Ethenea about trends in equity research, macro economics still relevant

Christian Schmitt

Interview Christian Schmitt, CFA, Portfolio Manager bij ETHENEA with Ronald Kok from

We spoke with Christian Scmitt and asked him our most crucial questions about investing in stocks

Trends in valuation methods

We do not recognize specific trends in valuation methods. Most analysts and investors who apply a value-based investment philosophy usually tend to stick to their models and approaches. The only observation worth mentioning is a bigger skew towards free cash flow measures in some valuation methods, as many quantitative analyses of single factors note the good investment results of this figure during different market cycles. The bigger trend in today’s markets seems to be a change from trying to compare current prices to fair value, towards a more thematically driven investment approach. It is worth noting that valuations are no longer as important for current markets as they should be.

Got an order in valuation criteria in the filters?

No, it is more important to follow a strict discipline within the chosen valuation method to navigate through financial markets. And also to know about the strengths and deficiencies of the criteria being used.

Why are markets still not efficient in 2017 as value investing still works

From time to time, and in specific situations, markets seem to be close to perfect market efficiency. And it’s true that every investor has had his own experience with market efficiency in the past. However, in the end capital markets are a very complex system with a myriad of reciprocal dependencies. As fear and greed are also inherent parts of investing and capital markets, I have no doubt that value investing will continue to deliver attractive returns in the future.

Do you use different valuation methods for sectors and sizes?

Yes, as you have to treat financials differently to most other businesses – this is also true for commodity-based companies. And for smaller or less-diversified companies it is okay to ask for higher risk premiums than for the Nestlés of the world.

Do you also invest in non-euro countries in EU?

Yes, why not? Our universe is global, focusing on all OECD countries. You should not make the mistake of thinking that EUR-denominated stocks bear no currency risk, just because this is not mentioned in your monthly portfolio overview. Most companies have an economic foreign exchange (FX) exposure within their business, and this is hard to translate into concrete numbers. The underperformance of European equities during the strengthening of the Euro in the summer months of 2017 is the best example for this relationship.

Does it happen that too few stocks are in portfolio?

This can happen and within the concept of the Ethna-DYNAMISCH fund, as a mixed fund, we appreciate this. As we have an absolute approach, not a relative one, every single stock has to offer value on its own - not compared to an index or a peer group. This is an important and meaningful supplement to our top-down view on markets. The same is true for other parts of the portfolio. As we are currently unable to find a sufficient number of attractive bond investments, the consequence is a cash quota of around 20%. Despite above-average valued equity markets, we are still able to find sufficient stocks to fill our equity bucket. The equity portfolio’s price earnings ratio of 11.0x and a dividend yield of 3.6% reflects this very well.

If e.g. 500 stocks are undervalued, how many do you buy and why these?

I’ll give you a simple explanation for this: we concentrate on the most attractive ones and target a concentrated portfolio of around 30 to 40 stocks to put our very best ideas to work. There is always a differentiation between the single names and our assessment of the individual investment cases. And in the end you have to keep control of your portfolio by investing in a manageable number of stocks.

How do you prevent noise influences?

That’s quite difficult, especially for investment professionals who spend a lot of their time in front of a Bloomberg and get flooded by a vast amount of input from all types of sources. However, over time you hopefully develop the right feeling to put everything in perspective. My advice: spend as much time as possible with analysing and reading information that matters – then you simply have no time left to absorb the noise.

Do you also hate quarterly statements?

No, I do not hate them. They are a helpful tool to follow a company’s development, especially via the quarterly earnings calls that follow. Both of these give you plenty of timely and relevant information. The negative aspect of quarterly statements is management’s potential short-term focus. Moreover, the market volatility produced by deviations to expected quarterly numbers can be quite excessive. But, hey, as a long-term investor you should welcome any short-term fluctuations!

What are your favorite valuation variables and did you discover new ones?

If I had to highlight one single measure, it would be the free cash flow yield. Free cash flow, in general, gives you a more unbiased picture of the profitability than earnings, which tend to be adjusted several times, and in in a number of different ways, to reach the results a company’s management is looking for. For a robust analysis and valuation of a company, you should consider a complete set of measures. Most of these figures are timeless - like the best-known ones such as price/book, price/earnings, price/sales, EBITDA/EV etc. You really have to be very cautious regarding new measures, especially if they come along with statements like ‘this time is different’…

What characterizes your fund most? Quality or quant?

High-quality fundamental research based on a quantitative preselection of potential investment ideas. That is how I would characterize it.

Who are your favorite investors?

I have great respect for all famous value investors. Everyone has his own story and you can learn a lot by studying his or her approaches and CV. Nevertheless, you should always be aware that in hindsight every success story is a little bit glorified. I find it much more thrilling to follow some of our highly regarded competitors, who have to navigate through the same markets at the same as we do every day.

What makes you different from Warren Buffett?

He is definitely much smarter than I am. However, he has to deal with a very large amount of money, which doesn’t make it easy to explore undervalued investment opportunities. In addition, each of his actions gets the maximum publicity. To be honest, I would not like to change places with him.

Are company visits helpful?

It can be very helpful to speak with the management and understand their vision for the company’s future. Though, please keep always in mind, that this is a type of marketing exercise for the company and that they will not proactively tell you about growing problems or better peers. In the end it, is one of many parts within the valuation of the company and contributes to the overall picture.

In the long run macro stuff seems irrelevant for buy & hold value investors. Do you (still) use it, and why (not)?

The more powerful the idiosyncratic story of a company becomes, the less important the macroeconomic environment it is acting within becomes. However, it would be a big mistake to ignore the current state of the economic cycle, as you would tend to over- or underestimate the relevant company figures. Another question is whether you (or your investors) are able to absorb the complete volatility of an equity investment. Behavioural finance tells us that this is usually not the case. That is why at ETHENEA we focus on developing the performance of our funds as smoothly as possible. An important factor in achieving this goal is understanding the impact of the ‘macro stuff’ on our investments. News Wire & Equity Research: +31 084-0032-842

Copyright B.V.
All rights reserved. Any redistribution, duplication or archiving prohibited. doesn't warrant the accuracy of any News Content provided and shall not be liable for any errors, inaccuracies or for any actions taken in reliance thereon.