Good Investing Talks - Marko Graßmann, what do you plan with the Alpha Star Europa fund?

Episode Date: March 22, 2023

Marko Graßmann just recently started managing the Alpha Star Europe fund. Here you can get insights into the strategy of the fund and Marko's plan with it.

A warm welcome to the Good Investing Talks podcast. I'm your host, Tillman Fersh, and in this mini-series, I want to portray people who are starting a fund or just start the fund. With this interviews, I want to help these people to get exposure to the community, get connected, and talk about their mission, why they started the fund, what they're planning for the next years, what is their strategy, and more. I hope you enjoy this format, and if you like it, please leave a leg and a comment. Thank you. And warm welcome to the Good Investing Talks podcast. I'm your host, Tillman Fersh, and I'm very happy that you're discovering underfollowed

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All we are doing here is no advice and no recommendation. Please always do your own work. And now, enjoy the video. Dear years of good investing talks, it's great to have you back. Today, I'm starting a new format with Premier with Marco Krasman of Alpha Star Funds. It's the fund starter format. They're following the idea of portraying underfollowed investors. I want to portray people who are just starting out with the fund and with a new product.

So I'm very happy to have Marco as the first guest here. Hi, Marco. Hi, Tilman. Happy to be here. It's great to have you here. You're based like the Alpha Star crew based in Munich or Augsburg or the south of Bavaria. Maybe let's start with the first question for this new format. What drives you to start another fund in the world where there are already a lot of funds?

Yeah, I mean, if you are in. an analyst, equity analyst, and if you are enthusiastic about the stock market and investing in general, I think for almost everyone, maybe there are exceptions, but for a lot of people like me, that's the ultimate goal to have an own fund or to be responsible for your own fund. And I think it's a good way to practice and to build knowledge as an professional investor and then at some point in time to, yeah, to how you say, to take a step and start and launch a fund on your own or with partners. And that's what I what I did with Alpha Star some time ago. So with a fund, you're also a servant to your investor and want to solve problems for them.

What kind of problems are you solving with your investment approaches? Others don't solve like you do. Alpha stuff from the beginning was a company or is a company that that strives for the best investment results on the long term. So we are very performance driven. That also means we prefer at some point to have less assets than to have more assets because we will always be, our priority number one will always be the performance, the investment performance and we hope that the investors who invest with us also are benefiting

then from from from the best risk-adjusted long-term performance and i think this will be has been in the past and will be in the future our main kPI so our main also unique selling point that we have yeah the best one of the best performance track records on the long term of course in the short-term Nobody really knows where the market goes and how the performance stacks up in one individual year. But over the long term, we hope to be one of the best performing funds. And the recent history for the Alpha Star funds, yeah, looks quite promising. And with the new fund, which serves the same, has the same strategy, yeah, we look to continue to be one of the best performance generators for the long term. To achieve this great performance, what kind of like, is there any number you're aiming for with your investments, so to say, like 15%, or is it like, what is your hurdle, so to say?

Yeah, so we strive to generate 15% per annu over the long term. And that's net of fees, so we hope that also our investors will receive those return that means for us, as a fund who also obviously charges fees. We have to have a gross performance before fees that is higher than this 15%. But yeah, that's, I think, a good hurdle to achieve. And we are quite confident that this is, with our approach, that this is possible to get to those numbers. So with this goal and as an investor in general, what are you paying especially attention to?

What are the maybe three important things in an investment you're looking for? For us, the most important point are, so I have to go probably a step back and say, we are quality investors. So we look for companies of the highest quality. Quality for us is growth and growth opportunities, high profitability, high return on capital employed or invested capital. So basically the internal rate, the company generates on the capital.

That's for us the most important KPI. And that drives our investment process. So we are looking, if we look at the company, we are looking for entry barriers, for unique business models, for companies that can, yeah, or have created entry barriers. They have a white mode.

if you want to call it that way, so that nobody erodes the high return the company is generating on their capital. And of course, we look, maybe that's the first point if you ask for three. And then the second would be that high returns are nice, but they are only half of the equation if you don't have the reinvestment opportunities. So we need a growing market, a healthy market where the company with all their strengths can invest, reinvest their capital and have further growth opportunities, either new markets or have small market share where they can grow their market share. So that depends, but we need or we like structurally growing markets where the company can reinvest and, yeah, keep the growth track or be on the growth track for quite some time.

And then the last, not the last, but the third very important point is the management and the shareholders. We are long-term investors, so we want co-shareholders that are like partners with us who have the same mentality like we have, so are long-term, also long-term owners of the of the company have a long-term mindset, know about the strength of the company and the reinvestment opportunities, and are, yeah, taking us or view us like partners. And usually those are family-owned companies or companies where you have a strong shareholder who has an influence over the company and, yeah, kind of keeps controlling it and, yeah, has formed a culture.

and is, yeah, very motivated to keep the unique culture of those companies alive. And, yeah, if we have those three, yeah, things, you know, sorted out. So a strong business model, growth opportunity, and strong management and strong co-shareholders, then we are on a good track and probably have a very good long-term investment in our fund. with this format i also want to give a bit insights in your history as an investor and i really like to ask about mistakes so what kind of mistakes have helped you to become or to grow to the investor you are today oh yeah i certainly did my fair share of of mistakes but i also think that's that's kind of part of the journey that you that you do mistakes

The most important part is that you keep learning and try to repeat those mistakes again. I think probably every investor has somewhat of an evolution. You start out at the beginning, looking for different things than you look for after a couple of years. And for me, that applies as well. And in the previous questions, I lined out the qualitative approach I have and also Alpha Star has. That hasn't been the case all the time. So I started out as a more classical value investor looking for cheap, undiscovered, somewhat quirky companies or stocks. and yeah, we're quite enthusiastic about the very low price I pay for those, for those companies.

And if you then buy the shares and monitor them and study and do your models and so on, and you realize that those ideas sometimes work, but very often do not really work because there was a reason in the first place why the company was cheaply valued. And yeah, usually those companies, they do not really progress. If you're looking for a company that grows their intrinsic value, it's very rare that you find them among those cheap companies. And they very often stay cheap and you get a very low return on your investment. Maybe you just receive a dividend, a nice dividend yield. but that's that's about it so I if I start if I would start out as a very young investor

today I would like to have this evolution to go to quality companies a little bit earlier so I wouldn't say that those were those those were classic mistakes but those it's more like an evolution of an investor in my case gravitating more to quality companies and that helped my my returns immensely so looking not just for for cheap companies but rather start with the qualitative assessment of a company of a business and then later very about the valuation and be more creative and long-term with a long-term mindset approaching the valuation of a company and go earlier to those qualitative characteristics of an investment of a company you look at.

Is there any case or any company that came to mind that you now label with a mistake, you want to share to get some more color besides the general level? I don't think it's a good way to blame those companies with you because they didn't perform. But I mean, I was very enthusiastic if I found a company with something like a net cash, where the net cash position was as big as or even bigger than the market cap. And you thought you get something for free. But then if you, I invested in those companies and then just waited and waited and hope for something was happening.

those were companies that had a very, very poor return on invested capital. They were not growing. They were kind of eroding in quality. So the intrinsic value was actually going down. They did not pay a dividend. So you had no access to the large cash balance. And then something went wrong. A big contract was miscalculated.

and you had a large, you had a very large loss, one-time loss that eroded some of the cash balance as well. And you had then, yeah, a management that left. So you had the company in a vacuum. And luckily, someone was taking over the company. And I received a little bit of my, I received my money back into a very small return. but in the end it was it was a very poor investment in the way that you could have over that period of time you could have done only an ETF or broad index like the Ducks would have outperformed those poor investment as well so that was one of the lessons to yeah to not

be attracted to yeah to the cheapness of a company and to the opportunity because of a low valuation but rather look at the qualitative aspects of the business if I had looked at the quality of the business before being attracted by the cheap price and I would have passed easily on that one so that's part of the evolution I am that you have to learn you know probably the hard way to to to realize and I hope people or young investors maybe learn this this lesson without paying the the price for it yes sometimes you have to pay the price for it to stop doing things um to add a bit more color as well what kind of industries or types of investments

won't i find in your portfolio so what is not like outside of your investable universe what are examples for this. Yeah, I think commodity companies where the revenue is to a large part driven by commodity prices, I don't invest in those because I'm not an expert. And even you see even the experts have a hard time forecasting commodity prices. And those, if you do not have a, cannot have a clear view about the revenue of a company, how should you, forecast such a company and such an investment. So for us, companies that are not in control of setting the prices for their products are not very interesting for us.

Another bucket would be utilities where their revenue or their whole business is quite heavily regulated by mostly by governments or other entities that set the prices for them and those are also not of very much of interest of us because also you have to keep in mind those investments or those business models are very CapEx heavy so you have to have you have to reinvest a lot of capital at very low and regulated returns so it's very hard to to earn decent or superior returns on capital on those business and also yeah if you want to grow, you need a lot of capital. And those are not investments that we look for. And maybe a third one where are financials or especially banks. A bank also, if you look at

the balance sheets and if you open the any report of Deutsche Bank or Commerzbank, you see a huge balance sheet and those are for us at least or for me very opaque. You do not get a good view on what's in on the balance sheet and how it is accounted for. So what is the cost they are put in? And also with such a large balance sheet, it's also very difficult to get a good return and to get a high return on those large balance sheet. And a bank almost by nature is very heavily leveraged.

So they have a very thin equity slice, but a very large balance sheet. And so if something goes wrong with those balance sheet, the equity is very easily eroded. And I look especially for companies that have strong balance sheet that have a lot of cash, not a big balance sheet, but still a bit of cash that are resilient and have buffers if something happens and cannot really easily be destroyed by an external event. So those are those areas, banks, utilities. or commodity companies that rarely excite me.

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And feel free to sign up, it's free. Thank you for your attention. And now, Edward Tillman, and you're still kind of a value investor that gravitated to quality. But also on your investments, I think you have this value investor framework that you look for a certain quirky quality. So quality that doesn't shine super and doesn't offer this, like, isn't perfectly priced. So how much quirkiness are you willing to accept and you? your investments and where do you say okay this valuation attracts me so how do you balance between value and quality so to say yeah yes this this quality or these um growth and value um

debate is is quite quite difficult because every every quality or every yeah every quality or growth investor wants to wants to have a decent value in an investment otherwise you probably he or she wouldn't do it. And as a value investor, of course, you also value your growth. You want to have growth in certain areas that you don't, you just want to pay that much for such growth. So it's a difficult debate, but you are right. The value investors start out more like the classical value value. what you would you define with Graham and Dot as a value investor,

and then they maybe like Buffett gravitate more more to quality. And that's at least that that happened to me, that I appreciate the quality much, much more. Where you can, in my experience, where you can find value in growth companies, if you will, is if you look more in, yeah, different jurisdictions. If you leave the classical German or UK

or Scandinavian area or the US area and look more in places like, for example, Eastern Europe or Southern Europe, where you find very good quality companies, also with very good management, very entrepreneurial management, and very good business models, very entrenched and with very good

entry barriers, very good market positions, exactly like we look for, but they are in areas like the Baltic regions or in Greece. And for that reason, they are not, at least in my view, not that appreciated. If such a company were in Germany or in the UK or even in Scandinavia, they probably would have been priced differently. So you get something like a discount for being in such countries. Maybe there are valid reasons for such a discount because you have a political landscape that maybe isn't that stable or you have interference with the free market so that you are not that sure that you really can push through your property rights. You may have even doubt if you are in court or before a court that your rights as an owner will not be appreciated.

So those may be valid reasons, but if I were, and we are actively looking for such high quality companies in those areas where maybe not everybody is looking. And that's also an advantage if you are a new fund like we with a limited amount of, of asset under management now, those companies are generally smaller and other investors, professional investors, maybe don't even look at them because a Baltic software company or Greece, Greek software company is per definition with a smaller market smaller. And so, yeah, maybe some small cap experts are looking, but the general professional investing Crowd leaves out those markets and that's, I think, one of the edges, one of the edges we can gain as a very smaller, nimble investor who is willing to look in those places. How did you come up with the portfolio for day zero or day one? Because you've set at this fund.

And so the question is like, what is your construction principle for the portfolio? you have somehow created a lot of thin air, but there are also some other recipes to creating a portfolio for a new fund. So how was this process going about? Yeah, if you are already an investor with some experience, you do not start from scratch, right? Because you have experience and you know companies,

you know, you know the management and you can, yeah, transfer those companies that you have been invested previously to the fund. So you're not starting from scratch. So because you have an investable universe, you know those companies. And if the price is still right and you're still convinced about those qualities, then you can bring your model. up to date you have to dust it off if it's if it's not up to date and yeah you have to get probably the latest development and yeah approach the company again talk to talk to the management see if

if everything is still as you expected to be and get up to speed with new developments and then you can can easily build up a portfolio but what we did in addition is we surveyed the landscape together my two analysts that are helping me. We build a large list of companies that we want to take a look at and want to investigate further. So essentially we did a preliminary, a very short screening of the companies that attract us from a market cap perspective in a given jurisdiction. And then we see if we can sort out very quickly. The banks, like I mentioned, we don't invest in, like the commodity companies we don't invest in the leveraged companies to, we weed them out. And then the list gets smaller and smaller and smaller.

And here we can start by making like a list of priorities where we look just briefly at the company and see, okay, they have a very good track record of profitability and growth. let's put this on priority number one and look at that company in detail. And then if you think another company also looks interesting, but it's more like second priority, then rank it at two and then look at that later. So what we also did on top of having our investable universe somewhat ready, we did a screening of the main jurisdictions in Europe and looked what could be interesting and where do we want to allocate our time into because that's also very important as an investor.

I mean, you have just a limited amount of time every day, even if you are two or three people. So you want to have your priorities right and look at the most interesting companies most of the time and just weed out the companies that are nothing. for you and that are uninteresting and don't spend much time on those companies. I think that's very, very important and very often overlooked. You just mentioned an interesting transition you also did when becoming a fund manager. Besides becoming a fund manager, you also became a boss somehow because you have two analysts now. How has this changed you after being a one-man ship for quite a while?

Yeah. In my previous experience, I also dealt with interns and I was actively looking after them and so helping them to grow and have, yeah, to start their career or maybe get them interested in the career of an activity analyst. But with now, with launching the fund, the, yeah, those duties, if you will, increase, course and now you are also responsible for for or I am responsible for for two analysts that means I have to take take care of them and allocate time to to discuss the ideas also help them grow if there are more just taken a different difficult accounting a problem or a company reports very numbers, then we have to look at it together and my, of course, my responsibility there

is to help the younger analysts to understand those problems and deal with them and often the experience, if you have an experience, you have seen certain things and you can help them with that. And I take this very seriously because, I mean, also now in the age of after COVID with many people working remotely. It's very easy to lose track if you're not in the office every day, but you still have to be mindful that there's someone else sitting somewhere else and having limited experience and just needs help. And that's very, very important for me, of course, to help them. And I take this seriously. And I have, I enjoy it. I enjoyed discussing.

and I enjoy teaching. And so this is very, I like it. And I also hope to get to get better over time. But also the flip side is you have less time for yourself looking at those companies. So you don't have that much time for, you still have time, but not as much as previously to do the primary research. Then I rather have to read the notes, the analysts. are doing and still reading about the company myself because I want to get a better feeling from the primary research but your day and your or day-to-day

working changes in a way that you have to yeah also take care of of those people and manage them if you will hey Timon here it's great that you've made it that far into the video and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent as well as Experian fund managers. So if you're interested, please click on the link below. And now, without further do, enjoy. the conversation. How much skin in the game do you have with your fund? It's important to know that

Alpha Star has a background as like an investing club. So very, very basic investing routes, so where you took your own money and the money from family and friends and start investing it in a very basic setting. That was the beginning almost 16, 17 years ago. Of course, over the years this professionalized more and more and now it's a it's a proper fund with proper infrastructure and we have all the the systems and regulations you need so there was a very big step in in becoming professionalized but what did not change is the the mindset that every investor in the fund is special and we are very transparent in a way so that we gave out all the information

about the information we like to share with our co-fund owners. And this is also done because the roots are that we invest our own money. And this obviously, as I said, has not changed. So we still have very much of our own money invested into the fund. And from the Alpha Star founders have to some. extent 100% of their own money invested and that's also what you what you want to see from a fund manager if i were investing in a outside fund i don't do just invest in our own fund i would ask if if the fund manager is well incentivized and eats his own cooking if you if you want to call

it that way and i think that's that's important we do this and we communicated it and we we would demand it from others as well. And I think that's a very important question that you as a potential investor in a fund should ask the fund manager right away. So are you invested in your own fund in a material way? And hopefully the answer is yes. Otherwise, I don't think it's a very good background

to invest in a fund where the fund manager isn't incentivized or isn't invested because, yeah, obviously there are then this conflict of interest. From our standpoint, I would say there are very few conflicts of interest because almost everybody in the firm is very much invested in our funds. And I think that's the right way to approach it as well. The idea of this format is to also give a chance to do a follow-up interview in like two or three years to see how the project has developed.

Maybe let me ask for the end the question about not Alpha Star, but the North Star of you. Where do you want to be with your fund project in three years? I very much like it to be not that much different from now. So we have the team ready. I'm very enthusiastic about the team members. Maybe we will add one analyst. Maybe not. The point is to have still a very small focused team because, yeah, we don't want to have the largest team in the industry.

We want to have the best one. We want to stay focused. And the things I mentioned about managing people should still be rather small in relation to the overall work. So I don't want to want to become a management. of people, I just still want to be an investor and looking at companies, speaking to companies. So we do not strive to have a very large team. And also what counts for team counts for assets. So of course we want to grow our asset basis because we need to, we want to reinvest the fees into our

research and traveling, meeting companies and so on, of course, that costs, costs money. And if you're very small, you're not generating that much, you're barely, barely profitable. So there is a need to grow, but we also say we don't want to grow too much and too fast. So we want to keep our asset under management in a controlled way. So we are not looking for, let's see if we can grow this fund as fast as we can to one billion, just to be big and just to be, have a lot of fees. That's not our goal. We want to be the best fund.

And if a best fund needs a size cap so that we have to reduce or have to make a cap on new subscription, we will do it because we will always, as I mentioned, will be driven by performance. And if you are growing very much, very fast, it does not help to generate a very good performance. So the performance will always be the number one criteria we look for. And if you ask about what we want to speak in five years, it will be not, I will not be bragging. We are now that big and we have a team of six and we have one billion and we are proud of that one billion. I think those are the wrong goals. It's just about performance.

And hopefully when we speak again, we say, yeah, we have enough asset under management that we can have a good, can cover our cost and be attractive as an employer to potential analysts and that we also have a good, very comfortable life. But not, we don't want to be a fee generator. so we rather always performance will be on top priority and if we speak again we will hopefully we can show some good performance numbers not necessarily a big asset manager organization and a big and a big pile of money that's good then i still have a chance to interview in three years because you've been not in the level of the stars just an alpha star So thank you for the interview. We will do a small follow-up part where you're presenting an idea in the good

investing plus communities for people who are interested in hearing what ideas Marco likes. Please click on the link below and apply for the good investing plus community. And if you're a fit for the community, I'm happy to let you in. And Marco, thank you very much for our conversation and all the best with the new fund. I hope to talk to you. Hopefully it was what was helpful and I enjoyed it. Hopefully we can do it again. Yeah.

I hope so too. Thank you and bye bye.