Old school New England 92 - Scanorama

SPECIAL ADVERTISING SUPPLEMENT FROM INVESTMENT MANAGER SKAGEN FUNDS
Businesses don’t thrive by
following the crowd. Why
should fund managers be any
different, asks Mark Lewis?
MARK LEWIS/JOURNALIST
Trusting your philosophy
On 15 September 2008, when the whizz kids
of the fi nancial boom came blinking out of the
Lehman Brothers offi ce in Canary Wharf, it must
suddenly have dawned on many of these former
Masters of the Universe how little they knew.
The years spent sitting in front of
a fl ickering computer screen in London
turned out to be poor preparation for
fi nancial Armageddon, when facing
down warlords in West African jungles
would have been more appropriate
training.
“When the fi nancial world fell off a
cliff, 10-15 years of fund management
experience and a degree in fi nance
didn’t help,” says Tim Warrington, head
of International at Scandinavian investment
boutique, SKAGEN Funds. “After
all, these were the people who got us
into trouble in the fi rst place.”
Certainly, Warrington’s experience as a
Gurkha commanding offi cer, meant he
could keep a cool head in a crisis. But
as investors all over the world made the
classic mistake of piling out when stock
prices were low, SKAGEN was faced
with the same problem as every other
fund manager on the planet: convincing
clients that their stocks had underlying
value, even while the market sent them
plummeting.
“It was during the 2008 downturn that
we saw how the information and education
that we had given our clients about
how our funds work really paid off for
them,” says Åge Westbø, SKAGEN cofounder
and deputy managing director.
“A lot of our clients stayed in our funds
in that period and then quickly got
back into the black when the markets
rebounded.”
Throughout the crisis, SKAGEN’s fund
managers ignored the sheep and
lemmings. They stayed true to the
SKAGEN investment philosophy and
trusted the decisions they had made
prior to the crash. SKAGEN has its own
share of fi nancial whizz kids, of course.
But stock picking for the company’s
three equity funds is underpinned by a
simple philosophy: the stocks should
be undervalued, under-researched, and
unpopular.
The company’s philosophy is one of
bottom-up stock picking. Fund managers
select companies irrespective of
industry, geography or indices. And the
equity funds all have a global mandate,
so stocks come from all over the world.
But, however geographically disparate,
the stocks share certain attributes.
When investing in companies, portfolio
managers value a strong balance sheet,
limited exposure to debt, good cashfl
ow, and management with a commitment
to creating and sharing shareholder
value. Deep analysis of these
companies should also reveal likely
triggers which in the medium term will
release some of that value to SKAGEN
clients. The philosophy is as simple
to explain as it is devilishly diffi cult to
implement.
But thriving in 2008’s turmoil
became about more than a strong stock
picking philosophy. It also demanded
that enough SKAGEN clients trusted
their portfolio managers to stick with
them through the turbulence. SKAGEN
believes that the company’s culture of
openness and communication here was
key. As Westbø says, “The easiest thing
in the world would be to go into hiding
when stocks take a downturn. We make
sure we continue to communicate with
our clients and explain why we think
these things have happened.”
Right from the beginning the company’s
founders believed it was critical for
SKAGEN to align company interests with
those of its clients, in order to build
credibility and trust. The equity funds
have performance-based fee models
and the remuneration of the fund
managers is tied closely to the risk
adjusted return they are able to generate
for the clients. In addition, all
of SKAGEN’s portfolio managers are
invested in their own funds, often with
very large amounts of their personal
wealth. “Our business model is to
have alignment with our clients,” says
Kristian Falnes, portfolio manager. “We
have clear incentives to work with our
clients and that is an important part of
our model.”
It is a business model which has been
around since the fi rm’s four founders
started out in 1993, investing money for
their friends and family during the week,
and sitting beside them at the dinner
table at the weekend. Ever since,
despite the value of its funds growing to
€12 billion, SKAGEN has tried to maintain
that same level of dinnertable trust.
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