Welcome to our new series with fund starters! Here we want to portray Emerging Managers that just recently started a fund. In this episode, Marko Graßmann shares insights about his Alpha Star Europa fund.
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We have discussed the following topics:
- Introduction
- Welcome to Good Investing Talks
- Introduction to Marko Grassmann & Alpha Star
- The drive to start a new fund
- Alpha Star’s approach to investing
- The long-term goal
- Things to look out for in investment as quality investors
- Mistakes that helped Marko Graßmann to grow as an investor
- Companies Marko Graßmann avoids
- Balancing value and quality
- Recipe for a starting portfolio
- Taking on the role of a boss
- Apply to Good Investing Plus
- Skin in the game
- Perspective on the next 3 years
- Thank you & goodbye
Introduction
[00:00:00] Tilman Versch: A warm welcome to the Good Investing Talks podcast. I’m your host, Tilman Versch. And I’m very happy that you’re discovering underfollowed investors and underfollowed companies together with me. Before we jump into this conversation. I want to thank my supporters. They helped me to keep this channel free and public for everyone. Thank you very much. If you also want to join the Good Investing Supporters Club, please click on the link below. You’re very welcome.
Welcome to Good Investing Talks
[00:00:26] Tilman Versch: And now one last step. Here’s the disclaimer for you. All we are doing here is no advice and no recommendation. Please always do your own work and now enjoy the video. Dear viewers of good investing talks, it’s great to have you back. Today, I’m starting a new format with a premiere with Marko Graßmann of Alpha Star Funds.
It’s the fund starter format there, following the idea of portraying underfollowed investors and wanting to portray people who are just starting out with the fund and with the new product. So I’m very happy to have Marko as the first guest here.
Hi, Marko.
[00:01:04] Marko Graßmann: Hi, Tilman. Happy to be here.
Introduction to Marko Grassmann & Alpha Star
[00:01:07] Tilman Versch: It’s great to have you here. You’re based like the Alpha Star crew based in Munich or Augsburg or South of Bavaria. Maybe let’s start with the first question for this new format. What drives you to start another fund in the world where there are already a lot of funds?
[00:01:27] Marko Graßmann: If you are an equity analyst and if you are enthusiastic about the stock market and investing in general. I think for almost everyone, maybe there are exceptions, but for a lot of people like me, that’s the ultimate goal to have your own fund or to be responsible for your own fund, and I think it’s a good way to practise and to build knowledge as a professional investor and then at some point in time to take a step and start and launch a fund with on your own or with partners and that’s what I did with Alpha Star some time ago.
If you are an equity analyst and if you are enthusiastic about the stock market and investing in general. I think for almost everyone, maybe there are exceptions, but for a lot of people like me, that’s the ultimate goal to have your own fund or to be responsible for your own fund, and I think it’s a good way to practise and to build knowledge as a professional investor and then at some point in time to take a step and start and launch a fund with on your own or with partners and that’s what I did with Alpha Star some time ago.
The drive to start a new fund
[00:02:14] Tilman Versch: So with the fund, you’re also a servant to your investor and want to solve problems for them. What kind of problems are you solving with your investment approaches others don’t solve as you do?
[00:02:27] Marko Graßmann: Alpha Star from the beginning was a company or is a company that wants that strives for the best investment results in the long term. So we are very performance-driven. That also means we prefer at some point to have fewer assets than to have more assets because we will always be our priority, number one will always be the performance, the investment performance and we hope that the investors who invest with us also are benefiting them from the best risk-adjusted long-term performance.
Alpha Star’s approach to investing
[00:03:06] Marko Graßmann: I think this will be has been in the past and will be in the future our main KPI. So our main also is a unique selling point that we have. One of the best performance track records in the long term. Of course, in the short term, nobody knows where the market goes and how the performance stacks ups in one individual year, but over the long term we hope to be one of the best-performing funds and that is the recent history for the Alpha Star funds it looks quite promising and with the new fund which has the same strategy, we look to continue to be one of the best performance generators for the long term.
The long-term goal
[00:03:55] Tilman Versch: To achieve this great performance, is there any number you’re aiming for with your investments, so to say like 15% or what is your hurdle so to say?
[00:04:08] Marko Graßmann: So we strive to generate 15% per annum over the long term and that’s net of fees. So we hope that also our investors will receive those returns which means for we, as a fund, will also charge fees. We have to address performance before fees that are higher than this 15%, but that’s I think a good hurdle to achieving and we are quite confident that this is with our approach that this is possible to get to those numbers.
Things to look out for in investment as quality investors
[00:04:48] Tilman Versch: So with this goal and as an investor, in general, what are you paying special attention to? What are the maybe three important things in an investment you’re looking for?
[00:05:02] Marko Graßmann: For us, the most important points are– So we have to go probably a step back and say, we are quality investors. So we look for companies of the highest quality. Quality for us is growth and growth opportunities, higher profitability, and high return on capital employed or invested capital. So basically the internal rate the company generates on their capital, that’s for us the most important KPI and that drives our investment process.
So we are looking, if we look at the company, we are looking for entry barriers for unique business models for companies that have created entry barriers. They have a white mode if you want to call it that way so that nobody erodes the high return the company is generating on their capital. And of course, maybe that’s the first point if you ask for three and then the second would be that high returns are nice, but they are only half of the equation if you don’t have the reinvestment opportunities.
So we need a growing market, a healthy market where the company with all its strengths can invest, and reinvest its capital better and have further growth opportunities in either new markets or having a small market share where it can grow its market share. That depends, but we need or we like structurally growing markets where the company can reinvest and keep the growth track, or be on the growth track for quite some time and then the last, not the last, but the third very important point is the management and the shareholders.
We are long-term investors, so we want co-shareholders that are partners with us, and who have the same mentality as we have. So our long-term owners of the company have a long-term mindset, know about the strength of the company and the reinvestment opportunities and take us or view us like partners and usually, those are family-owned companies or companies where you have a strong shareholder, who has an influence over the company and kind of keeps controlling it and has formed a culture and is very motivated to keep the unique culture of those companies alive. If we have those three things sorted out, so a strong business model, growth opportunity, and strong management and strong co-shareholders, then we are on a good track and probably have a very good long-term investment in our fund.
Mistakes that helped Marko Graßmann to grow as an investor
[00:08:15] Tilman Versch: With this format, I also want to give a bit of insight into your history as an investor, and I really like to ask about mistakes. So what kind of mistakes have helped you to become or to grow into the investor you are today?
[00:08:31] Marko Graßmann: I certainly did my fair share of mistakes but I also think that’s kind of part of the journey that you do mistakes. The most important part is that you keep learning and try to not repeat those mistakes again. I think every investor has somewhat of an evolution. You start out at the beginning looking for different things, then you look for after a couple of years. And for me, that applies as well. In the previous questions, I lined out the qualitative approach I have and also Alpha Star has that hasn’t been the case all the time.
So I started out as a more classical value investor looking for cheap, undiscovered, somewhat quirky companies or stocks. And we’re quite enthusiastic about the very low price I pay for those companies. And if you then buy the shares and monitor them and study and do your models and so on. And you realise that those ideas sometimes work, but very often do not really work because there was a reason in the first place why the company was cheaply valued.
Usually, those companies do not really progress. If you’re looking for a company that grows its intrinsic value. It’s very rare that you find them among those cheap companies and they very often stay cheap and you get get a very low return on your investment. Maybe you just receive a dividend and a nice dividend yield, but that’s about it. So if I would start out as a very young investor today, I would like to have this evolution to go to quality companies a little bit earlier.
So I started out as a more classical value investor looking for cheap, undiscovered, somewhat quirky companies or stocks. And we’re quite enthusiastic about the very low price I pay for those companies. And if you then buy the shares and monitor them and study and do your models and so on. And you realise that those ideas sometimes work, but very often do not really work because there was a reason in the first place why the company was cheaply valued. Usually, those companies do not really progress.
So I wouldn’t say those were classic mistakes, but this it’s more like in evolution of an investor. In my case, gravitated more to quality companies and that helped my returns immensely. So looking not just for cheap companies, but rather start with the qualitative assessment of a company, a business and then later worry about the valuation and be more creative and with a long-term mindset approaching the valuation of a company and go earlier to those qualitative characteristics of an investment of a company you look at.
[00:11:36] Tilman Versch: Is there any case or any company that came to mind that you now label with a mistake you want to share to get some more colour besides the general level?
[00:11:49] Marko Graßmann: I don’t think it’s a good way to blame those companies with you if you know because they didn’t perform. But I mean, I was very enthusiastic. If I found a company with something like net cash where the net cash position was big or bigger than the market cap and you thought you get something for free. But then I invested in those companies and then just waited and waited and hope that something was happening but those were companies that had a very, very poor return on invested capital. They were not growing. They were kind of eroding in quality, so the intrinsic value was actually going down.
They did not pay a dividend, so you had no access to the large cash balance and then something went wrong. The big contract was miscalculated and you had a large loss, a one-time loss that eroded some of the cash balance as well. And you had then, yeah. And management that left. So you had the company in a vacuum and luckily someone was taking over. I received my money back and a very small return. But in the end, it was a very poor investment in the way that you could have over that period of time you could have done only an ETF or broad index like the DAX would have outperformed those who invested as well.
So that was one of the lessons to not be attracted to the cheapness of a company and to the opportunity because of a low valuation. But rather look at the qualitative aspects of the business. If I had looked at the quality of the business before being attracted by the cheap price, I would have passed easily on that one. So that’s part of the evolution that you have to learn probably the hard way to realise and hope people or young investors maybe learn this lesson without paying the price for it.
Companies Marko Graßmann avoids
[00:14:32] Tilman Versch: Yes, you have to pay the price for it to stop doing things. To add a bit more colour as well, what kind of industries or types of investments won’t I find in your portfolio? So what is not like outside of your investable universe? What are examples of this?
[00:14:53] Marko Graßmann: I think commodity companies where the revenue is to a large part driven by commodity prices, I don’t invest in those because I’m not an expert and even, you see, even the experts have a hard time forecasting commodity prices. And if you cannot have a clear view of the revenue of a company, how should you forecast such a company in such an investment? So for us, companies that are not in control of setting the prices for their products are not very interesting for us. Another bucket would be utilities where their revenue or their whole business is quite heavily regulated by mostly the government or other entities that set the prices for them and those are also not of very much interest to us because also you have to keep in mind those investments or those business models are very CapEx heavy. So you have to have you have to reinvest a lot of capital at very low and regulated returns, so it’s very hard to earn decent or superior returns on capital on those businesses.
I think commodity companies where the revenue is to a large part driven by commodity prices, I don’t invest in those because I’m not an expert and even, you see, even the experts have a hard time forecasting commodity prices. And if you cannot have a clear view of the revenue of a company, how should you forecast such a company in such an investment? So for us, companies that are not in control of setting the prices for their products are not very interesting for us.
And also if you want to grow, you have to need a lot of capital and those are not investments that we look for maybe a third one where our financials or especially banks, banks also, if you look at the balance sheets and if you open the annual report of Deutsche Bank or Commerzbank, you see a huge balance sheet and those are for us, at least for me, very opaque. You do not get a view, good view of what’s in on the balance sheet and how it is accounted for.
So what is the cost they are put in? And also with such a large balance sheet, it’s also very difficult to get a good return and get a high return on those large balance sheets. And a bank or almost by nature is very heavily leveraged. So they have a very thin equity slice but a very large balance sheet and so if something goes wrong with those balance sheets, the equity is very easily eroded. And I look especially for companies that have strong balance sheets that have a lot of cash, not a big balance sheet but still a bit of cash that are resilient and have buffers if something happens and cannot really easily be destroyed by an external event. So those are those areas of banks, utilities, or commodity companies that rarely excite me.
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Balancing value and quality
[00:18:25] Tilman Versch: You are still kind of a value investor that gravitated to quality. So, but also in your investments, I think you have this value investor framework that you look for a certain quirky quality, so quality that doesn’t shine super and doesn’t offer this like isn’t perfectly priced. So how much quirkiness are you willing to accept in your investments and where do you say, Okay, this valuation attracts me? So how do you balance value and quality, so to say?
[00:18:59] Marko Graßmann: Yes, this quality or this growth and value debate is quite difficult because every quality or every quality or growth investor wants to have a decent value and an investment otherwise you probably, he or she, wouldn’t do it. And as a value investor, of course, you also value, you grow if you want to have growth in those certain areas that you don’t want to pay that much for such growth so it’s a difficult debate, but you are right, the value investors start out more like the classical value that you would you define with Graham and thought as a value less and then they may be, like Buffet, gravitate more to quality. At least that happened to me and I appreciate the quality much, much more.
In my experience, where you can find value in growth companies if you will is if you look more in different jurisdictions. If you leave the classical German or UK or Scandinavian area and or the US area and look more in places like, for example, Eastern Europe or southern Europe where you find very good quality companies, also with very good management, very entrepreneurial management and very good business models, very entrenched and with very good entry barriers, very good market positions, exactly like we look for, but they are in areas like the Baltic regions or in Greece and for that reason they are not, at least in my view, not that appreciated.
If such a company were in Germany or the UK or even in Scandinavia, they probably would have been priced differently. So you get something like a discount for being in such countries. Maybe there are valid reasons for such a discount because you have a political landscape that maybe isn’t that stable or you have interference with the free market so that you are not that sure that you really can push through your property rights or you maybe have in doubt if you are in court or before a court, that your rights as an owner will not be, will not be appreciated.
So, those may be valid reasons, but if I were and we are actively looking for such high-quality companies in those areas where maybe not everybody is looking and that’s also an advantage if you are a new fund like we with a limited amount of assets under management, those companies are generally smaller and other investors, professional investors, maybe don’t even look at them. Because a Baltic software company or Greece Greek software company per definition, with a smaller market, smaller. And so, maybe some small cap experts are looking, but the general professional investing crowd leaves out those markets and that’s I think one of the edges, one of the edges we can gain as a very smaller nimble investor who’s willing to look in those places.
Recipe for a starting portfolio
[00:22:54] Tilman Versch: How did you come up with the portfolio for day zero or day one because you started this fund and so the question is like what is your construction principle for the portfolio you have somehow created it out of thin air, but there are also some other recipes to creating a portfolio for a new fund. So how was this process going about?
[00:23:18] Marko Graßmann: And if you are already an investor with some experience, you do not start from scratch, right, because you have experience and you know companies, you know the management and you can transfer those companies that you have been invested in previously to the funds. So you’re not starting from scratch. So because you haven’t invested in the universe you know those come. And if the price is still right and you’re still convinced about those qualities then you can bring your model up to date. You have to dust it off if it’s not up to date, then you have to get probably the latest development and approach the company again.
Talk to talk to the management to see if everything is still as you expect it to be and get up to speed with new developments, and then you can easily build up a portfolio. But what we did, in addition, was we surveyed the landscape together with my two analysts that are helping me. We build a large list of companies that we want to take a look at and want to investigate further. So essentially we did write a preliminary, very short screening of the companies that attract us from a market cap perspective in a given jurisdiction and then we see if we can sort out very quickly the banks like I mentioned, we don’t invest in like the commodity companies. We don’t invest in leveraged companies. We read them out and then the list gets smaller and smaller and smaller.
And here we can start by making a list of priorities where we look just briefly at the company and see, Okay, they have a very good track record of profitability and growth. Let’s put this on priority number one and look at that company in detail and then if you think another company also looks interesting, but it’s more like second priority then rank it at two and then look at that later. So what we also did on top of having our investable universe, somewhat really, was we did a screening of the main jurisdictions in Europe and looked at what could be interesting and where we want to spend allocate our time because that’s also very important as an investor. I mean, you have just a limited amount of time every day, even if you are two or three people. So you want to have your priorities right and look at the most interesting companies. Most of the time and just weed out the companies that are nothing for you and that are uninteresting and don’t spend much time on those companies. I think that’s very, very important and very often overlooked.
But what we did, in addition, was we surveyed the landscape together with my two analysts that are helping me. We build a large list of companies that we want to take a look at and want to investigate further. So essentially we did write a preliminary, very short screening of the companies that attract us from a market cap perspective in a given jurisdiction and then we see if we can sort out very quickly the banks like I mentioned, we don’t invest in like the commodity companies. We don’t invest in leveraged companies. We read them out and then the list gets smaller and smaller and smaller.
Taking on the role of a boss
[00:26:40] Tilman Versch: You just mentioned an interesting transition you also did when becoming a fund manager. Besides becoming a fund you also became a boss somehow because you have two analysts now. How has this changed you after being a one-man ship for quite a while?
[00:26:57] Marko Graßmann: Yeah, in my previous experience I also dealt with interns. And I was actively looking after them and so helping them to grow and start their career or maybe get them interested in the career of an equity analyst. But with now with launching the fund, those duties, if you will, increase of course. And now you are also responsible for or I am responsible for two analysts which means I have to take care of them and allocate time to discuss the ideas.
Also, help them grow if they are just taking a different difficult accounting problem or the company reports very quirky numbers. Then we have to look at it together and of course, my responsibility there is to help the younger analysts to understand those problems and deal with them. And often the experience, if you have an experience, you have seen certain things and you can help them with that. And I take this very seriously because I mean also now in the age of, after COVID with many people working remotely. It’s very easy to lose track if you’re not in the office every day. But you still have to be mindful that there’s someone else sitting, sitting somewhere else and having limited experience and just needs help. And that’s very, very important for me, of course, to help them and I take this seriously.
And I enjoyed it. I enjoyed discussing and I enjoy teaching and so this is very– I like it and I also hope to get better over time, but also the flip side is you have less time for yourself looking at those companies, right? I still have time, but not as much as previously to do the primary research than I rather have to read the notes the analysts are doing and still read about the company myself because I want to get a better feeling from the primary research. But your day-to-day work changes in a way that you have to also take care of those people and manage them if you will.
Apply to Good Investing Plus
[00:29:50] Tilman Versch: Hey, Tilman here. It’s great that you have made it that far into the video and I think it shows a certain passion for investing you’re having. If you want to dive deeper and go further down the rabbit hole, you’re invited to apply to my community Good Investing Plus.
It’s a place that’s very helpful to people who are ambitious about investing, is helpful to investment talent as well as experienced fund managers. So if you’re interested, please click on the link below and now, without further ado, enjoy the conversation.
And now, without further ado, enjoy the conversation.
Skin in the game
[00:30:24] Tilman Versch: How much skin in the game do you have with your fund?
[00:30:27] Marko Graßmann: It’s important to know that Alpha Star has a background as an investing club. So very, very basic investing routes. So where you took your own money and the money from your family and start investing it in a very basic setting. That was the beginning almost 16, 17 years ago. Of course, over the years this professionalised more and more, and now it’s a proper fund with proper infrastructure and we have all the systems and regulations you need so. There was a very big step in becoming professionalised, but what did not change is the mindset that every investor in the fund is special. And we are very transparent in a way so that we gave out all the information, about the information we like to share with our co-fund owners.
And this is also done because they’re the routes that we invest our own money and this, obviously, as I said, has not changed, so we still have very much of our own money invested into the fund and from the Alpha Star founders have to some extent 100% of their own money invested. And that’s also what you want to see from a fund manager. If I were investing in an outside fund, I don’t do just invest in our own fund. I would ask if the fund manager is well incentivized and eats his own cooking if you want to call it that way, and I think that’s what’s important. We do this and we communicated it and we would demand it from others as well. And I think that’s a very important question that you… as a potential investor and a fund should ask the fund manager right away. So are you invested in your own fund in a material way? And hopefully, the answer is yes. Otherwise, I don’t think it’s a very good, very good background to invest in a fund where the fund manager isn’t incentivized or isn’t invested. Because obviously there is then this conflict of interest. From our standpoint, I would say, there are very few conflicts of interest because almost everybody in the firm is, very much invested in our funds. And I think that’s the right way to approach it as well.
Perspective on the next 3 years
[00:33:12] Tilman Versch: The idea of this format is to also give a chance to do a follow-up interview and like two or three years to see how the project has developed. Maybe let me ask for the end question about not Alpha Star but the North Star view. Where do you want to deal with your fund project in three years?
[00:33:32] Marko Graßmann: I very much like it to be not that much different from now. So we have the team ready. I’m very enthusiastic about the team members. Maybe we will add one analyst, maybe not. The point is to have still a very small focused team because we don’t want to have the largest team in the industry. We want to have the best one. We want to stay focused and the things I mentioned about managing people should still be rather small in relation to the overall work. So I don’t want to become a manager of people. I just still want to be an investor and look at companies, and speak to companies, so we do not strive to have that very large team.
And also what counts for team counts for assets. So of course we want to grow our asset basis and because we need to, we want to reinvest the fees into our research and travelling meeting companies and so on. That of course costs money and if you’re very small, you’re not generating that much, and you’re barely profitable. So there is a need to grow, but we also say we don’t want to grow too much and too fast. So we want to keep our assets under management in a controlled way. So we’re not looking for, let’s see if we can grow this fund as fast as we can to one billion just to be big and just to have a lot of fees. That’s not our goal.
We want to be the best fund. So and if the best fund needs a size cap so that we have to reduce or have to make a cap on new subscriptions, we will do it because we will always as I mentioned will be driven by performance and if you are growing very much very fast, it does not help to generate. And very good performance. So performance will always be the number one criterion we look for and if you ask about what we want to speak about in five years, I will not be bragging. We are now that big and we have a team of six and we have one billion and we are proud of that one billion. I think those are the wrong goals. It’s just about performance and hopefully, when we speak again we say, yeah, we have enough assets under management that we can cover our cost and be attractive as an employer to potential analysts and that we also have a yeah good very comfortable life but not we don’t want to be a fee generator so we rather always perform will be on top priority. And if we speak again, we will hopefully, we can show some good performance numbers, not necessarily a big asset management organisation and a big and a big pile of money.
Thank you & goodbye
[00:37:03] Tilman Versch: That’s good and I still have a chance to interview in three years because you’ve been not at the level of the stars, just an alpha star. So thank you for the interview, we will do a small follow-up part where you’re presenting an idea in the Good Investing Plus communities. For people who are interested in hearing what ideas Mark will like, please click on the link below and apply for the good investing plus community. And if you’re a fit for the community, I’m happy to let you in. And Marko, thank you very much for our conversation and all the best with the new fund. I hope to talk to you–
[00:37:39] Marko Graßmann: Thank you. Hopefully, it was helpful and I enjoyed it and hopefully, we can do it again.
[00:37:46] Tilman Versch: I hope so too, thank you and bye-bye.
