Philip C. Ordway Anabatic Fund’s Principal & Portfolio Manager discusses value-oriented opportunities in financial guaranty.
Financial Guaranty: Value-Oriented Investment Approach
Determine what an informed, rational, long-term investor would pay – and then pay a lot less
Valuation of an Enterprise
- Evaluate businesses, not just securities
- Assess the business- and product-level economics, incremental returns on capital, and competitive advantage
- Understand and value he entire business, and then target specific parts of the capital structure based on where the value of the enterprise is most likely to be realized
Margin of Safety
- Rely on a fundamental research process designed to ensure a built-in margin of safety in every valuation
- Apply experience in volatile markets and in distressed investments to identify long and short ideas and their potential risks
- Allocate capital at prices such that a mistake or market volatility is not expected to result in a large permanent loss of capital
Understand the Price and Identify a Catalyst
- Ask why a security is mispriced and what will drive a change in valuation
- Identify events that may be a catalyst for change
- Maintain deliberate investment process and checklist to proactively identify potential mistakes
Market Price as a Source of Opportunity
- Use market prices and volatility to take advantage of opportunities
- Estimate intrinsic value using a range of probabilistic outcomes
- Avoid false precision and overconfidence, key dangers in the valuation process
Financial Guaranty: Investment Philosophy
- Anabatic’s investment philosophy is drawn from, and Anabatic’s investment portfolio is managed against the backdrop of, well-established value investing tenets
- A “margin of safety” is paramount – successful investments require investing at a price that absorbs volatility and errors to minimize the risk of a significant impairment to capital
- Markets are highly competitive and often efficient, but investors occasionally act irrationally and thereby create opportunities; as such, value investors with a disciplined, rational and patient process can have a distinct advantage over time
- Value investing works because it requires the time, patience and discipline that many investors lack – in other words, value investing works over time because it doesn’t work all the time
- Valuation produces a range of estimates in seeking to minimize common valuation mistakes such as overconfidence and false precision
- Good opportunities are rare and deserve meaningful capital – avoid diluting returns by over-diversifying, but employ an appropriate level of diversification over time to better protect capital
- Preserve the flexibility to be opportunistic – invest in equity and in credit, take long and short positions, and hold cash when appropriate
- Seek to act rationally in the face of near-term and be prepared to tolerate short-term volatility and underperformance in order to pursue expected long-term results
Financial Guaranty: Key Strengths
- Fundamental value approach: Anabatic’s investment process utilizes fundamental analysis to evaluate businesses and invest when securities are believed to offer a significant margin between price and expected value
- Focus on under-followed companies and special situations: Anabatic’s portfolio focuses on companies that attract relatively little attention from the market and on special situations that may be complex or subject to non-economic buying/selling pressure
- Fund size: Capacity is carefully monitored to preserve an opportunistic approach as the ability to allocate to smaller companies and under-followed situations is a key advantage
- Experience: Over the course of his career, including his over 6 years with CFIP, Mr. Ordway has analyzed and invested across the entire capital structure, long and short, in smaller companies, and in distressed credit situations, through a variety of market conditions
- Concentration: Anabatic’s portfolio is expected to be concentrated, generally with 8-12 investments comprising at least two-thirds of capital
- Long-term approach: Anabatic seeks to maintain a patient, long-term oriented investment process, particularly in the face of near-term market uncertainty and volatility; accordingly, Anabatic targets equally patient, like-minded investors
Financial Guaranty: Review of 2013 Small Caps Conference – EGL
- Update: Despite ongoing dysfunction in Washington and related top line pressure, Engility Holdings Inc (NYSE:EGL) has performed well; business model remains attractive, valuation less so; jury still out on recent acquisition of DRCO
- Performance: +109.5%
