Vanshap employs a rigorous analytical process when evaluating potential investments. We construct a concentrated portfolio of 12-15 positions, investing meaningful capital in our best ideas to maximize returns while balancing portfolio risk through reasonable diversification and maintaining low portfolio turnover. Our overarching goal is to know the businesses in greater detail than the vast majority of other market participants.
Investments must achieve a ‘trifecta’ of attractive attributes:
- Quality Business
- Exceptional Management
- Discounted Valuation
We think of a quality business in terms of durability, rational competition, and achieving an adequate return on invested capital (typically double digits on average) throughout the cycle. While technology is impacting nearly every industry around the world, some are particularly susceptible to a rapid pace of disruption. We seek to avoid these areas and instead focus on businesses, usually with significant tangible asset backing, that have withstood the test of time and face limited disruptive threats. These businesses may not be the fastest growing, but typically achieve at least average growth, yet are far more insulated to irrational competitive pressures and margin degradation.
We spend considerable time conducting company and industry due diligence to properly assess Porter’s five forces. We stress observable factors such as the supply of capital and underlying competitive dynamics versus relying on long-term demand projections, addressable market statistics, or trying to predict consumer preferences. Lastly, the business must have a sound balance sheet. We prefer operational gearing rather than financial gearing to enhance returns, as the margin of safety typically dwindles with debt.
Exceptional management is nearly impossible to identify via screening alone. While value creation may be quantitatively observable, other intervening variables may have heavily contributed to the result. We therefore spend a significant amount of time not only speaking with managers and directors, but also competitors and local analysts/investors to obtain a broader view of management’s reputation, operational prowess, and capital allocation discipline. Many of our investments are managed and owned by a family or successful entrepreneur, as we firmly believe proper alignment of interests produces superior long-term results.
The price paid for a security is the primary determinant of returns. While this tenet is not always appreciated, we strive to maintain a strict valuation discipline, purchasing businesses at mid-single digit normalized earnings multiples and frequently at a discount to book value. While most investments have average or better growth prospects, we prefer not to ‘pay up’ for them. Instead we are strong believers in balance sheet and asset-based investing, paying attention to what are we paying for a business based on what we can accurately measure and observe. We are cognizant of the fact that the more one relies on future long-term growth estimates to justify current valuations, the more susceptible one is to an unacceptably low risk-adjusted return or even a permanent loss of capital if the thesis does not materialize.
We believe that conducting thorough due diligence is like solving a jig-saw puzzle. One piece or just a few pieces in isolation may not provide the entire picture necessary to make a proper investment decision. Instead, we seek a variety of different angles, including macro, political, industry, financial, and perhaps most importantly, management. To gain a more complete understanding, we have developed a robust institutional network of global contacts that we are continuously expanding through painstaking efforts to form mutually beneficial long-term relationships. We are not arm-chair investors. We make a point of visiting management and locals several times before we are sufficiently comfortable to make a significant investment. We frequently notice subtle cues in assessing the mood on the ground and management reputation that are often missed through a phone call.
While we are definitively bottom-up investors, political and currency risk plays an important factor when allocating capital internationally. We prefer investing in countries with conservative levels of public and private debt, a strong rule of law, including respect for basic property rights and individual liberties, a low-to-moderate level of overall taxation, and an independent-minded central bank with a relatively good track record maintaining currency stability. These factors are not analyzed in a static manner as material policy changes occur often and frequently provide attractive investment opportunities that may have not been present previously.