The exemplary returns of a fund manager inspired by valour

Share

Remembrance Day provides time to pause and reflect about the horrors, and heroism, of the past.

Unfortunately, the descent of Germany in the 1930s seems hauntingly relevant this year. It's sobering to think that the people of a technologically advanced country were willing to usher in such malignant rulers and support them through years of bloodshed and ruin.

The fault wasn't due to a character flaw that was uniquely German. Rather, it reflects a human weakness, which has troubling implications for us all.

But it is well worth remembering that some Germans, such as theologian Dietrich Bonhoeffer, tried to stem the tide of madness. He gave his life for the cause and was executed by the Nazi regime.

While his life was snuffed out far too early, people still remember Mr. Bonhoeffer because his work survives and his books have been translated into English over the years. They touched the heart of money manager Keith Smith, who recently opened a private hedge fund which he named in honour of the courageous man.

You might remember Mr. Smith because I first highlighted his record, as a private investor, in 2013.

Fast forward four years and he continues to report exemplary returns, which are in the process of being audited to provide third-party verification. He compounded his capital at an average annual rate of 28.1 per cent over the 15 years through to the end of 2016. His 10-year annual return rate came in at 22.4 per cent and over the past five years, the rate surged to 38.9 per cent.

You'd have done well to have followed his advice in 2013 when he recommended General Communication Inc. (GNCMA). The Alaska-based integrated telecommunication company benefited from a recent takeover offer and is on track to be acquired by Liberty Interactive. The stock was recommended at $9.76 per share and it recently closed at $40.36. Those who held it over the period gained a whopping 314 per cent, which translates into an annualized return of 43 per cent. It was a big winner for Mr. Smith who recently sold his stake in the firm.

Mr. Smith, whom I spoke with recently by phone from his home in Rochester, N.Y., likes to size up stocks based on their EV/EBITDA ratios. EV, or enterprise value, reflects the market value of a business, including both its equity and debt, while adjusting for cash. It's an estimate of what a private buyer might have to pay for a firm while settling its debts at the same time. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure of a firm's operational profitability that's independent of its capital structure.

You can think of EV/EBITDA as being roughly analogous to the more familiar price-to-earnings ratio. Generally speaking, value investors such as Mr. Smith are attracted to stocks with low ratios.

He opened the Bonhoeffer Fund (for U.S. residents) this summer and has been putting its capital to work. But just 3 per cent of its assets are invested in U.S. stocks because the bargain bin is nearly bare stateside, according to Mr. Smith. Instead, he invests internationally with large holdings in South Korea, Hong Kong, the Philippines, South Africa and a smattering of other countries.

He is particularly keen on Wilh. Wilhelmsen Holding ASA. The firm hails from Norway, trades on the Oslo exchange and offers marine shipping and logistics services to its customers.

Mr. Smith points to the good capital allocation skills of its managers. They operate in a notoriously difficult industry that is dominated by "riverboat gamblers" who often lever up only to fail when the economic tide goes out.

Wilhelmsen's numbers look good. Its stock trades at an EV/EBITDA ratio of five and at a price-to-earnings ratio of four. It pays a 2.5 per cent dividend yield and has almost doubled its book-value-per-share over the past 10 calendar years.

If you've benefited from Mr. Smith's General Communication recommendation, you might want to pass some of your gains to charitable causes such as the Royal Canadian Legion and this year's poppy campaign.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.