It was our pleasure to welcome Theron de Ris of Sorengo Partners as a first-time guest on Good Investing Talks. We discussed how he invests taking advantage of the market cycles.
By loading the video, you agree to YouTube’s privacy policy.
Learn more
We have discussed the following topics:
- Introducing Theron de Ris
- The early impressions
- Understanding Eschler
- What Sorengo Partners stands for
- [00:09:40] The investing philosophy of Sorengo Partners
- Typical investment cases
- Good Investing Plus - A warm invite to apply
- Special situations
- The research process
- Changes over the past 5 years
- Theron de Ris on identifying the steps in the cycle
- Larger holdings in the fund
- Jet2Airways
- Patience
- Learnings from helping fund managers
- Things that can go wrong
- Why did you start a fund, Theron de Ris?
- Theron’s competitive advantage as a fund manager
- Portfolio construction
- Closing thoughts
- Thank you
- Disclaimer
Introducing Theron de Ris
[00:00:38] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back on the podcast and it’s great to welcome Theron de Ris of the Sorengo Partners, for the first time on the podcast. Theron, I’m happy to give you the stage for a short introduction. So who are you and what made you come to the finance industry?
[00:00:58] Theron de Ris: Sure. And thanks for having me on the podcast, Tilman. Why don’t I just tell you a little bit about my background growing up and how I came to Europe to start? So I grew up in a small town in upstate New York. My parents were in the Peace Corps.
And so they wanted to, you know, settle down in a small town I went to a Waldorf school which is a school, sort of like Montessori. I’m not sure if you heard of it. There are quite a few of them around the world, including in Germany in particular. There were nine students in my graduating class in high school. So a very, very small town.
Growing up, you know, money was pretty tight. So you know, I spent most of my time during the summer working frankly and trying to earn money so that I could travel. That’s what I like to do.
And so, you know, I came to Europe several times. The first time was when I was 16 years old in the summer. I got on a plane, flew to Zurich with my bike, and then biked from Zurich to Salzburg to attend a language course which was a lot of fun.
The second time was for my first year of college. I went to Franklin University, which is a small American College in Lugano, Switzerland, where they gave me a scholarship. So that was a great experience and the one benefit was that I met my wife there and that was back in 1991 and then the third time I came to Europe and I stayed was after my junior year in college.
I came to Frankfurt, Germany in the summer, with $400 in my pocket, and didn’t have any place to stay or any job. But I was lucky enough to find some internships, and earn some money and that kind of paid for my study abroad. I was studying at the University of Mines, so you know, you can see I kind of wanted to come to Europe and build my career here.
And I was lucky enough to get my first job in Frankfurt, Germany, at Goldman Sachs. And so that’s kind of where it started. And by that time I was obviously, you know, very interested in, you know, getting into the industry didn’t know exactly what I wanted to do. But that was where it started.
The early impressions
[00:03:04] Tilman Versch: How did it go from there? Like what path in the financial industry?
[00:03:09] Theron de Ris: Yeah. So that was in 1995 when I joined Goldman. And so I was there for five years. Right through the peak of the bubble.
So I saw a lot of kind of the craziness which was, I think, a good learning experience and it made sure that sort of the early impressions of my career was of, you know, a positive experience where, you know, some people when they start during a bear market, that’s the first experience of the bear market, and it takes them a long time to, you know, have the optimism to kind of adjust, but then you know then I spent eight years at Morgan Stanley from 2000 to 2008.
Saw the sort of the full cycle, the down cycle, the upcycle, commodities bull market and I was running a team at Morgan Stanley in sort of 2005-7 where we were talking to global investors, macro hedge fund investors, all sorts of different investors and that was the first time I really sort of realise there’s a many ways to earn a return in the markets, many styles and so while it’s important to have your own style that works for you. There’s just a lot, a lot of ways to do it, and so it’s good to have an open mind.
So that was my sell-side career, I guess ended at the end of 2007. And then I joined, I joined in this capital which is a long-short equity group focused on Asia and I was there in different roles for eight years, really until the end of 2016. And that’s when I launched my full-time at the beginning of 2017, which I’ve been running until now.
Understanding Eschler
[00:04:49] Tilman Versch: What kind of structure do you have? I have two kinds of ideas combined with you. It’s one is Eschler Asset Management which is more platform for different fund managers and one is Sorengo. We will focus the talk on Sorengo but maybe help us to understand what Eschler stands for.
[00:05:10] Theron de Ris: Yeah, sure. So I guess also the question is why did I start Sorengo? And that’s where Eschler comes in. So you know, when I left this at the end of 2016, I had a fund with $4,000,000 in AUM.
So it was it was way too small. I had two kids going to school, so I was upside down financially and I could have kind of given up, but you know, what I noticed is that there are a number of other managers in similar situations, but wanted to launch their funds and so long story short, as I was able to turn my regulated investment management firm and into a platform for emerging managers and that brought some money in and gave me more financial runway and time to build my track record.
[00:06:03] Tilman Versch: So you made your cost to a revenue source, kind of?
[00:06:06] Theron de Ris: Exactly. I turned my back office into a profit centre. You could say that. But if you fast forward to today, we’ve got about almost 20 managers on the Eschler platform. That’s Eschler, the separate business and turned into a nice little business in its own right.
So anyway with that context, it’s sort of easier to answer the question. You know, why did I start Sorengo? You know, I do like speaking with other managers. And I get a lot of pleasure from that. We get a lot of ideas together. But what I really like is, you know, finding investment ideas, deploying capital, constructing a portfolio.
So we set up Serrano partners in May of last year to do just that. So it’s a single strategy fund and we don’t do anything else. And so that’s sort of the way for Sorengo and a little bit on Eschler and of course I can expand on Escher at any time if you want as well.
What Sorengo Partners stands for
[00:07:10] Tilman Versch: Let’s talk a bit. About what Sorengo stands for? What is the mission of the fund so to say?
[00:07:16] Theron de Ris: Yeah, sure. So we’re an independent investment firm based in Cambridge, UK. We also work out of London. The strategy is directional equity long short focused on quality businesses in cyclical industries with attractive risk-rewards. We focus primarily on small and mid-caps.
And we also invest on both sides of the Atlantic. The first half of the track record was more in North America. More recently we’ve deployed a lot of capital in Europe, including the UK, where we can talk about. The investment strategy just briefly is very concentrated.
So the top 10 holdings tend to make up at least 50% of the NAV, it’s long biassed, so you know we’re generally 70 to 90% net loan, though we do have shorts and we, you know, tactically take advantage of that from time to time and then we’re value-oriented.
So you know we’re looking for companies that really can double over two to three years and we tend to have a preference for quantitatively cheap stocks. It’s not something we have to have, but it tends to that’s what we tend to focus on. So anyway, when you think of a Sorengo, I would think of a single strategy firm, a capacity-constrained strategy. We’re independent employee-owned. We have top-tier infrastructure across, you know, custody, trading, administration, etcetera.
And I think we also have a strong alignment of interest with our clients which I can talk about. I mean as an aside, you know, when I was growing up, my dad had a small architecture practice and so he had a small team with great camaraderie. He was very kind of creative in how he went about his projects and he was very focused on his clients and it’s really that’s what we’re trying to do at Sorengo.
[00:09:40] The investing philosophy of Sorengo Partners
[00:09:17] Tilman Versch: You invest in cyclical companies. What is your secret sauce, your framework to make money there?
[00:09:27] Theron de Ris: Yeah. So that’s right. I mean, I guess this is a question on the philosophy. And so what I’ll do is maybe talk about some of the maybe the three tenants that we focus on philosophically. So first, we’re very valuation-focused. Second, you know, we find cheap stocks by investing countercyclically.
And third, we’re very focused on the alignment of interests. So first, you know we’re unabashedly valuation-focused. It’s not about value or growth. You know, I want to invest in growing companies, but what I do like is situations where I can invest with a high cash flow yield.
And you know the challenge with, in my mind, momentum investing or investing in, you know, quality growth companies is that they’re already priced for a market return, so you have to be very confident in your analysis that the companies are going to do better than what the market already expects and you’re competing with a lot of other analysts. So that’s point one.
Point two is, you know, momentum and earnings growth can be correlated from one year to the next, right? But there’s no cause and effect. So if the momentum stops or the earnings growth stops, you know what you have to fall back on, right?
And if you compare that to, you know, buying a company where you have a good cash flow yield, you’re essentially creating your return through the cash flow yield as long as you have a, you know, a decent capital allocator. And so that that’s cause and effect and I think that’s more reliable in my mind is a way to invest.
The last thing I’ll say is I’m very familiar with the arguments about, you know, if you’re investing for long periods of time, 5, 10,15 years, if you buy a quality company, doesn’t really matter what valuation you pay, right, within reason.
And I totally get that totally makes sense. But The thing is, you know, we’re focused on a one to three-year time horizon generally. And so in that time horizon valuation is incredibly important, right? So that’s the first point on valuation. I wanted to make it clear that you know we kind of focus on that as a primary thing.
The second thing is we look to invest in capital-constrained industries where you’ve had a dislocation, capital has exited the industry and you’ve had some consolidation. And so you know, I want to kind of know where we are in the cycle and try and you know and invest when there’s an inflexion in the fundamentals and sentiment.
And one of the best frameworks that we found for analysing industries is the capital cycle. And you may be familiar with that. It was popularised and used by a company called Marathon Asset Management. Actually, just down the road, there’s a book that compiles their letters called Capital Returns, so that’s a very useful framework.
The simple idea is that it’s really the supply of capital in and out of an industry that drives the fluctuations in the industry cycle. And so if you think about, you know, a cycle where there’s lots of capital coming into the industry eventually that obviously increases competition, drives margins down and you get a down cycle and then during the down cycle, of course, you have consolidation companies exiting the industry capital exits.
And the best time to invest is when the industry is recovering, but there’s still a deficit of capital. People are too afraid to invest. So if you can deploy capital, then when other people don’t want to, you have less competition, you have higher returns on the depleted capital and that can be quite exciting. So that’s kind of the framework. It’s very you know, sort of simplistic in some ways it applies very well to the commodity-related industries where price really dictates supply and that’s it.
So you know pre-COVID there were a number of commodity-related industries whether it’s you know, coal, natural gas, precious metals, uranium where you know prices got down well below the cost of production. That was a classic example where supply exited and there was an opportunity to invest and we did.
And we still are invested in some of those areas. More recently we’ve been using the framework to identify industries where you know price isn’t the only determinant of whether clients you know purchase products and where it’s harder for supply to enter into the industry because of that. And you know, one example is we’ve recently made a purchase in the auto parts retailing industry, which is a pretty consolidated industry where it’s been remarkably difficult for Amazon to gain market share. So we can use the framework in different ways and it’s quite useful.
One of the last things I’d say about the capital cycle is that, you know recently we’ve seen globally this trend towards sort of deglobalization of more nationalist politics and policies, a nearshoring of production and I think you can apply the capital cycle to individual countries these days. And so I’ve done that in some cases and I think it’s a good framework for looking at individual countries as well.
The last point on investment philosophy just to round out this, this part of the conversation is on the alignment of interests where you know, we’re really looking to invest with companies that have high insider ownership, or if there isn’t high inside ownership, at least have incentives in place that ensure management behaves well and generally, we’re looking for situations where there’s a long term focus, not excessive use of stock options, focus on free cash flow as opposed to EBITDA, buybacks that are opportunistic, that create value for the remaining shareholders, not just to sort of offset the issuance of shares from options.
And the last thing is, you know, owner-operators tend to be more disciplined about allocating capital and that really matters for you know, some of the more mature industries where and stocks that we tend to be involved in where you know the opportunities for reinvestment may or may not be as good as they used to be.
Typical investment cases
[00:16:13] Tilman Versch: So you guys run this thought strategy and what is the situation on the long side as well on the short side? So I asked for two situations that make you passionate, so maybe go back in time and try to remember one situation for both sides where you have been really passionate and been kind of non-stop thinking about this investment case and also telling your friends and your spouse and whoever you meet about this case because it’s so compelling. What are these? What is an example for both long and short?
[00:16:48] Theron de Ris: Well, I’ll start on the long side. I mean one area where I was very involved for many years. I continue to be involved and you know many investors don’t like the industry. Neither do I frankly.
But I still can make money in it because it’s quite inefficient and that’s precious metals and I got involved with the industry back in 2014, which in hindsight was about two years too early. So it’s much easier said than done to, you know, use the capital cycle to invest in, you know, deep cyclical industry.
But anyway, I had, yeah, more than 1/3 of my fund in that industry in 2014 and 15. It was a classic situation where the entire industry was down like 85%, right. Of course, you had a big bear market in gold. The average, you know, gold mutual fund was down like 75% over the past five years. And the stock market was kind of doing really well, the traditional stock market, and so there was no interest in a classic alternative like gold.
Anyway, this is sort of the background, but the valuations in the industry have gotten tremendously interesting. And I thought there was a place for gold and I won’t go into sort of the long term, all the rationales, but the bottom line is I invested too early, which was a mistake, but I stayed with it and we’ve made a tonne of money in that industry for the past five or six years actually even longer than that, even longer.
On the short side, I mean, maybe I’ll just I’ll bring up a short that we have right now that we have a reasonably high amount of conviction in which is called Main Street Capital, which is a business development company.
And basically, this is an industry where you know that’s set up with advantages in terms of being able to avoid taxes if they pay out, you know, 90% of their profits and that the industry exists to supply capital to small and medium-sized businesses that otherwise couldn’t get financing.
So these are businesses that are probably you know below average quality. But need growth capital anyway. You know, we think the company is a lousy investor even though they present a very attractive or you know strong track record.
We don’t think they’ve really been able to make any money. If you like, analyse the actual realised gains since they came public, so most of their NAV is unrealized and it’s privately marked positions.
And yeah, if you just look at the equity capital and the debt capital that has gone in to create that net asset value, there’s really no there’s no value that’s been creative and the company is very selective in its disclosure of its successes, but it doesn’t really give you much information on things that go wrong, and it’s they also use a deceptive practice to remunerate so-called remunerate their retail investors because most of the investors are retail. I don’t think really understand the risk they’re taking.
And that is the company. Basically, uses a dividend reinvestment plan that retail investors can opt into, and most do right. They just want to reinvest their dividends into new shares. And instead of, you know, buying those shares, the company just issues them.
So every year its shares outstanding go up by you know 70% and that’s, you know continuously every year. So you know what kind of business you know has to issue, you know, what kind of, you know investing business has to issue shares like that every year. And yeah, so we don’t think it’s sustainable. The challenge is the company trades at a 1.5 times book value multiple.
So you know it’s like if my fund traded at 1.5 times the asset value would I want to issue shares, sure, that would be great because I would increase the value per share, but would it be justified? Absolutely not, you know, so we’re not quite sure what’s going to be the catalyst here. But I think that the quality of their loan book is quite questionable and you can see for example that they tend to extend their loans to clients that can’t pay them back.
And so that you know that’s worked during this period of you know of low interest rates and low defaults, but arguably we’re going into a more difficult environment with a higher cost of capital. So bottom line, we don’t think it’s worth one point. We think it’s worth, you know at one time NAV at best. But anyway, this is a reasonably large position for us. We have a fair amount of conviction and it’s also something that’s quite current.
Good Investing Plus – A warm invite to apply
Hey, Tilman here. You seem to have passion investing. That is great!
If you want to dive deeper and go further down the rabbit hole, you are kindly invited to apply to my community Good Investing Plus. It’s a place that’s very helpful to people who are ambitious about investing and is helpful to investment talent and experienced fund managers. So if you’re interested, please click on the link below.
Special situations
[00:22:17] Tilman Versch: You also have special situations and as one topic you can invest into. What are these kinds of passionate situations? You may mention one.
[00:22:30] Theron de Ris: By special situations, we’re not really talking about, you know, companies going through corporate reorganisations or, you know, hard catalyst investing event-driven stuff.
By special situations, I just mean interesting ideas frankly that may not, you know, fit within our capital cycle framework, but happened to be very interesting where we’ve invested. I mean I could think of one. This is several years ago, back in 2018, we invested in a company called Affiliated Managers Group, AMG. Are you familiar with them?
No. They were an S&P 500 company with about a 5 or $6 billion market cap. Basically, they have assembled a couple dozen minority stakes or in some cases, majority stakes in boutique investment managers, okay?
So it’s actually quite an attractive business because they basically have revenue shares with these managers and they basically helped the first generation to hand off ownership to the second generation and they provide stability and capital but they’re focused on active managers, right? And of course, we’ve had this long-term trend of money leaving active managers and going to passive etcetera.
Anyway, by the end of 2018, the stock was down by like five times earnings. When we bought it, it was probably 80, $90 a share. And what I kind of recognised there was the asset centre management of their boutique managers, affiliates, was going down a lot and so the market was concerned because their revenue is based on you know the assets centre management of their investees. But actually their largest investee which is actually AQR.
The large sort of value coin shop. They had a different arrangement with AQR where it was based on their profits, not the revenue share and so it was only like 5% of their cash flow. Bottom line, even though was like 30 or 40% of their AUM, the total AUM of the investees.
And so I kind of recognised that the market was misunderstanding the risk to the company’s cash flow. Plus the company was expanding into alternatives which had a better, better growth profile, and better net flows.
So anyway bought it five times earnings didn’t quite know what was going to happen to the earnings, but I had the cash flow yield. And as it happens next couple of years and of course, going through COVID and after COVID stock went up quite a bit, earnings went up quite a bit and I was able to sell it, you know, something like a double. So that’s a good example of a, yeah, I guess you call it a special situation.
The research process
[00:25:13] Tilman Versch: Let’s look a bit into your research process. What usually happens before you turn an idea into an investment?
[00:25:20] Theron de Ris: Yeah. So question sort of how we find ideas. We, of course, are monitoring industries that are going through consolidation with our capital cycle framework. Were also to some extent using screens to isolate certain lists of companies based on the criteria we’re interested in.
We’re referring to primary sources to do research. So company documents, SEC filings, etcetera, I love to read investor letters and find ideas frankly, from fellow investors, the gentleman who works with me, Remo, our analyst probably does for the one deep dive idea every month. So we have sort of a continuously building pipeline of ideas.
Not all of which we invest in. Oftentimes it’s a pass or, you know not the right time. But you know, we’re constantly replenishing our universe of ideas. So those are some of the ways we find ideas.
[00:26:36] Tilman Versch: Why do you pass an idea?
[00:26:40] Theron de Ris: It’s often of valuation, frankly, or we find out something about the company or the management that we didn’t expect things like that. You know, as you turn over rocks, you find you find things that you didn’t expect.
So yeah, it’s a combination of, you know, the fundamentals not being as good as we thought, the market being essentially right to put you know low valuation on the company which happens quite a lot because markets are pretty efficient, yeah or the management not, or the incentives in place not being what we wanted.
Changes over the past 5 years
[00:27:21] Tilman Versch: So let’s go back five years. On which part of the research process compared to this five-year time frame are you now spending more time and effort?
[00:27:33] Theron de Ris: I’ve always been interested in how kind of the macro situation impacts industries. I’m interested in market cycles and I’ve always kind of used that top-down input to find ideas, to construct the portfolio, and also to manage risk.
So I’d actually say that’s kind of always been there. Of course, it’s the opposite of your question, but I’m probably spending a little less time on deep dives into individual businesses since Remo came on board who’s our analyst.
Who is, you know, far more capable of taking a company apart. And understanding the value drivers and whatnot than I ever was, frankly. And so it’s more of a conversation with him, probing, figuring out things with him and him doing a lot of the deep dive analysis that I would have done in the past because of course, I was on my own.
Theron de Ris on identifying the steps in the cycle
[00:28:45] Tilman Versch: How do you find out where you are in the cycle so you have the cyclical framework you already mentioned that with precious metals you haven’t time to write but like how do you generally try to find out where you are?
[00:29:00] Theron de Ris: Yeah. I mean one way not to find out is to just do a lot of research and think that just because you’ve done all the research that is the right time to deploy capital, that’s very risky, but it happens all the time.
So I think you have to be humble and understand that just because you’re doing a lot of work and you’re very excited about something, you know, industry cycles can be very long and you know, take longer than expected.
And so one thing I’ve learned is to only deploy a small amount of capital initially into kind of a thematic idea like that, no matter how high conviction I am and then build it as it starts to work.
But you know I’m a big fan of looking at the contrarian anecdotes that sort of reflect prevailing sentiment which get of course very pronounced at extremes. So about just like one indicator which is I think really good, Tilman, is when an ETF, an industry ETF gets liquidated by the Asset Management Company that provides it and like one example that comes to mind and there’s been others is at the end of 2020, the coal mining ETF was liquidated.
It was the only way to sort of gain exposure to the coal industry in aggregate. Yeah, and they liquidated it. And you know the coal industry bottomed within two months. And had one of the most explosive rallies of any industry ever over the next two years.
So that’s just one indicator, you know. Another analogue would be when the price of oil went negative. You know, I mean that was an expression of extreme sentiment. I mean, there are obviously some technical issues that caused oil to go negative, but clearly, the sentiment is extremely negative.
You also had, you know, very prestigious universities like Oxford. I mean, I shouldn’t name names, but lots of universities, Harvard, everyone. Telling the media actively, proactively telling the world that they were divesting all of their fossil fuel investments, and this was when oil was basically at zero. So these are very powerful anecdotes that can be used by investors to build a contrarian investment case.
Larger holdings in the fund
[00:31:18] Tilman Versch: Maybe let’s also look a bit into your portfolio. What are examples of larger holdings in your fund?
[00:31:27] Theron de Ris: Yeah, I mean the largest holding in the fund right now is a company listed here in the UK called Jet 2. Airways. If you want, I can talk briefly about that one.
[00:31:36] Tilman Versch: Let’s just make a spotlight on the larger holdings so that you get an idea of what, what you have the highest conviction on.
[00:31:43] Theron de Ris: Yeah. So that’s clearly the largest holding and I have a lot of conviction on that. We also own companies in Greece, which we sort of identified using our capital cycle framework. We own a bank there called Piraeus.
We own the Greek Stock Exchange. We own a house builder here in the UK, which is sort of subject to structural supply-demand and balances, but it’s a very company-specific situation called Visory. We own a uranium company that purchases spot uranium listed here in the UK called Yellow Cake.
We own Advanced Auto Parts, which is an auto parts retailer which I just mentioned. That was the most recent purchase we made and then we own a number of precious metals, mining companies and realty companies as well. So those are some of the core positions in the fund.
Jet2Airways
[00:32:36] Tilman Versch: Let’s take a look into Jet2 Airways. What kind of problems is the company solving for the customers?
[00:32:43] Theron de Ris: Oh, that’s a good question because this company literally exists to solve problems for customers, I mean that they’re obsessively focused on the customer. And if you read the chairman’s letter. That’s basically all he talks about and they’re super proud of all the awards they get.
As you know, the best tour operator, best low-cost airline, etcetera. So that’s really what the companies are about but I could just sort of step back and tell you a little bit about it. Story. I mean, first of all, it’s about a £3 billion market cap company and about 2.6 billion in enterprise value.
They hold a lot of customer deposits in cash that’s not really theirs, but they earn interest on it trading around five times EV to EBIT and has a high ROE, 32% ROE.
This year we think it’s worth, you know between sort of £19 and £22 per share. So quite a lot of upside, 35 to you know 60% upside from here. And that’s based on a pretty modest multiple sort of 10 to 12 times PE, which is you know where it used to trade pre-COVID. The history of the company.
The chairman, who recently stepped back Philip Neeson, originally started the business as basically a company that delivered flowers from the Channel Islands to the UK just back and forth. In 2002 he launched a low-cost airline with fully online booking and then in 2007 he added on Jet2 holidays, which is a tour operator where they, you know buy inventory from hotels and offer a package holiday to customers.
And it’s all online. And they’ve been doing that ever since and growing consistently growing market share in that business.
The way the capital cycle plays a role here in this idea is that during COVID, one of the largest tour operators in the UK, Thomas Cook exited the market, and basically went bankrupt. And so, you know, Jet2 Airways was very well positioned to gain market share in the UK market.
Anyway, that’s kind of the background, but the reason I like it is first this customer focus. I’ll give you an example. You know during COVID they gave back the deposits that customers had made to travel, but they weren’t able to. So I think it’s a very honourable thing to do. They didn’t fire any of their employees, actually raised their salaries and have continued to raise them, you know, above inflation for the last several years.
The second reason I like it is it’s a unique business model and that they’ve focused on regional cities in the north of England, and I mean the annual holiday for the average UK family to a sunny destination is very, very important, right? It’s almost non-discretionary.
They dominate departures from these regional cities in the north of England, so they have eight regional cities. They also have Bristol. They have Stansted, which is I guess London, but they don’t really compete in the London market with the other airlines to the same extent. And they’re also launching Liverpool this month, so 11 places that they really quite dominate in terms of their market share.
And that gives them advantages in terms of scale and ability to price and bundle their package holidays and whatnot. And then the company, as I said is quite it’s quite cheap and it’s trading at you know five times cash flow, seven times PE.
You know we think it’s worth you know eight times cash flow you know 10 to 12 times PE where basically where it used to trade. So that’s really kind of the idea. The chairman, who recently stepped back, Philip Neeson, owns about 18% of the company. So major shareholder, the CEO, Steve Heapy, has worked with Phillip for, you know, 15 years or so.
And was promoted internally, and so while he doesn’t own a tonne of stock, he’s a culture carrier. And I think he’s the right person, but he owns about £5 million of stock which is sort of like 7 times his base salary. So you know definitely has some skin in the game. So that’s Jet2 Airways in a nutshell, I’ve owned it for three years. Yeah, we’re still, we’re still waiting for it to revalue.
[00:37:36] Tilman Versch: So you already laid out your investment thesis for Jet2 Airways. What kind of research did you do before buying it? What kind of rocks did you turn before buying it?
[00:37:49] Theron de Ris: Yeah, basically I got the idea from another fellow investment manager. And so he’s already done a tremendous amount of work on it and had, you know, a large percentage of his fund in the company.
And so candidly, I was able in this particular situation to piggyback on the analysis that another manager had done. And frankly, that was enough for me. You know, I don’t have to meet with the company management before I invest. Clearly, if you are a shareholder in a company and you’re able to meet the senior management that can help build conviction or you know, help you discover new things you didn’t know, but the initial decision to purchase
I can I’m happy to make it just by doing my own research or you know in this case relying frankly on all the work that another manager has done and then just, you know, doing my own checks on the company to make sure it’s sort of consistent with the type of idea that I tend to like. So yeah, it was a pretty fast process.
And the company had just raised capital. This was a post just post-COVID, right? So they raised capital and strengthened their balance sheet and I felt it was a good time to invest at that point because the risk was very low and the share price was quite, quite low as well.
Patience
[00:39:16] Tilman Versch: So it’s a kind of a team investment. How could you find out or how have you worked on finding out what you could have potentially gotten wrong with the investment? So getting a bit paranoid about the investment, what did you do?
[00:39:35] Theron de Ris: Well, I’m always paranoid about the investment and candidly it’s, you know, the return on the investment hasn’t been really high, but I’ve been very patient in my belief that the value will be realised, so I’m always concerned about when I’m losing money on a position, especially as time goes by and I’m still losing money. In this case,
I’ve made some money, but it’s something I monitor and for each position in the portfolio, you know we do have a risk budget where you know if we lose a certain amount of money we’re reevaluating the position. So I’ve that’s been sort of continuous in the case of Jet2 Airways and there’s a lot that’s outside. The control of an airline company.
So, but these are often yeah, I’m not that concerned about things that are outside a management’s control. I’m more concerned about is the company doing well with its customers offering value and continuing to gain market share moving forward. And in the case of this company, it’s continuing to do that.
So if you compare, you know this year, you know this, the past year’s financial results with the last year before COVID and everything’s looking better you know their package holidays are up 40% versus you know fiscal 2020? Customer departures are up and everything is sort of moving in the right direction.
Learnings from helping fund managers
[00:41:01] Tilman Versch: Let’s step away from the investment example to your business. You have built this fund for a platform where you help different fund managers. What did you learn from helping these managers for your own fund business?
[00:41:21] Theron de Ris: Well, I’ve certainly enjoyed making a number of you know, new friends on the platform side and I think we learn from each other. I’ve certainly had some experience. In, you know trying to set up and grow a small investing business, which I think is valuable for a number of the managers who decide to work with the platform and equally I certainly learn a lot from them as well.
You know, in terms of how they decide to structure their team, even the types of investments they’re making make me question, you know, whether I should be more open-minded in the types of ideas that I’m. I tend to focus on. Things like that.
Things that can go wrong
[00:42:28] Tilman Versch: What have you seen not working in this structure?
[00:42:35] Theron de Ris: Okay. Yeah, there’s a lot that can go wrong. Some things that don’t work, for example, are if you have two partners who are both doing the portfolio management. I’ve seen that not work several times. It tends to be better when one is focused on investing the money and the other is focused on non-investment-related activities in my experience.
You know, I think there are some issues around risk management sometimes with new investors deploying capital in the markets. And yeah, I think that’s important to have a risk management framework and it’s you know, value investors. I think when they feel when they talk about risk management, they talk about. Buying a stock that’s. You know, trading at a big margin of safety, right?
So they have the margin of safety and that’s that. But there’s a lot more to risk management than that. There’s position liquidity, there’s position concentration. There’s, you know, diversity in the portfolio, there’s, you know, exposure management and I think that’s important. And maybe underappreciated by some new managers. Those are a few examples.
Why did you start a fund, Theron de Ris?
[00:43:54] Tilman Versch: What is your personal why for starting a fund?
[00:43:59] Theron de Ris: Yeah. I mean, when I started my fund full-time. It was really just about wanting to have control over my time. And wanting to make my own decisions. And sort of live or die by my decisions. It wasn’t about building, building a business.
You know, it was really kind of to approach investing as a vocation like a doctor or a lawyer, where you’re providing a service to your clients and where you have a strong alignment of interest. So that was always objective and it still is. It’s just that you know as we’ve grown a bit. We’ve had more resources and it’s made sense to build a small team.
And to make sure that we’re financially viable and it’s a work in progress. But first, first and foremost, it was really the desire to have some more control over my time and be more accountable for my decisions.
[00:44:59] Tilman Versch: Why are you offering a solution that could be better than other offerings in the market with your fund?
[00:45:08] Theron de Ris: My fund, I would say we offer three benefits to investors. The first is that the fund has a relatively low correlation with other long-short strategies. And also to the broader market, so it’s a good addition to a market portfolio or replacement frankly for other long-short portfolios.
The second is that we have an attractive risk-reward ratio. So you know our focus is very much on you know how much can we make an investment, how much can we lose is that ratio attractive because over time, that’s led to us making more money on the winning investments that we’ve lost on the losing investments, the track record shows a good attractive risk-reward, which I think is important.
And then the third thing is the alignment of interest which I touched on earlier where we have committed to kind of have our own policies that we would sort of expect from our company management so in specifically we are going to reduce management fees as the fund grows, we’re going to close the fund at $500 million should we ever get there, but that’s kind of a hard capacity of the fund.
I’m going to continue reinvesting at least 50% of any money that I make back into the fund, and I’ve continued to do that for over a decade now. And lastly, we’re never going to cede ownership. A majority ownership in some mango to a third party. So I think those are unique attributes that make for you know productive offering.
Theron’s competitive advantage as a fund manager
[00:46:55] Tilman Versch: Maybe expand this question a bit. What is your competitive advantage as a fund manager?
[00:47:00] Theron de Ris: I’d say our capital cycle approach is quite unique in the market you know the result of investing capital countercyclical really is that our portfolio looks quite, quite different.
And so I think that provides diversification and is complementary to investors’ portfolios and I think we’ve shown through a number of different investments in different situations that we can use that framework to make a very substantial amount of money and to make it at times when sometimes other investors or the market is not doing so well. So I think that’s a real advantage that we that we have to name one.
Portfolio construction
[00:47:56] Tilman Versch: In this framework, how do you think about portfolio construction? What is your framework for building a portfolio?
[00:48:04] Theron de Ris: Yeah. So we’re going to have a concentrated portfolio where the top ten positions are over half the NAV. And those positions are going to be large because they have attractive risk-reward ratios. And then we’re going to have a longer tail of, call it 10 to 20 holdings that are smaller as a percentage of NAV but have potentially larger absolute upside. But they also have a lot more risk, right?
So the risk-reward ratio is a wider range. So that’s how we kind of approach portfolio construction, it’s the attractive risk-reward ratios that tend to be the larger positions in the fund. We also ensure that the top ten positions have a great deal of liquidity. So the position needs to represent no more than 10 days of average trading volume. If the fund were, you know, hundreds of millions of dollars.
Of course, right now it’s just under 20 million. So it’s obviously a very liquid portfolio, but we think about if the fund were larger how would the liquidity be of the top 10 holdings and we ensure that it’s no more than 10 days of trading volume. So that’s kind of how we approach constructing the portfolio and generally, we have a small number of industries or geographic bets in the portfolio that are there by design, where we’re taking an overt exposure.
So, you know, Greece would be an example. Precious metals would be an example. The UK more broadly would be an example. Energy in the last few years would be an example of Uranium.
[00:49:48] Tilman Versch: So you’ve seen these other different 20 roughly 20 funds under your umbrella. How is your portfolio construction framework different? Generally to what you found there or what you find on the market.
[00:50:04] Theron de Ris: Well, I think we have a collection of you know, managers who are who are quite unique, each of them.
And so they each have portfolios that I think are quite unique in their own respect. So I don’t want to claim that you know my portfolio is exceptionally different and I think we all kind of think that our portfolio is more unique than it is and the reality is there are tonnes of competition and there’s all sorts of you know, portfolios that can, that can probably mimic what you’re doing, but I would say there are very few funds out there that were willing to put a large percentage of the fund into energy-related stocks when they were cheap, who are willing to have, you know, 1/4 of the fund and precious metals related equities. A) because they’re in an interesting position in the capital cycle but B) also because they complement the rest of the portfolio because they tend to move when the rest of the portfolio doesn’t.
So they have a sometimes negative correlation. So from a portfolio perspective, they’re very attractive. I don’t think many other portfolio managers do that. So that’s one example of I think you know the portfolio being you know very different in some cases. And then we have some managers who are more, you know, specialists in one geographic area. I think my fund is quite, quite unconstrained.
We tend to focus on new opportunities, but we’re unconstrained in terms of our universe and we’re willing to go in very different directions than we did in the past, for example, to ensure that we can continue to compound capital as opposed to getting stuck in one area that could work at one point in the cycle and then not in the next.
Closing thoughts
[00:51:49] Tilman Versch: It’s my last question. I want to give you the chance to add anything we haven’t discussed. So is there anything you want to add that we haven’t covered in the interview already or you want to go deeper into?
[00:52:00] Theron de Ris: No, I think I think we’ve covered a lot of ground, Tilman, and I appreciate all the questions.
Thank you
[00:52:10] Tilman Versch: Then thanks for coming on and sharing your insights and sharing an interesting investment case. And thanks to the viewers for staying here. Bye bye.
[00:52:19] Theron de Ris: Thank you very much. Bye.
Disclaimer
[00:52:21] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like and a comment and subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer, so here you can find the disclaimer. It says, and please do your own work. This is no recommendation what we are doing here is just a qualified talk that helps. You, but it’s no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye bye.
