Edgefolio Spotlight – Interview
Interview with Theron de Ris:
Briefly introduce yourself and your fund:
“I grew up in Upstate NY in the U.S. but have spent the past 24 years in Europe – my whole professional career. The first half was on the sell-side at Goldman Sachs and then Morgan Stanley. I spent a lot of time in Italy covering institutional investors with a focus on U.S. equities. Latterly, in the mid-2000s, I ran an advisory team in London at which time I also caught the investing bug as I was meeting all these fascinating investors and traveling each year to the Berkshire Hathaway annual shareholders meeting.”
The second half of my career since early 2008 has been on the buy-side, first as a senior analyst and in client services at Indus Capital, a $6bn Asia-focused long-short and long-only boutique. For the past 6 years, I’ve been running my own independent fund at Eschler Asset Management LLP. We focus on investing in well-managed businesses at statistically cheap valuations. We’re currently finding mispricings in capital-starved, cyclical industries. From time to time we also short poorly managed businesses in over-capitalized industries.
What is your role?
I am the portfolio manager of Recovery Fund and I also have an operational role, including overseeing several other emerging managers in the office for which Eschler Asset Management LLP acts as the regulated AIFM.
A brief history of your fund:
Inspiration/motivation for opening:
For me, it was a passion for investing and wanting to be my own boss. I guess I’m belatedly following in my dad’s footsteps, a self-employed architect who rarely worked for anyone else.
The Recovery Fund has compounded at 18% net of fees and expenses in the three years ending 30 September 2018.
What is the goal of the fund?
I’d like to get to the point where the fund’s net return is compounding in the low double-digits since inception. We have quite some work to do but the most recent three years are very encouraging. My own capital is 29% of the fund, it’s essentially all my liquid net worth so the goal is to grow value and make it through the next bear market in a position of relative strength.
How did you manage to escape the ‘Tipping point’ and achieve ‘Break-even’?
We are not there yet, because I hardly charge any management fees. However, we are in the process of diversifying Eschler’s revenue streams which will extend the runway and reduce dependence on the fund in the short-term.
What is your unique value proposition:
We combine analysis of market cycles, industry cycles and individual businesses to inform portfolio construction and generate alpha. We are currently specifically focusing on capital-starved, cyclical industries where expected returns are higher that of the broader market and where correlations to traditional financial assets are lower. We are active, long-term, value-oriented, public market investors. We want to pay low multiples of normalized cash flow like private equity used to 20 years ago. Needless to say, this is an out-of-favor style in a market where passive, growth investing and private equity auctions are all the rage.
How do you market your uniqueness?
We write an annual letter to shareholders detailing our philosophy and ideas and host interviews and selectively speak at conferences during the year. We have also started writing a brief quarterly missive and we report monthly returns to investors who want that. We discourage short-term focus, though, and essentially only seek investors with a private equity-like time horizon.
Is this method effective?
I think it is effective in building credibility as an independent investor but it has not led to much investment in the fund!
What are the strategies you employ in order to enhance your returns and manage your risks?
From time to time we make large bets in out-of-favor industries where capital competition is lower and career risk is higher. Because we are paying lower prices, we are investing in a high reward-to-risk ratio if our thesis is correct, our timing is half-decent and we remain patient. This is how many famous investors have greatly enhanced their long-term track records but it is not for the faint of heart.
Other ways we manage risk include focusing on only a small number of situations where we can develop expertise, running a relatively lower gross exposure (i.e. a small short book), tilting toward North America with which we are more familiar, eschewing the use of options etc. This approach is born out of experience and self-reflection.
Are you risk-averse or do you like taking a risk?
If you are defining risk as “volatility” or mark-to-market then sure I don’t mind that. If, on the other hand, we are defining risk as the possibility of permanent loss of portfolio capital, I am very risk-averse.
What sort of a selection/filtration process does a stock go through before you invest in it?
We try to understand the industry dynamics and spend a lot of time on the balance sheet, alignment of interests and price (quantitative value and/or low multiple of normalized earnings).
What kind of research do you put into selecting stocks, and sectors at large?
We rely heavily on a respected network of experts we’ve become familiar with over time. These include fellow investors, analysts, industry experts, and management of companies. A lot of reading is involved. We maintain watch lists and cross-reference ideas with proprietary screens. We spend a lot of time looking at a company’s track record and evaluating what companies do vs what they say.
Which type of investments has seen best returns in the past five years?
We’ve been pretty successful investing in the precious metals and uranium industries, both of which are gradually emerging from brutal down-cycles.
Is there one investment decision that has changed the course of your fund?
A few industry allocation decisions have played a much bigger role than anything else.
Are you optimistic about the economy in the near future? What is your personal take on the Asset Management Industry?
I believe we are very late in the cycle. Recession indicators are not flashing red yet (fed funds, credit spreads, yield curve etc.) but they are orange. The rise in interest rates, oil, and the dollar are already being felt outside the U.S. and have, historically, preceded recessions. The U.S. economy has experienced a “sugar high” with record deficit spending deep in the recovery cycle. This keeps the Fed hawkish as the Fed wants maximum ammunition to combat the inevitable bust.
The asset management industry is fat and happy. Over-regulation and distribution processes help incumbents to the detriment of new entrants. There will surely be more consolidation and a forest fire might be necessary to clear out the many undifferentiated offerings.
What trends do you expect will disrupt the asset management industry?
Machine learning will harvest alpha from short-term discretionary traders but the opportunity for longer-horizon approaches is alive and well. Passive will have some sort of reckoning given how much naive capital passive strategies have attracted over the past decade.
How do you see digitalization impacting the asset management industry?
“If you don’t have a digital strategy these days it’s like driving with a foggy windshield. Those competitors that have one are cruising past you on the highway.”
Today it is possible to have better technology than large firms even if you are small because of the cloud and new digital marketing offerings like Edgefolio.
Raising capital is difficult for most new hedge funds. What technologies should a new manager invest in to help with the asset raising process?
Having a CRM and/or a digitized investor relations solution like Edgefolio seems key. In particular, the ability to track investor engagement with your content can help economize and better target time spent on investor outreach.
Will word of mouth still be the main factor when bringing in new clients in 5 years?
I think so. Referrals will always play a big role. Relationships and trust really matter in this industry. One less positive aspect of this is asset owners tend to hunt in packs and over-allocate to the same managers. That won’t change. Institutional behavior is structurally pro-cyclical.
How have you overcome GDPR, MiFID II, AIFMD?
Eschler Asset Management LLP is regulated as a Small UK AIFM. We are subject to parts of both the AIFMD and MiFID II regulations but because of our size, there are exemptions. Edgefolio is a neat solution for investor relations in that potential clients need to sign up as professional and/or accredited investors and consent to being contacted under GPDR.
What’s the next area you expect to see new regulations?
I would reverse the question and ask where in future will regulation be rolled back? We seem to be pretty far on one side of the pendulum (my wishful thinking probably).
How does the fund plan to scale up its operation and what challenges do you expect to overcome?
Our first hire will be a financial analyst with a business development skillset. The big challenge we will have to overcome is probably an operational due diligence process on the part of a larger institution. We are working on preparing for that but recognize we will just have to cross that bridge when it arrives.
Where do you see an exciting opportunity to grow?
I think the best shot we have is to convert family office prospects in our own network and then attract non-profit capital in North America.
What are your personal plans in 5-10 years time?
I’d like to be running a high-performing small boutique with outstanding client experience. I have no interest in a strategy of “getting into the billion-dollar club” or modifying my approach to appeal to certain institutions. We will stay true to our philosophy and focus on adding value.
Thank you, Theron, for taking the time to talk with us. We wish you the best of luck to achieve your goals!