Interview Christian Schmitt, CFA, Portfolio Manager bij ETHENEA with Ronald Kok from Valuespectrum.com
We spoke with Christian Scmitt and asked him our most crucial questions about investing in stocks
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.
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.
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.
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.
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.
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.
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.
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!
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’…
High-quality fundamental research based on a quantitative preselection of potential investment ideas. That is how I would characterize it.
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.
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.
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.
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