Old school New England 92 - Scanorama

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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. �
UNDERVALUED COMPANIES �� fundamental values are not reflected in the share price �� which are out of the spotlight due to the sector to which they belong UNPOPULAR COMPANIES �� records or have committed “past sins” �� tory or hard-to-access information �� of-favour sector or region and thereby be shot by association UNDER-RESEARCHED COMPANIES �� little to no research coverage �� which are wrongly researched and/or misunderstood since analysts’ perceptions about the company are erroneous Illustration: Per Dybvig
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Old school New England 92 - Scanorama

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