\t\t\t\t<\/figure>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t

We also became a victim of the \u201crunning-ahead-of-yourself\u201d phenomenon. Back in early 2022 we sold Moncler, the Italian fashion company, in order to reduce portfolio\u2019s exposure to luxury, as it was expected to suffer due to subdued consumer appetite as a result of the war in Ukraine. This risk, however, never materialized. We took note, and applied a different approach when concerns emerged
about the business models of Synopsys and Cadence Design Systems \u2013 both dominant players in Electronic Design Automation (EDA), potentially being disturbed by the generative AI, we did thorough research first to actually conclude that both will be among major beneficiaries of the AI wave. They remain core holdings of our portfolios by this day. <\/p>\n

Better excellent few than many but mediocre<\/strong><\/p>\n

Given lessons from the past, we avoid industries that heavily depend on the commodity prices, either on revenue side or on cost side (if commodity share is relatively large). While this self-imposed restriction is logical and sensible, it does have one negative consequence \u2013 in some regions it substantially shrinks investable universe leading to rather concentrated portfolios. In pursuit of diversification we have added LG Household & Health Care, Korean household goods and cosmetics manufacturer, whose stock had a value profile that fit well into the portfolio. However, the overly high reliance on one brand became critical during COVID and raised questions about the overall quality of business model leading to the sell decision. <\/p>\n

Margin of Error<\/strong><\/p>\n

A margin of error can be acceptable if it does not have significant impact on the performance. In our Top portfolios, 80-90% of companies deliver outperformance , while in regional 55-60% do. By revising track-record of the decision-making, our primary goal is to push share of the outperformers higher, minimize the loss in critical cases and generate more value for our stakeholders. And while past performance is by no means indication of the future one, past decisions, once analyzed, provide us with a solid reference book to aid in future investment calls <\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\t
\n\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\tPDF<\/span>\n\t\t\t\t\t<\/span>\n\t\t\t\t\t<\/a>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

It is a basic psychological need to ‘be good’ and to receive praise, especially when effort is involved. This trend is further reinforced by regulators who formally define who is considered ‘good.’ <\/p>\n","protected":false},"author":1,"featured_media":7890,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[37],"tags":[],"class_list":["post-7902","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate-excellence-insights-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/posts\/7902","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/comments?post=7902"}],"version-history":[{"count":5,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/posts\/7902\/revisions"}],"predecessor-version":[{"id":7909,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/posts\/7902\/revisions\/7909"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/media\/7890"}],"wp:attachment":[{"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/media?parent=7902"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/categories?post=7902"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hqam.ch\/en\/wp-json\/wp\/v2\/tags?post=7902"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}