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Alternative Market Briefing

Where patient capital is a clear behavioural edge

Thursday, February 20, 2020

Mark Walker
B. G., Opalesque Geneva for New Managers:

How can a long-term equity investment approach be differentiated? According to Tollymore Investment Partners, a sensible long-term, business owner investment philosophy is of no use if the investing ecosystem is a barrier to faithfully executing a thoughtful investment process. Execution is everything. So, investment partnership relationships can be a genuine source of edge

London-based Tollymore Investment Partners is a private partnership that invests in a small number of exceptional publicly listed businesses. It was founded in 2018 by Mark Walker, who previously worked at Seven Pillars Capital Management, RWC and Goldman Sachs.

The firm was created "as an effort to create value for long-term minded individuals, family offices, endowments and foundations," Mark Walker says in a recent Opalesque TV interview. "It is an attempt to create value for those investors with very long-term, potentially perpetual investment problems that they are trying to solve."

"The opportunity is not especially exotic or unique investment strategy… It's really a recognition that behavioural edge is the most obvious source of competitive advantage in this industry," he adds.

Rationale: partnership model

Actors in the institutional money management industry face a great many constraints to making good decisions, Walker explains. Career risks encourage them to take a short-term view. They are focused on precise estimates of the future, which is a guessing exercise. Alignment of interests is typically an afterthought as few are invested in their funds. The fee structures do not take into consideration the alpha produced. And there is a pitch book mentality whereas "investment strategies are a product of what might look good in an investor presentation without necessarily a deep level of thought or introspection about what is efficacious, what might work, what might be consistent with generating performance."

Furthermore, in larger money managers, there is a division of roles between analysts and portfolio managers, which he thinks is adverse to good decision making: the analysts typically gather the conviction about long-term business prospects and portfolio managers, who are under pressure to make decisions, are more likely to use the share price as a signal of value. Analysts are also typically specialists and are not focused on exercising sound investment judgement.

"For all of those reasons I have seen the opportunity to create a partnership model, in which the managers consider their investment partnership relationships as a genuine source of edge, in being able to execute a long-term investment strategy," he continues. "Once you see your clients as genuine partners, your behaviour changes. Your clients are not a mechanism for you to get rich. But they're an important ingredient in generating acceptable annual investment results."

Philosophy: patience

Investment decisions are made with long-term investment results in mind, he explains. Correlation between price and value, business success and stock success is higher over the long-term rather than the short-term. "That disparity is the key to making money, but it's a disparity that can persist for long periods of time. Therefore it pays to have a patient temperament accompanied by patient capital."

As long term investors, the firm has two main advantages. First of all, it has the capacity to exercise a time arbitrage in a market where average holding periods are eight months on average, and the capacity to assemble a portfolio of companies that are able to increase their own intrinsic values over the long run.

Secondly, "we have a value-oriented investment approach, i.e. we try to maximise the intrinsic value of a group of companies." This is done by buying assets at a strong discount.

Furthermore, Walker views time as a catalyst. "We are not short-term investors therefore we do not need a catalyst to induce a rating of an asset to earn our investment results. In fact, we think that where catalysts are readily identifiable, there is unlikely to be this very large gap between price and value. It is those large gaps that we're seeking to profit from."

Tollymore runs a high-conviction, long-only global equity concentrated strategy which has annualised 20% in the last four years. It is a concentrated portfolio of holdings, typically with between 10 and 15 securities.

You can watch the entire interview on Opalesque TV here:

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