Exclusive Interview with VNB Wealth Management: Catalyst-driven Value Investing

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Investment Mandate

VNB Wealth offers a fee structure for separately managed accounts that includes a fixed fee plus incentive fee, typically 0.75% and 20% of the profits, respectively, so we are intensely focused on trying to avoid losses, particularly those that are permanent. We operate under the mantra of “putting capital to its highest and best use” which charges us with finding securities throughout the capital structure with the most favorable risk/reward.

Fee Structure

For any investment we make we are targeting a 15+% internal rate of return (IRR) via a combination of current free cash flow or earnings yield plus growth, along with any projected increase in multiple, as well as any dividends accrued. If we can’t get to the 15% IRR number with a high degree of confidence, we don’t invest. Unofficially, we are looking to double our clients’ money every 5 years which ties in with the 15% IRR target.

Core Investment Philosophy

  • Core investments are made in those companies that have high and increasing returns on tangible capital, recurring revenues and generate substantial free cash flow.
  • An identifiable catalyst is a key component in almost all of our investments. The catalyst can be ‘soft’ or ‘hard.’ We tend to think of a ‘soft’ catalyst as representing inflection points in the way a company is valued maybe via a change in multiple or in the trajectory of their operating results. A ‘hard’ catalyst for us is aligned with the traditional definition of a targeted corporate event.
  • The Enhanced portion of the portfolio includes investments throughout the capital structure in undervalued securities of companies undergoing various types of corporate events: refinancings, mergers and acquisitions, balance sheet restructurings, earnings, divestitures, spin-offs, litigation, etc. A particular emphasis is placed on micro cap securities in this portion of the portfolio.
  • The strategy is managed using a concentrated approach investing in typically no more than 30 securities. This approach allows us to focus on our ‘best ideas.’ Additionally, we believe our experience and expertise in conducting fundamental analysis combined with our ability to identify catalysts gives us the potential to deliver our desired returns on a consistent basis
  • The investment process is fundamentally driven and our bottom-up fundamental research and analysis drives all of our decisions. We actively seek to identify securities with asymmetrical return probabilities – limited downside with the potential for substantial upside.

 

Evaluating Management

  • In our view, the most important responsibility of a CEO is capital allocation
  • We admire CEOs who think like owners and who are continuously striving to widen the moat of their business and create long-term shareholder value
  • The inherently strong economics of a good business may fully or partially mask the weaknesses of an average CEO. We read shareholder letters of past several years and transcripts of earnings calls and various investor conferences to better understand management’s thought process on competition, drivers of growth and value, operational issues (if any), and capital allocation. Going back several years allows us to see if management has fulfilled past promises, paid up for acquisitions, or bought back shares at inflated prices
  • We also closely study the proxy statement to learn about the backgrounds and compensation structure of the executive management team and the board of directors
  • We are wary of management teams that focus on acquisition-driven growth strategy, constantly increase share count via issue of excessive stock options, and are compensated based on short-term stock price appreciation

 

 

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