How did you return 20+% p.a. in American and Canadian stock, Andrew Brenton?

Summary

In this interview, Andrew Brenton, co-founder of Turtle Creek Asset Management, shares insights into the firm’s long-term investment strategy. Emphasizing a value-driven approach, Turtle Creek focuses on purchasing high-quality companies at below-average valuations and holding them for the long haul. The firm seeks to minimize risk while aiming for consistent returns, primarily through a patient, buy-and-hold philosophy. Brenton discusses the importance of understanding companies’ intrinsic value, disciplined portfolio concentration, and the shift towards more market inefficiencies. The firm's track record demonstrates their commitment to value-driven, risk-conscious investing.

Takeaways

• 😀 Risk mitigation is a top priority for Turtle Creek Asset Management, focusing on minimizing risk over maximizing returns.
• 😀 Turtle Creek aims to outperform the market, targeting returns of 9-9.5%, but emphasizes risk reduction in its investment strategy.
• 😀 The core investment approach involves owning high-quality companies at below-average valuations, creating value for shareholders.
• 😀 Portfolio diversification is key, with at least 25 holdings to spread risk, but top positions can become more concentrated based on opportunities.
• 😀 The firm evaluates companies based on the present value of their cash flows, rather than relying on traditional valuation metrics like P/E ratios.
• 😀 Turtle Creek is flexible with portfolio sizing, increasing positions when prices drop and trimming holdings when prices rise significantly.
• 😀 The firm operates with a buy-and-hold strategy, but adjusts positions actively based on market changes and valuations.
• 😀 Economic moats, such as regulatory advantages, are not a primary focus; instead, the emphasis is on companies that can adapt and operate efficiently in changing markets.
• 😀 Market inefficiencies are seen as opportunities for long-term investors, with the firm capitalizing on irrational price movements.
• 😀 Turtle Creek’s 22% return is attributed to a combination of owning exceptional companies at favorable prices and taking advantage of market mispricings.

Q & A

What was Andrew Brenton's background before founding Turtle Creek Asset Management?

Andrew Brenton's career began in investment banking, where he specialized in mergers and acquisitions. Later, he transitioned into creating a private equity fund in the 1990s. Eventually, he realized his investment philosophy aligned with value investing, focusing on present value cash flows, which led to the creation of Turtle Creek Asset Management.

How has Turtle Creek Asset Management performed over the years?

Since its inception, Turtle Creek has generated compounded annual returns of over 20%. Their investment strategy has turned an initial dollar into approximately $65 over 21 years, though Brenton emphasizes that the goal is not to chase high returns but to minimize risk.

What is Turtle Creek's approach to managing risk in their portfolio?

Turtle Creek manages risk by holding at least 25 different investments, ensuring diversification. The largest holding is typically capped at 10%, with a focus on minimizing risk rather than seeking to maximize returns. This diversified strategy ensures that no single investment carries too much weight.

What is Turtle Creek's buy-and-hold strategy?

Turtle Creek employs a buy-and-hold strategy where they intend to hold investments indefinitely unless a significant change in valuation occurs. This approach is inspired by their private equity background, where ownership is typically long-term unless market conditions dramatically change.

How does Turtle Creek identify good investment opportunities?

Turtle Creek identifies promising investments by focusing on companies that are high-quality and well-managed, even in rapidly changing environments. They prioritize companies that can adapt to technological disruptions, valuing flexibility over traditional economic moats.

How concentrated is Turtle Creek's portfolio?

Turtle Creek’s portfolio is relatively concentrated. The top three holdings account for approximately 25-30% of the portfolio, while the top 10 holdings comprise over 50%. This concentrated approach allows them to focus on their best ideas while managing risk.

What industries does Turtle Creek avoid, and why?

Turtle Creek avoids industries such as basic resources (oil, gas, mining) and drug discovery/biotech. They prefer investing in well-managed companies that are capable of adapting to changing market conditions rather than industries with uncertain or volatile prospects.

What is Turtle Creek's investment process for sourcing ideas?

Turtle Creek's investment process involves extensive research, including discussions with industry experts, analysts, and attending conferences. They typically spend several months conducting research, valuing companies, and waiting for the right price before making an investment.

How does Turtle Creek assess a company’s intrinsic value?

Turtle Creek assesses a company's intrinsic value using a discounted cash flow model, applying a discount rate of 8.5-10%. This approach allows them to estimate the present value of future cash flows and determine whether a company is undervalued or overvalued.

How does Andrew Brenton view the efficiency of financial markets?

Andrew Brenton disagrees with the notion that financial markets are becoming more efficient. He believes markets are actually becoming less efficient, which creates opportunities for long-term investors like Turtle Creek to take advantage of irrational price movements and market inefficiencies.