Nil annual management fees
We charge no annual management fee and only charge a performance fee when the Fund delivers returns of at least 6% per year. This fee structure has been designed to align the interests of our investing partners with the Fund Manager and ensure a rigorous focus on performance rather than asset gathering.
Avenir Capital tends to have relatively concentrated portfolios with relatively low turnover. There are typically 15-20 stocks in the portfolio at any one time which allows our best ideas to drive performance. We see no merit in having money invested in our 63rd best idea and would rather add funds to our best ideas or maintain firepower in the form of cash to put into new high quality ideas as they are uncovered.
We do not in any way seek to replicate market indices and instead focus on maximising risk adjusted returns over the medium to long term by following an absolute return strategy. We believe that a fundamental flaw in much of the institutional money management industry involves either explicit or closet indexing which reflects asset gathering behaviour and inevitably leads to inferior long term returns. We will prudently limit our exposure to any one industry or macroeconomic factor.
Whilst we are generally investing with a two to three year outlook, stock and market volatility can enable value adding shifts in position weighting within the context of our long term outlook.
We invest alongside you
We invest the bulk of our own investable assets alongside our investors, which is a sign of confidence sadly lacking amongst most fund managers. We see no reason why you should be expected to trust us to protect and grow your capital if we are not prepared to put our money alongside yours.
Hold cash when we cannot find compelling investments
We will only invest in situations which we feel are compelling, where we can invest with a material margin of safety and in which risk is carefully controlled. The corollary of this is that we feel no need to be fully invested at all times. ‘Cash’ is a residual of our investment process rather than a target in and of itself. We would rather maintain a cash balance should we not be able to find compelling new ideas to replace positions we are exiting.
Our fee structure is aligned with this approach as we do not earn any management fee purely on assets under management and only earn a performance fee should the fund return more than 6% per annum (well above a normal cash interest rate).
A different view of ‘risk’
Avenir has a different perspective on risk than the vast majority of the institutional money management industry. Most institutional investors measure risk by beta, annual volatility or deviation from a benchmark. Avenir, quite simply, sees risk as the risk of permanent loss of capital. Avenir also differentiates between an uncertain outcome (i.e. a range of possible outcomes) and the risk of permanent loss of capital. The market often gets confused between risk of loss of capital and uncertainty of outcome, and low risk, high uncertainty is a great combination for finding investment value as it can lead to severely depressed prices for businesses. Avenir seeks to identify and benefit from situations in which the range of possible outcomes provides for significant potential value creation (even if the actual outcome is uncertain) and limited probability of permanent loss of capital – ‘heads we win; tails we don’t lose much’.
Volatility works for us
We are not perturbed by short-term volatility as we do not believe that volatility is indicative of the risk of permanent loss of capital or medium to long-term value generation potential. We would rather buy at $0.60 a stock worth $1 that has followed the price pattern $0.70, $0.90, $0.60 than buy at $1 a stock worth $1 that has followed the price pattern $1, $1, $1. This works well for us because many in the market treasure the dollar bill that sells for $1.10 – as long as it consistently does so. In other words, volatility is on sale because the vast majority of institutional managers out there are doing their best to avoid it under the mistaken belief that volatility equates to risk. We see volatility as our friend and use it to our advantage in our search for appropriately cheap and safe stocks to buy.
The Fund will use minimal leverage (excluding short positions) and, in no event, greater than 20% of gross assets. We expect the Fund to generally have no leverage (other than select short positions) and the Fund does not intend to use leverage as a driver of returns.
We are of the view that leverage is not necessary to deliver superior returns when following a patient, value-based strategy investing in safe and cheap stocks. What is important is being able to maintain our composure and act as long term investors in volatile times. Leverage is inconsistent with this approach. We do not want to be shaken from a compelling long term position due to a margin call and, in fact, want to be positioned to buy when others are forced to sell for that reason.