Brar Investment Fund On The Bullish Case For Eurobank ErgasiasVW Staff
Brar Investment Fund LP Reports 1.7% Gain For Q2 2014, Holds 15% Cash To Pursue Opportunities by Pope Brar, Brar Investment Capital
- Portfolio Discussion
- “Low Risk, High Uncertainty” approach to investing
- Market Valuations
- Benefits of Meditation
Brar Investment Fund Presentation
Here is a link to our Fund Presentation
Previous articles are available under the “BIF in Media” tab on our website here.
- Real Money/The Street.com: Uncertainty is Your Friend
- Brar Investment Capital to Discuss Lower Risk-High Uncertainty Investment Strategy at Family Office Forum 2014
- Brar Investment Capital to Speak at Emerging Managers Summit 2014
- Brar Investment Fund Reports Q1 2014 Results (for readers wishing to view past commentary)
Next opening for Brar Investment Fund, LP
The next opening for the Fund is September 1st, 2014. You may reach out to us if you are interested to invest.
We are pleased to report the positive absolute gain for your investment fund. Please note that we are most likely to outperform the S&P 500 Index in years when the market is down or moderately up but may struggle to match index gains when the market rapidly gains, as seen in the second quarter. The rationale is simple, we purchase businesses trading at deep discounts to their intrinsic value. It takes more than 18 months for value to substantially materialize. The process is slow and steady and may not match rapid market gains in certain periods. We hold about 15% cash, likely to increase as markets gain, to take advantage of opportunities in declining markets. If our cash pile grows, our investors should not expect dynamic absolute gains seen in past periods. We remain ready to pull the trigger on outstanding bargains.
We are confident that over a three to five year cycle, we have a great chance of outperforming the markets. I recommend that investors judge our performance (along with that of most investment funds) over a period of at least three years and preferably five with an economic cycle to see how we perform in both bear and bull markets. This also tests our ability (or the lack of) to take advantage of opportunities found in times of fear and panic, a key ingredient to achieving intelligent investment returns. We see pockets of existing value in the financials (banks) and natural resources (natural gas). The portfolio currently contains excellent businesses with good long term prospects, it continues to trade at a good discount to intrinsic value. The NAV should meet the underlying value of the businesses over the next few quarters to years.
We added one new opportunity in the second quarter, Eurobank Ergasias EO-,30 (FRA:EFGC). The bank is one of four systemic banks in Greece, having an approximate 20% market share in loans and 18% in deposits. Why Eurobank? The opportunity was born as Eurobank’s capital needs arose with stress tests of Greek banks by the Bank of Greece. The tests analyzed the estimated losses of the loan portfolios and the ability of the banks to generate internal capital. Previously, the Bank of Greece stated that Eurobank would need additional EUR 3bn to cover capital needs. Eurobank subsequently engaged in an equity offering which covered the capital requirements and provided sufficient resources to take advantage of the rebound in the Greek economy.
The capital increase came from proven and long term oriented shareholders, Prem Watsa and Wilbur Ross. Eurobank is now the best capitalized bank among its peers in Europe, with a robust 19% Core Tier 1 capital ratio. To ensure accountability and results, both investors have joined the corporate governance of the bank. The element of “uncertainty” remains with investors, particularly with Eurobank's listing on the Greek Athens Exchange, but we believe the risk of a long term decline of its intrinsic value is low. We see Eurobank similarly to Bank of America post the financial crisis. As the Greek economy recovers, credit quality and Eurobank’s capital position substantially improves.
During an investment conference this summer, we discussed our “Low Risk – High Uncertainty” approach to investing. The mention of “uncertainty” raised eyebrows among the audience. In general, we believe that the investment business is set up in the wrong way. It is least geared to serve the shareholder, while promoting the interests of the manager. The majority of the market believes that one must assume high risk to achieve greater returns. The intelligent investor does everything to avoid risk. A majority of our success is built on making low risk bets with high return possibilities. Holding an additional number of investments to our ideal 10 to 12 positions is dilutive to focus and investor returns. We invest long term for our shareholders to potentially earn them returns, not to limit their earning potential. Therefore, we operate a highly concentrated portfolio holding about 10 positions. Our average position size in June was 9%. The sector breakdown was approximately: Banks (30%), Natural Gas, and related (26%), Insurance (14%), Natural Resources (8%), Consumer (7%). The highly concentrated nature of the fund makes it more volatile than others but one that pursues investing as businesslike and aims to generate absolute returns.
To show how higher volatility does not equate to more risk, let’s assume we have two companies, Uncertainty Inc. and Surething Corp. Let’s say Uncertainty Inc. trades between $10 and $20 in a year and Surething Corp between $10 and $14. Uncertainty Inc. may have higher volatility but this alone does not make it more “risky” than Surething. The intrinsic value and margin of safety are the key determinants for managing risk. Our calculated intrinsic value of Uncertainty may be $18, but for Surething Corp – $14. If we purchase both at the same price, the margin of safety is significantly higher for Uncertainty, making it a less risky proposition than Surething, despite higher volatility. To minimize risk, we look for investments with good management, substantial discounts, difficult to “kill” business models, and temporary uncertainty. The market vehemently dislikes uncertainty and at times provides glaring bargains despite a favorable long term outlook. One of the intelligent ways to generate returns is to be a practitioner of patience who goes about daily tasks, when the world becomes severely uncertain, pulls out the tools and goes to work.
At recent conferences, we noticed numerous participants searching for “exciting” and differentiated investment strategies. We believe that all investing aims to locate value. Investors may be best advised to buy a strategy that has been tested through an economic cycle to determine consistency. We do not believe it’s the uniqueness of the strategy that will best suit the investor but the ability of its manager to consistently generate returns over economic cycles.
Recently, markets have corrected to reflect overvaluation in certain sectors. We are not macroeconomic experts and have no intention of forecasting movement of the markets. If one observes the S&P 500 Case Schiller Index below, it currently trades at 19x price to earnings, compared to its ultra-long term (100+ year) average of 16x. While not cheap, it does not reflect the irrational exuberance experienced in the previous two bubbles (2001 & 2008).
Price to earnings ratio, based on trailing twelve months “as reported” earnings.Current PE is estimated from latest reported earnings and current market price. Source: Robert Shiller and his book Irrational Exuberance for historic S&P 500 PE Ratio.
Market commentators and speculators have been pointing to the overvaluation of the market for the past three years and the imminent collapse. This is due to the dynamic market gains and the fresh memory of the recent financial crisis. We like to argue that it is very difficult to predict the timing of market collapses. Once markets become overvalued, they can stay expensive for long periods. Below is a chart of 15 bull markets since 1871. The average bull market lasted approximately 68 months and resulted in cumulative gains of 182%. For reference, we are currently 65 months into the current bull market that gained 161% since 2009.
As markets decline, we will utilize our cash to pursue opportunities. We are obsessed with purchasing excellent companies trading at large discounts. If our cash pile grows due to lack of bargains, our investors should not expect dynamic absolute gains like in the past, but we remain ready to pull the trigger on outstanding bargains.
Best things come last: Benefits of Meditation
The greatest gift one can receive and experience is one of silence. Over the past few years meditation has offered me numerous benefits including greater focus, increased inner peace, and the ability to think different. A 2005 study published by Harvard Medical School, neuroscientist Sara Lazar showed that meditating enhances the prefrontal cortex, creating more connections between neurons and enlarging blood vessels. The prefrontal cortex processes sensory information, handles rational decisions and regulates the amygdala, the structure that feeds our fight-or-flight instinct. To learn more, browse through a variety of meditation videos by Deepak Chopra on YouTube. He does a great job of describing the simple yet highly effective technique. Some of the brightest minds on Wall Street have attributed their success to meditation. View Ray Dalio’s statement on meditation here.
I hope that I have adequately communicated the strategy and direction of your fund. If you have any questions, please feel free to contact.
Bhupinder “Pope” Brar
Brar Investment Capital, LLC
+1 (408) 675-5400