Good Investing Talks - Why do you like Jet2Airways stock, Theron de Ris?

Episode Date: May 19, 2024

It was our pleasure to welcome Theron de Ris of Sorengo Partners (https://www.sorengopartners.com/) as a first-time guest on Good Investing Talks!

I turned my back office into a profit center. You could say that. But if you fast forward to today, we've got about almost 20 managers on the Echler platform. When I was growing up, my dad had a small architecture practice, and so he had a small team with great camaraderie.

He was very kind of creative in how he went about his projects, and he was very focused on his clients. And it's really that's really what we're trying to do at Serengo. I think it's worth, you know, between sort of 19 pounds and 22, pounds per share. So quite a lot of upside, 35 to 60% upside from here. And that's based on Dear viewers of Goodal Testing Talks, it's great to have you back on the podcast. And it's great

to welcome Ferranda Rees of Sorango Partners for the first time on the podcast. Ferron, I'm happy to give you the stage for a short introduction. So who are you and what made you come to the finance industry? Sure. And thanks. Thanks for having me on the podcast, Tillman. Why don't I just tell you a little bit about my background growing up and how I came to Europe to start. So I grew up in a small town in upstate New York. My parents were in the Peace Corps, and so they wanted to settle down in a small town. And I went to a Waldorf school, which is a school sort of like Montessori.

I'm not sure if you've heard of it. There's quite a few of them around the world, including in Germany in particular. There were nine students in my graduating class in high school, so a very, very small town. Growing up, you know, money was pretty tight. So, you know, I spent most of my time during the summer working, frankly, and trying to earn money so that I could travel. That's what I like to do. And so, you know, I came to Europe several times. The first time was when I was 16 years old in the summer.

I got on a plane, flew to Zurich with my bike, and then biked from Zurich to Salzburg. to attend a language course, which was a lot of fun. The second time was, for my first year of college, I went to Franklin University, which is a small American college in Lugano, Switzerland, where they gave me a scholarship. So that was great experience, and one benefit was that I met my wife there, and that was back in 1991. And then the third time I came to Europe and I stayed was after my junior year in college, I came to Frankfurt, Germany in the summer, $400 in my pocket, didn't have any place to stay or any job,

but I was lucky enough to find some internships, earned some money, and that kind of paid for my study abroad. I was studying at the University of Mines. So, you know, you can see I kind of wanted to come to Europe, build my career here, and I was lucky enough to get my first job in Frankfurt, Germany, at Goldman Sachs. And so that's kind of where it started. And by that time, I was obviously, you know, very interested in, you know, getting into the industry. Didn't know exactly what I wanted to do, but that was where it started. How did it go from there? Like your path in the financial industry?

Yeah, so that was 1995 when I joined Goldman. And so I was there for five years right through the peak of the bubble. So I saw a lot of the kind of the craziness, which was, I think, a good learning experience. And it made sure that sort of the early impressions of my career, were of, you know, a positive experience, whereas, you know, some people, when they start during a bear market, it's their first experience to bear market and it takes them a long time to, you know, have the optimism to kind of adjust. But then, you know, then I spent eight years at Morgan Stanley from 2000 to 2008. I saw sort of the full cycle, the down cycle, the

up cycle, commodities bull market. And I was running a team at Morgan Stanley in sort of 2005 to 7, where we were talking to global investors, macro hedge fund investors, all sorts of different investors. And that was the first time I really sort of realized there's many ways to earn a return in the markets, many styles. And so while it's important to have your own style that works for you, there's just a lot of ways to do it. And so it's good to have an open mind.

So that was my sell side career, I guess, ended at the end of 2007. And then I joined Indus Capital, which is a long-short equity group focused on Asia. And I was there in different roles for eight years, really, until the end of 2016. And that's when I launched my fund full-time at the beginning of 2017, which I've been running until now. What kind of structure you have? Because I have two kind of ideas combined with you. is Eshler Asset Management, which is more a platform for different fund managers and Bonas Sorango. We will more focus the talk on Serengo, but maybe help us to understand what Eshler stands for.

Yeah, sure. So I guess also the question is, you know, why did I start Serengo? And that's where Eshler comes in. So, you know, when I left Indus at the end of 2016, I had a fund with $4 million. in AUM. So it was way too small. I had two kids going into school. So I was upside down financially and I could have kind of given up. But, you know, what I noticed is that there were a number of other managers in similar situations that wanted to launch their funds. And so long story short, as I was able to turn my regulated investment management firm into a platform for,

emerging managers, and that brought some money in and gave me more a financial runway and time to build my track record. So you made your cost to revenue source? Exactly. I turned my back office into a profit center, as you could say that. But if you fast forward to today, we've got about almost 20 managers on the Eschler platform. That's Eshler is the separate business. and that's a you know that's a turned it turned into a nice a nice little business in its in its own right so anyway with that with that context it's sort of easier to ask the question you know why did I start Serengo you know I do like speaking with other managers and I drive a lot of pleasure from that we get a lot of ideas together but what I really like is you know

finding investment ideas deploying capital constructing a portfolio and so we set up Serango partners in May of last year to do just that. So it's a single strategy fund and we don't do anything else. And so that's that's sort of the the why for Serengo and a little bit on Escher. And of course I can expand on on Aschler at any time if you want as well. Let's talk a bit about what Serango stands for. What is the mission of the fund, so to say? Yeah, sure.

So we're an independent investment firm based in Cambridge, UK. We also work out of London. The strategy is directional equity along short. We're focused on quality businesses in cyclical industries with attractive risk reward. We focus primarily on small and midcaps. And we also invest on both sides of the Atlantic. First half of the track record was more in North America. More recently, we've deployed a lot of capital in Europe, including the UK, which we can talk about.

The investment strategy, just briefly, is very concentrated, so the top 10 holdings tend to make up at least 50% of the NAV. It's long biased, so we're generally 70 to 90% net long, although we do have shorts, and we, you know, tactically take advantage of that from time to time. And then we're value-oriented, so, you know, we're looking for companies that really can double over two to three years. And we tend to have a preference for quantitatively cheap stocks. It's not something we have to have, but it tends to, that's what we tend to focus on. So anyway, when you think of a Serengo, I would think of a single strategy firm, a capacity

constrained strategy. We're independent, employee owned. We have top tier infrastructure across custody, trading, administration, etc. And I think we also have a strong alignment of interest with our clients, which I can talk about. I mean, as an aside, you know, when I was growing up, my dad had a small architecture practice. And so he had a small team with great camaraderie. He was very kind of creative in how he went about his projects, and he was very focused on his clients. And it's really that's really what we're trying to do at Serengo. You invest in cyclical companies.

What is your secret source, your framework to make money there? Yeah, so that's right. I mean, I guess this is a question on the philosophy. And so what I'll do is maybe talk about some of the, maybe the three tenets that we focus on sort of philosophically. So first, we're very valuation focused. Second, we find cheap stocks by investing countercyclically. And third is we're very focused on alignment of interests.

So first, you know, we're unabashedly valuation focused. It's not about value or growth. You know, I want to invest in growing companies. But what I do like is situations where I can invest with a high cash flow yield. And, you know, the challenge with an investment. my mind, momentum investing or investing in, you know, quality growth companies is that they're already priced for a market return. So you have to be very confident in your analysis that the companies are going to do better than what the market already expects. And you're competing

with a lot of, a lot of other analysts. So that's point one. Point two is, you know, momentum and earnings growth can be correlated from one year to the next, right? But, you know, but, you know, But there's no cause and effect. So if the momentum stops or the earnings growth stops, you know, what do you have to fall back on, right? And if you compare that to, you know, buying a company where you have a good cash flow yield, you're essentially creating your return through the cash flow yield, as long as you have a, you know, a decent capital allocator. And so that's cause and effect. And I think that's more reliable in my mind as a way to invest.

The last thing I'll say is I'm very familiar with the arguments about, you know, if you're investing for long periods of time, five, 10, 15 years, if you buy a quality company, it doesn't really matter what valuation you pay, right, within reason. And I totally get that. Totally makes sense. But the thing is, you know, we're focused on a one to three year time horizon, generally. And so in that time horizon, valuation is incredibly important, right? So that's the first point on valuation.

I wanted to make it clear that we kind of focus on that as a primary thing. The second thing is we look to invest in capital-constrained industries where you've had dislocation, capital has exited the industry, and you've had some consolidation. And so I want to kind of know where we are in the cycle and try and invest when there's, you know, an inflection in the fundamentals and sentiment. And one of the best frameworks that we found for analyzing industries is the capital cycle.

And you may be familiar with that. It was popularized and used by a company called Marathon Asset Management, actually just down the road. And there's a book that compiles their letters called Capital Returns. So that's a very useful framework and the simple idea is that it's really the supply of capital that into and out of an industry that drives the fluctuations in the industry cycle. And so if you think about a cycle where there's lots of capital coming into the industry, eventually that increases competition drives margins down and you get a down cycle and

And then during the down cycle, of course, you have consolidation, companies exiting the industry, capital exits. And the best time to invest is when the industry is recovering, but there's still a deficit of capital. People are too afraid to invest. So if you can deploy capital then when other people don't want to, you have less competition, you have higher returns on the depleted capital. And that can be quite exciting. So that's kind of the framework. It's very, you know, sort of simplistic in some ways. It applies very well to the commodity-related industries where price really dictates supply, and that's it.

So, you know, pre-COVID, there were a number of commodity-related industries, whether it's, you know, coal, natural gas, precious metals, uranium, where, you know, prices got down well below the cost of production. that was a classic example where supply exited and there was an opportunity to invest and we did and we still are invested in some of those areas more recently we've been using the framework to identify industries where price isn't the only determinant of whether clients purchase products and where it's harder for supply to enter into the industry because of that and one example is, we've recently made a purchase in the auto parts retailing industry, which is a pretty consolidated industry where it's been remarkably difficult for Amazon to gain market share. So we can use the framework in different ways, and it's quite useful. One of the last thing

I'd say about the capital cycle is that, you know, recently we've seen globally this trend towards sort of de-globalization, more nationalist politics and policies, a near-shoring of production. And I think you can apply the capital cycle to individual countries these days. And so I've done that in some cases. And I think it's a good framework for looking at individual countries as well. The last point on investment philosophy, just to round out this part of the conversation is on alignment of interests, where we're really looking to invest with companies that have high insider ownership.

Or if there isn't high insight ownership, at least you have incentives in place that ensure management behaves well. And generally, we're looking for situations where there's a long-term focus, you know, not excessive use of stock options, you know, a focus on free cash flow as opposed to EBITDA, you know, buybacks that are opportunistic that create value for the remaining shareholders, not just to sort of offset the issuance of shares from options. And the last thing is, you know, owner operators tend to be more disciplined about allocating a capital and that really matters for, you know, some of the more mature industries and stocks that we tend to be involved in where, you know, the opportunities for reinvestment may or may not be as good as they used to be. So you guys run this short strategy and what is the situation on the long side as well on the short side. So I ask for two situations that make you passionate.

So maybe go back in time and try to remember one or like one situation for both sides where I've been really been passionate and been kind of nonstop thinking about this investment case and also telling your friends and your spouse and whoever you meet about this case because it's so compelling. What are this? What is this an example for both for long and short? Well, I'll start on the long side. I mean, one area where I was very involved for many years, I continue to be involved. And many investors don't like the industry. Neither do I, frankly. But I still can make money in it because it's quite inefficient. And that's precious metals. And I got involved with the industry back in 2014, which in hindsight was about two years too early. So it's much easier said than done to use the capital cycle to invest in a deep cyclical industry. But anyway, I had more than a third of my fund in that industry in 2014 and 15. It was a classic situation where the entire industry was down like 85%. Of course, you had a big bear market in gold.

The average gold mutual fund was down like 75% over the past five years. And the stock market was kind of doing really well, the traditional stock market. And so there was no interest in a classic alternative like gold. Anyway, these were all the, this was sort of the background. But the valuations in the industry had gotten tremendously interesting. And I thought there was a place for gold. And I won't go into sort of the long term, all the, all the rationales. But bottom line is I invested too early, which was a mistake.

But I stayed with it. And we've made a ton of money in that industry for the past five or six, five or years. Actually, even longer than that, even longer. On the short side, I mean, maybe I'll just, I'll bring up one of a short that we have right now that we have a reasonably high amount of conviction in, which is called Main Street Capital, which is a business development company. And basically, this is an industry where, you know, that's set up with some advantages in terms of being able to avoid taxes if they pay out, you know, 90% of their profits. And the industry exists to supply capital to small and medium-sized businesses that otherwise

couldn't get financing. So these are businesses that are probably, you know, below average quality, but need growth capital. Anyway, you know, we think, we think the company is a lousy investor, even though they present a very attractive, you know, a strong track record. We don't think they've really been able to make any money if you like analyze the actual realized gains since they came public. So most of their NAV is unrealized and it's privately marked positions. And yeah, if you just look at the equity capital and the debt capital that has gone in to create that net asset value, there's really no, there's no value that's been creative. And the company is very selective in its disclosure of its successes, but

it doesn't really give you much information on things that go wrong. And they also use a deceptive practice to remunerate, so-called remunerate their retail investors, because most of the investors are retail. I don't think really understand the risks they're taking. And that is the company basically uses a dividend reinvestment plan that retail investors can opt into. And most do, right? They just want to reinvest their dividends into new shares. And instead of, you know, buying those shares, the company just issues them. So every year, its shares outstanding go up by, you know, 7, 8 percent.

And that's, you know, continuously every year. So, you know, what kind of business, you know, has to issue, you know, what kind of, you know, investing business has to issue shares like that every year. And, yeah, so we don't think it's sustainable. The challenge is the company trades at a 1.5 times book value, multiple. So, you know, it's like if my fund traded that 1.5 times the net asset value, would I want to issue shares? Sure.

That would be great because I would increase the net asset value per share. But would it be justified? Absolutely not, you know. So we're not. quite sure what's going to what's going to be the catalyst here. But I think the quality of their loan book is quite questionable. And you can see, for example, that they tend to extend their loans to clients that can't pay them back. And so that's worked during this period of, you know, of low interest rates and low defaults. But arguably, we're going into a more difficult environment

with a higher cost of capital. So bottom line, we don't think it's worth one point. We think it's worth you know, one times NAV at best. But anyway, this is a reasonably large position for us. We have a fair amount of conviction, and it's also something that's quite current. 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 ado, enjoy the conversation. You also have special situations as one topic you can invest into. What are this kind of passionate situations? You maybe can mention one. By special situations, we're not really talking about, you know, companies going through corporate reorganizations

or, you know, hard catalyst investing event-driven stuff. By special situations, I just mean interesting ideas, frankly, that may not, you know, fit within our capital cycle framework, but happen to be very interesting where we've invested. I mean, I can think of one, this is several years ago back in 2018, we invested in a company called affiliated managers group. AmG. Are you familiar with them? No. They're basically, they were an S&P 500 company, about a $5 or $6 billion market cap. Basically, they have assembled a couple dozen minority stakes, or in some case, majority stakes in boutique investment managers. Okay. So it's actually quite an attractive business because they basically have

revenue shares with these managers. And they've basically helped the first generation to hand off ownership to the second generation, and they provide stability and capital. But they're focused on active managers, right? And of course, we've had this long-term trend of money leaving active managers and going to passive, et cetera. Anyway, by the end of 2018, the stock was down at like five times earnings. When we bought it, it was probably $80 or $90 a share.

and what I kind of recognized there was the asset center management of their of their boutique managers affiliates was going down a lot and so the market was concerned because their revenue is based on you know the asset center management of their investees but actually their largest investee which is actually AQR the large sort of value quant shop they had a different arrangement with AQR where it was based on their profits, not the revenue share. So it was only like 5% of their cash flow, bottom line, even though it was like 30 or 40% of their AUM, the total AUM of the investees. And so I kind of recognize that the market was misunderstanding the risk to the company's cash flow. Plus,

the company was expanding into alternatives, which had a better growth profile, better net flows. So anyway, bought it at five times earnings. Didn't quite know what was going to happen to the earnings, but I had the cash flow yield. And as it happens, the next couple years, And, of course, going through COVID and after COVID, stock went up quite a bit. Earnings went up quite a bit and I was able to sell it, you know, something like a double. So I think that's a good example of a, yeah, I guess you could call it a special situation. Let's look a bit into your research process. What usually happens before you turn an idea into an investment?

Yeah, so the question of sort of how we find ideas. we, of course, we're monitoring industries that are going through consolidation with our capital cycle framework. We're also, to some extent, using screens to isolate certain lists of companies based on the criteria we're interested in. We're referring to primary sources to do research. So company documents, SEC. filings, et cetera. I love to read investor letters and find ideas, frankly, from fellow investors. The gentleman who works with me, Rimo, our analyst, probably does sort of one deep dive idea every month. So we have sort of a continuously building pipeline of ideas, not all of which

we invest in. Oftentimes it's a pass or not, you know, not the right time, but we're constantly replenishing our universe of ideas. So those are some of the ways we find ideas. Why do you pass an idea? It's often, it's often valuation, frankly, or we find out something about the company or the management that we didn't expect. Things like that, you know, as you turn over rocks, you find, you find things that you didn't expect. So, yeah, it's a combination of the fundamentals not being as good as we thought, the market being essentially right to put a low valuation on the company, which happens quite a lot, because markets are pretty efficient. Yeah, or the management, you know, not, not are the incentives in place not being what we wanted? you're a while in the game so maybe let's go back five years on which part of the research process

compared to this five years time frame are you now spending more time and effort i'm i'm i've always been interested in how kind of the the macro situation impacts industries i'm interested in market cycles and i've always kind of used that top-down input to find ideas to construct the portfolio and also to manage risk. So I'd actually say that's kind of always been there, which, of course, is the opposite of your question. But I'm probably spending a little less time on deep dives into individual businesses since Remo came on board, who's our analyst, who is far more capable in

taking a company apart and understanding the value drivers and whatnot than I ever was, frankly. And so it's more of a conversation with him, probing, figuring out things with him and him doing a lot of the deep dive analysis that I would have done in the past because, of course, I was on my own. How do you find out where you are in the cycle? So you have the cyclical framework, and you already mentioned that with precious metals, you haven't timed it right. But like, how do you generally try to find out where you are? Yeah.

I mean, one way not to find out is to like just do a lot of research and think that just because you've done all the research, that is the right time to deploy capital. That's very risky, but it happens all the time. So I think you have to be humble and understand that just because you're doing a lot of work and you're very excited about something, you know, industry cycles can be very, long and, you know, take longer than expected. And so one thing I've learned is to only deploy a small amount of capital initially into kind of a thematic idea like that, no matter how high conviction I am, and then build it as it starts to work. But, you know, I'm a big fan of looking at contrarian anecdotes that sort of reflect prevailing sentiment, which get, of course, very pronounced at extremes.

And so, I'll just get like one, one indicator, which is, I think, really good, Tillman, is when an ETF, an industry, ETF gets liquidated by the, by the asset management company that provides it. And like one example that comes to mind, and there's been others, is at the end of 2020, the coal mining ETF was liquidated. It was the only way to sort of gain exposure to the coal industry as an aggregate. And they liquidated it. And, you know, the coal industry bottomed within two months and had one of the most explosive rallies of any industry ever over the next two years.

So that's just one indicator. You know, another analog would be when the price of oil went negative. You know, I mean, that was an expression of extremely. extreme sentiment. I mean, there are obviously some technical issues that caused oil to go negative, but clearly the sentiment is extremely negative. You also had, you know, very prestigious universities like Oxford. I mean, I shouldn't name names, but lots of universities, Harvard, everyone, telling the media, like actively, proactively telling the world that they were divesting all of their fossil fuel investments. And this was when oil was basically at zero. So these are very powerful anecdotes that can be. be used by investors to build a contrarian investment case. Maybe let's also look a bit into your portfolio. What are examples for larger holdings in your fund? Yeah, I mean, the largest holding in the fund right now is a company listed here in the

UK called Jet 2 Airways. If you want, I can talk briefly about that one. Let's just make a spotlight on the larger holdings that you get an idea of what you have the highest conviction on. Yeah. So that's clearly the largest holding, and I have a lot of conviction on that. We also own, we own companies in Greece, which we sort of identified using our capital cycle framework. We own a bank there called Piraeus. We own the Greek stock exchange. We own a house builder here in the UK, which is sort of subject to structural supply demand and balances. But it's a very company-specific situation called Vistri. We own uranium company that purchases spot uranium listed here in the UK called Yellowcake. We own advanced auto parts, which is an auto parts retailer, which I just mentioned. That was the most recent purchase we made.

And then we own a number of precious metals mining companies and royalty companies as well. So those are some of the core positions in the fund. Let's take a look into Jet 2 Airways. What kind of problems is the company solving for the customers? Oh, that's a good question, because this company literally exists to solve problems for customers. I mean, they're obsessively focused on the customer. And if you read the chairman's letter, that's basically all he talks about. And they're super proud of all the awards they get as the best tour operator, best low-cost airline, etc.

So that's really what the company's about. But I can just sort of step back and tell you a little bit about the story. I mean, first of all, it's about a 3 billion pound market cap company and about 2.6 billion in an enterprise value. They hold a lot of customer deposits in cash that's not really theirs, but they earn interest on it. But it's trading around five times EV to EBIT and has a high ROE, 32% ROE. this year, we think it's worth, you know, between sort of 19 pounds and 22 pounds per share,

so quite a lot of upside, 35 to, you know, 60% upside from here. And that's based on a pretty modest multiple sort of 10 to 12 times PE, which is, you know, where it used to trade pre-COVID. The history of the company is the chairman who recently stepped back, Philip Neeson, originally started the business as a basically company that delivered flowers from the Channel Islands to the UK, just back and forth. And then in 2002, he launched a low-cost airline with fully online booking. And then in 2007, he added on Jet 2 holidays, which is a tour operator, where they buy inventory from hotels and offer a package holiday to customers. And it's all online, and they've been doing that ever since and consistently growing market share in that business.

And the way the capital cycle plays a role here in this idea is that during COVID, one of the largest tour operators in the UK, Thomas Cook, exited the market, basically went bankrupt. And so, you know, Jet 2 Airways was very well positioned to gain market share in the UK market. market. Anyway, that's kind of the background. But the reason I like it is first this customer focus. I'll give you an example. During COVID, they gave back the deposits that customers had made to travel, but they weren't able to. So I think that's a very honorable thing to do. They didn't fire any of their employees. They actually raised their salaries. And I've continued to raise them above inflation for the last several years. The second reason I like it is it's a unique business model in that they've focused on regional cities in the north of England.

And I mean, the annual holiday for the average UK family to a sunny destination is very, very important, right? They're not going to, it's like, it's almost non-discretionary. And they dominate departures from these regional cities in the north of England. So they have eight regional cities. they also have Bristol they have Stansted which is I guess London but they don't really compete in the London market with the other airlines to the same extent and they're also launching Liverpool this month so 11 11 places that they really quite dominate in terms of their market

share and that gives them advantages in terms of scale and ability to price and bundle bundle their package holidays and whatnot. And then the company, as I said, is quite, it's quite cheap. I mean, it's trading it, you know, five times cash flow, seven times PE. You know, we think it's worth, you know, eight times cash flow, you know, 10 to 12 times PE, basically where it used to trade. So that's really kind of the idea. The chairman who recently stepped back, Philip Neeson, owns about 18% of the company. So major shareholder. The CEO, Steve Heapy has worked with Philip for, you know, 15 years or so and was promoted internally. And so while he doesn't own a ton of stock, he's a culture carrier and I think is the right person.

But he owns about 5 million pounds of stock, which is sort of like seven times his base salary. So, you know, definitely has some skin in the game. So that's that's Jet 2 Airways in a nutshell. I've owned it for three years, and yeah, we're still waiting for it to revalue. So you already laid out your investment thesis for Chet 2 Airways. What kind of research did you do before buying it? What kind of rocks did you turn before buying it? Yeah, basically I got the idea from another fellow investment manager.

And so he'd already done a tremendous amount of work on it. and had, you know, a large percentage of his fund in the company. And so candidly, I was able, in this particular situation, to piggyback off the analysis that another manager had done. And frankly, that was enough for me. You know, I don't have to meet with the company management before I invest. Clearly, if you are a shareholder in a company and you're able to meet the senior management that can help build conviction or, you know, help you discover new things you didn't

know. But the initial decision to purchase, I can, I'm happy to make it just by doing my own research or, you know, in this case, relying, frankly, on all the work that another manager has done and then just, you know, doing my own checks on the company to make sure it's sort of consistent with the type of idea that I tend to like. So there wasn't, yeah, it was a pretty fast process and the company had just raised capital. This was just post-COVID, right? So they'd raised capital, strengthened their balance sheet, and I felt it was a good time to invest at that point because the risk was very low and the share price was quite quite low as well. So it's kind of a team investment.

So what could if you, how could you find out or how if you worked on? in finding out what he could have potentially gotten wrong with the investment? So getting a bit paranoid about the investment, what did you do? Well, I'm always paranoid about the investment. And candidly, the return on the investment hasn't been really high, but I've been very patient in my belief that the value will be realized. So I'm always concerned about when I'm losing money on a position, especially as time goes by and I'm still losing money.

In this case, I've made some money, but it's something I monitor. And for each position in the portfolio, you know, we do have a risk budget where, you know, if we lose a certain amount of money, we're reevaluating the position. So that's been sort of continuous in the case of Jet 2 Airways. And there's a lot that's outside the control of an airline company. So, but these are often, you know, I'm not that concerned about things that are outside management's control. I'm more concerned about is the company doing well by its customers and offering value

and continuing to gain market share moving forward. And in the case of this company, it's continuing to do that. So if you compare, you know, this year, you know, this, the past year's financial results with pre the last year before COVID, you know, everything's looking better. You know, their package holidays are up 40% versus, you know, fiscal two. 2020, customer departures are up. Everything is sort of moving in the right direction. So let's step away from the investment example to your business.

You have built this platform where you help different fund managers. What did you learn from helping these managers for your own fund business? Well, I've certainly enjoyed making a number of new friends on the platform side. And I think we learn from each other. I've certainly had some experience in trying to set up and grow a small investing business, which I think is valuable for a number of the managers. who decide to work to work with the platform. And equally, I certainly learn a lot from them as well.

You know, in terms of how they decide to structure their team. Even the types of investments they're making make me question, you know, whether I should be more open-minded in the types of ideas that I'm, I tend to focus on, things like that. What have you seen not working in this structure? Okay. Yeah, there's a lot that can go wrong. Some things that don't work, for example, are if you have two partners who are both doing the portfolio management.

I've seen that not work several times. It tends to be better when one is focused on investing the money and the other is focused on the non-investment related activities in my experience. You know, I think there's some issues around risk management sometimes with new investors deploying capital in the markets. And yeah, I think that's important to have a risk management framework. And it's, you know, value investors, I think when they talk about risk management, they talk about buying a stock that's, you know, trading at a big margin of safety, right?

So they have the margin of safety and that's that. But there's a lot more to risk management than that. There's position liquidity. There's position concentration. There's, you know, diversity in the portfolio. There's, you know, exposure management. And I think that's important and maybe underappreciated by some new new managers. Those are a few examples.

What is your personal why for starting a fund? Yeah, I mean, when I started my fund full time, it was really just about wanting to have control over my time and wanting to make my own decisions and sort of live or die. by my decisions. It wasn't about building a building a business. It was really kind of to approach investing as a vocation, like a doctor or a lawyer where you're providing a service to your clients and where you have a strong alignment of interest. So that was always the objective.

And it still is. It's just that as we've grown a bit, we've had more resources and it's made sense to build a small team and to make sure that we're financially viable. and it's a work in progress. But first and foremost, it was really the desire to have some more control over my time and be more accountable in my decisions.

Why are you offering a solution that could be better than other offerings in the market with your fund? My fund, I would say we offer three benefits to investors. The first is that the fund has a relatively low correlation with other long short strategies and also to the broader market.

So it's a good addition to a market portfolio or a replacement, frankly, for other long short portfolios. The second is that we have an attractive risk reward ratio. So, you know, our focus is very much on, you know, how much can we make in an investment? How much can we lose? Is that ratio attractive? And because over time, that's led to us making more money on the winning investments than we've lost on the losing investments. The track record shows a good attractive risk reward, which I think is important.

And then the third thing is the alignment of interests, which I touched on earlier, where we have committed to kind of have our own policies that we would sort of expect from our company managements. So specifically, we are going to reduce management fees as the fund grows. We're going to close the fund at $500 million should we ever get there. But that's kind of a hard capacity of the fund. I'm going to continue reinvesting at least 50% of any money that I make back into the fund. And I've continued to do that for over a decade now. And lastly, we're never going to cede ownership, a majority ownership in Serengo to a third party. So I think those are unique attributes that make for a productive offering.

Maybe expand this question a bit. What is your competitive advantage as a fund manager? I'd say our capital cycle approach is quite unique in the market. You know, we, the result of investing capital countercyclically is that our portfolio looks quite, quite different. And so I think that provides diversification and is complementary to investors' portfolios. And I think we've shown through a number of different investments in different situations that we can use that framework to make.

a very substantial amount of money, and to make it at times when sometimes other investors or the market is not doing so well. So I think that's a real advantage that we have to name one. In this framework, how do you think about portfolio construction? What is your framework for building a portfolio? Yeah, so we're going to have a concentrated portfolio where the top 10 positions are over half the NAV, and those positions are going to be large because they have attractive risk reward ratios. And then we're going to have a longer tail of, call it 10 to 20 holdings that are smaller

as a percentage of NAV, but have potentially large. absolute upside, but they also have a lot more risk, right? So the risk reward ratio is a wider, a wider range. So that's how we kind of approach portfolio construction. It's the attractive risk reward ratios that tend to be the larger positions in the fund. We also ensure that the top 10 positions have a great deal of liquidity. So they need to have at least 10, they need to, the position needs to represent no more than 10 days of average trading volume if the fund were, you know, hundreds of millions of dollars. Of course, right now it's just under 20 million.

So it's obviously a very liquid portfolio. But we think about if the fund were larger, how would the top, how would the liquidity be of the top 10 holdings? And we ensure that it's no more than 10 days of trading volume. So that's kind of how we approach constructing the portfolio. And generally, we have a small number of industry or geographic bets in the portfolio that are there by design where we're taking an overt exposure. So, you know, Greece would be example, precious metals would be an example.

The UK, more broadly, would be an example. Energy in the last few years would be an example. Uranium. So you've seen these other different 20, roughly 20 funds under your umbrella. How is your portfolio construction framework different? generally to what you found there or what you find on the market? Well, I think we have a collection of, you know, managers who are quite unique, each of them. And so they each have portfolios that I think are quite unique in their own respect.

So I don't want to claim that, you know, my portfolio is exceptionally different. And I think we all kind of think that our portfolio is more unique than it is. And the reality is there's tons of competition and there's all sorts of, you know, portfolio. that can that can probably mimic what you're what you're doing. But I would say there are very few funds out there that were willing to put a large percentage of the fund into energy-related stocks when they were cheap, who are willing to have a quarter of the fund in precious metals-related equities, A, because they're in an interesting position in the capital cycle, but B, also because they complement.

the rest of the portfolio because they tend to move when the rest of the portfolio doesn't. So they have like a, sometimes a negative correlation. So from a portfolio perspective, they're very attractive. I don't think many other portfolio managers do that. So that's one example of, I think, you know, the portfolio being, you know, very different in some cases. And then we have some managers who are more, you know, specialists in one geographic area. I think my fund is quite, quite unconstraum.

We tend to focus on narrow opportunities, but we're unconstrained in terms of our universe. And we're willing to go in very different directions than we did in the past, for example, to ensure that we can continue to compound capital, as opposed to getting stuck in one area. That could work at one point in a cycle, and then not in the next. It's my last question. I want to give you the chance to add anything we haven't discussed. So is there anything you want to add? We haven't covered that in the interview already, or you want to go deeper into?

No, I think we've covered a lot of ground, Tillman. And I, you know, I said, I appreciate all the questions. Then thanks for coming on and sharing your insights and sharing an interesting investment case. And thanks to the years for staying till here. Bye, bye. Thank you very much. Bye. I really hoped you enjoyed this conversation.

If you did, please leave a like. and a comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says, please do your own work. This is no recommendation. What we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work.

Thank you and hope to see you in the next episode. Bye-bye.