In a recent talk to Ivey students, Andrew Brenton, an Ivey grad, emphasized the importance of getting to know management teams when selecting investments.
“It takes a long time to get to know a good company. And sometimes, it’s just blindly obvious when a company is phenomenal.” – Andrew Brenton
About Turtle Creek
Mr. Andrew Brenton is Chief Executive Officer and Co-Founder of Turtle Creek Asset Management based in Toronto, Ontario. Founded in 1997, Turtle Creek is an independent investment management firm focused on long-term capital growth that prides itself on taking a different approach than the typical value investor: they believe risk and return can be inversely correlated.
Turtle Creek has a history of outperforming all market environments, showing the merit in defying traditional approaches.
Getting to know management teams
Good management is an integral component of a strong company (See Burgundy Asset Management Ltd. Margin of Safety. December, 2002).
The first step in Turtle Creek’s four-step investment process is picking the right kind of company – a step that is critical and requires much care. An investor must not only pick the right company but keep an eye on whether the company is maintaining their competitive edge long-term. In most cases, it is unlikely to find a company that will continue to be great forever.
Visiting facilities and engaging in face-to-face conversations enables an investor to assess the intangible factors that make for an exceptional management team. This sheds light on management’s ability to allocate capital effectively. Still, few investment managers take the time to speak with management teams. This creates an advantage for value investors who do show an interest in getting to know management. For instance, Turtle Creek gets access to management teams despite not being a large shareholder, simply because they are among the few investors to take the initiative to do so.
Conversations with management provide critical insight on a company’s approach to capital allocation. Mr. Brenton described the example of a CFO who may want to de-risk the company in a time when management is focused on seizing large opportunities for the future to avoid distracting executives with the burden of adhering to covenants. Without a conversation with management, these motives would go unknown.
Companies, not stocks
A centuries-old philosophy in value investing is to view an investment as buying a piece of a company rather than a piece of paper. Understanding a company is more than analyzing candlestick charts and computing beta. It is about understanding how a company is run – its business model, competitive advantage, management team and intrinsic value – well enough that the investor is confident enough to own a piece of the business for years to come, and confident that they have purchased it for less than its intrinsic value. Mr. Brenton demonstrated this holistic view, speaking about ‘companies’ throughout his talk and barely once mentioning the word ‘stock’.
High conviction investing
Conventional investors argue for diversification as the only way to minimize risk. Value investors realize that diversification only guarantees average returns, not outperformance (See Burgundy Asset Management Ltd. Margin of Safety. December, 2002). Turtle Creek has never owned more than 37 companies, compared to the average mutual fund which holds hundreds of securities (See Adam Hayes, October 2020. Mutual Fund. Investopedia. https://www.investopedia.com/terms/m/mutualfund.asp). Is this an effective strategy? The proof: Turtle Creek has achieved a compound annual return of 22% since 1998, compared to a market average of 7% over the same period (See https://www.turtlecreek.ca/our-returns/).
Mr. Brenton left a lasting impression on students by demonstrating the value of putting your money where your mouth is. He shared that both himself and his partners have 100% of their net worth invested in Turtle Creek, along with their families’.
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Elena Dimitrov
Elena Dimitrov is a HBA student completing her final year at Ivey Business School. She developed an interest in investing at an early age. Before taking George Athanassakos’ class, she had read The Intelligent Investor three times. At Ivey, she has further developed her interest in value investing principles through the academic and co-curricular opportunities offered by the Ben Graham Centre. Upon graduation, Elena will be pursuing management consulting in Chicago, Illinois where she will continue to explore the foundation of what makes for a phenomenal business.
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The views expressed in these blog posts are the opinions of their authors, and do not necessarily reflect those of the Centre. The intention of this blog is provide a platform for current, past and upcoming HBA, MBA and Executive program value investing students to discuss value investing and related topics.
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