The Art and Science of Concentrated Investing€¦ · •Let the market provide opportunity, not dictate your actions Courage of your convictions •Industry in transition •Capital

The Art and Science of

Concentrated Investing

Adrian Warner

CEO and CIO, Avenir Capital

Unless otherwise specified, any information or advice contained in this publication is current as at the date of this

publication and is provided by Fidante Partners Limited ABN 94 002 835 592, AFSL 234668 (Fidante Partners), the

responsible entity and issuer of interests in the Avenir Global Fund (Fund). Avenir Capital Pty Limited (ABN 40 150 790 355,

AFSL 405469) (Avenir) is the investment manager of the fund and authorised to provide financial services to wholesale

clients only (within the meaning of the Corporations Act 2001 (Cth)).

For information about the Fund, you should contact Fidante Partners Limited (ABN 94 002 835 592, AFSL 234668), the

responsible entity of those fund, by calling their Investor Services Team on 13 51 53 or visiting www.fidante.com.au. Any

information provided is general in nature and does not take into account your personal circumstances, financial needs or

objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having

regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and

read the relevant Product Disclosure Statement or other offer document prior to acquiring a financial product. Please also

refer to the Financial Services Guide on the Fidante Partners website. Past performance is not a reliable indicator of future

performance.

Avenir Capital is a value-based global

equity manager founded in 2011

Unusual private equity background

Private Equity principles:

• Concentrated portfolio

• Highly selective

• Long-term orientation

• Broader opportunity set

• No control premium

• Material discounts to

intrinsic value

• Liquidity

Private EquityPublic Equity

Private equity investing in public markets

• Concentrated portfolio

• Focus on fundamentals

• In-depth due diligence

• Longer term investment

horizon

From 1983 to 2006, only 25% of stocks

were responsible for 100% of the gains

in the US stock market

The argument for passive is it’s

extremely difficult to pick the stocks

that outperform the market consistently

Just own everything

Source: Crittenden & Wilcox (2008) The Capitalism Distribution: Observations of individual common stock returns, 1983 – 2006

Stock picking is difficult…

0 1000 2000 3000 4000 5000 6000 7000 8000

- %20

-10%

0%

10%

20%

%30

%40

50%

%60

70%

%80

90%

The worst performing 6,000 (75%)

of all stocks had a total return of 0%

The best

performing

2,000 (25%)

stocks

accounted for

all the gains

100%

Highly active portfolios have declined

dramatically

Market increasingly focused on passive

Trend has accelerated in the last

decade with the rise of ETFs

Data from Petajisto (2013) Active Share and Mutual Fund Performance

…and there is less and less stock picking happening

Genuinely Active

Moderately Active

Closet Indexing

80-100%

60-80%

<60%

Active Share in US equity mutual fundsActive

Share %

Industry underperformance is driven by

index huggers

Studies show the value of a

concentrated approach

Concentrated investing requires

alignment of philosophy, process and

people

Source: Petajisto (2013) Active Share and Mutual Fund Performance

…but that doesn’t mean we shouldn’t try

‘Active Management’ US Mutual Fund Performance (Jan 1990 to Dec 2009)

Genuinely Active

Charlie

Munger

The idea that it is hard to find

good investments, so

concentrate in a few, seems an

obvious idea. But 98% of the

world does not think this way.

The Right Company Selectivity Patience

Framework

Case Study:

BBX Capital

(NYSE:BBX)

• Predictable, understandable

companies

• Non-binary

• Multiple ways of winning

• Allocate capital to the best ideas

• Low risk of capital loss

• Significant upside: 2x in 3-5 years

• Growing underlying value

• Let the market provide

opportunity, not dictate your

actions

• Courage of your convictions

• Industry in transition

• Capital heavy to capital light

• Increasing ‘quality’ of

industry participants

• Downside protected

• Underlying value 2x price

• Strongly growing cashflows

• Firm view of intrinsic value

• Catalysts to increase value

From theory to practice…

After 2 years down 30%

3x

money

Initial Buy

Avenir Target Price:

$7.00

$8.80

$11.50

BBX (NYSE): Patience & conviction in action

Source: Avenir, S&P Capital IQ

$9.14

$15.50

Source: Avenir analysis

$14.80 Shares in Bluegreen

NYSE:BXG

Other Assets

Net Debt

70%

upside

Consensus: $16.50

BBX (NYSE): Why we still like it