We know that investing with a boutique is hard. There is uncertainty about the business, the people, and the funds they offer. And even if you can get comfortable with them, you must then be able to motivate that boutique to your clients, something that can be difficult to do. But as we all know, nothing worthwhile comes easily. With a bit of work, boutiques like Obsidian, can add significant value to your business. Please let us explain how.
Returns – Different and Durable
The biggest risk of investing with a boutique, from your perspective, is that they go through an extended period of underperformance. No manager can guarantee this won’t happen to them as the future is uncertain. The next best thing, to give you comfort around the process they follow and its likelihood of success, is a long, successful track record.
The graph above shows our balanced fund strategy returns relative to the Reg. 28 High Equity Category since January 2010. An upward trending line means we are outperforming the average fund in the category over time. This can be seen in a different format in the table below. Note also that we’ve beaten the market over all reported periods except one.
We have generated equally impressive performance across all four of the strategies we offer, over meaningful time-frames. We are confident that the investment process we diligently implement, works. But performance isn’t everything; many of the bigger managers have also delivered good returns, so you wouldn’t necessarily include a boutique based purely on returns. There needs to be something else. The next graphic plots our balanced fund returns, and those of the more established managers, against a static asset allocation benchmark that Fundhouse use in their balanced fund analysis.
There are two messages from the above graph. First, reiterating what the previous images have shown, we have not disappointed from a performance perspective against our peers, including the bigger investment houses. Second, and more importantly for us, we have generated returns that are uncorrelated to our peers. This is critical; we don’t expect our funds to form the foundation of your client portfolios, but including us will improve their overall diversification, without sacrificing return, because we manage money in a unique manner.
Something different for your clients
Our investment process is simple, but unique. To gauge the valuation of the equities we analyse, we use the following 5-blocks process that is the proprietary property of Obsidian Capital:
The first block is the most important for us. Profitability Growth is a measure of the likelihood that a company can expand their margins, which should then translate into earnings growth. Traditionally, we’d get excited about shares where their current margins are below their long term averages. However, shares with elevated margins can also pass this screen if their margins can expand further.
Absolute Value is when a share has a dividend yield close to the return on cash. We think this provides a margin of safety for the investment, as long as they have reasonable earnings growth.
Historical PE’s is a pure valuation measure. Here we are looking for shares with PE’s (or dividend yields) that are cheap relative to their history.
Price/book is another valuation measure. When a share trades near its NAV, or below its long term average, we think it provides further safety for the investment case.
Debt levels is a very important block to end with as it will steer us away from investing in over-indebted companies. This is important because too much debt can have a very negative impact on returns if rights issues or forced asset sales come into the picture. The number of blocks we can satisfy determines the attractiveness of the valuation.
But we don’t buy shares based purely on valuation. The real crux and differentiator of our process is the work we do to understand the environment in which a particular asset resides. This is because we believe that the fundamental macro forces at play in the market are just as important as the internal workings of a business. As an example, we know that SA Banks tend to do well when our bond yields are falling. To get conviction on the direction of bond yields, we’ll need to establish a view on inflation, the prospects for the rand, and the likelihood of interest rates cuts. This in turn requires understanding the global forces at play that influence the aforementioned variables. To sum up our process we use the following catch phrase: “Marry Valuation with the Cycle”.
Pedigree you can stand behind
The investment process detailed in the previous section has been developed over a 25-year period. Richard Simpson and Royce Long started their investment careers together at RMB Asset Management in 1994, and have been managing money together ever since. An investment partnership of this tenure is rare, if not unheard of, in the South African fund management landscape. At RMB they were exposed not only to a deeply enriching investment environment, but were also intricately involved in growing the business from what was essentially a boutique, into one of the largest asset managers in the country. Above everything else, their experience at RMB instilled in them the importance of managing people’s money prudently.
Their time at RMB culminated in Richard being Chief Strategist and Head of Resources, while Royce was Head of Financials and a member of the Asset Allocation Committee. Leaving RMB to found Obsidian Capital was a decision made on the back of a shared investment philosophy; they both wanted to manage money within a multi asset framework, where both stock selection and asset allocation play equally important roles. It is their belief that this approach gives them the best possible chance of generating inflation beating returns, at a reasonable level of risk, for their investors. So strong is that belief, that they have a substantial portion of their own wealth invested in the funds they now manage.
We are often asked why, given Obsidian’s performance over the last 10 years, the business isn’t bigger. The truth is that Richard and Royce, and the team they have around them, are extremely investment-centric individuals. Managing money is not a nine to five job for them, but a way of life. As a result, they are more comfortable, and focused, on being trustworthy and skillful custodians of their investors’ money, rather than marketing their business. In our humble opinion, Obsidian remains one of the best kept investment secrets.
What a future with us looks like
You’ll always know what we’re doing. We think it crucial that you understand how we are positioned, what we need to happen in order to perform well, and what the risks are in our portfolios. This we’ll do both in person, through clear written communication, or over the phone, whichever suits you best. One thing you can be sure of is that our views and strategy will be unlike anything else you’ll hear; we are not afraid to make investments that seem a but unusual to the naked eye, but are actually incredibly exciting under more intense, fundamental scrutiny. Your interactions with us will leave you with unique points of view backed by hard evidence.
What you won’t get is overconfidence. We know that the market is a complicated machine that is sometimes near-impossible to comprehend. Under these scenarios we will admit that we don’t have the answers, and our portfolios will be constructed to reflect our doubts. When we do have conviction, we will take calculated risk to make sure we capitalise on the opportunities presenting themselves. No matter the environment, we will always have the preservation of your client’s capital in the back of our minds.
We know that the people you serve and their satisfaction are most important to you. Because of this, we see it as our duty to help you navigate any uncertainties that they might have about a boutique asset manager like Obsidian, both prior to investment and during. Whether it be one-on-one interactions, or addressing your clients as a group, we are always willing to tell our story, and to provide answers to any questions your clients may have. To summarise, we want to be accountable not only to you, but to your end clients as we strive to grow their wealth.