Invest with a long term perspective in well-run companies with a sustainable business model that generates free cash flow for the owners.
Make sure you understand the company and the underlying factors driving growth so you understand when your assumptions change.
These are companies you can keep during bad times and they will come back. That way, you exploit the power of compounded interest rate.
Work with a risk level that suits you.
Be certain you understand where your risk level really is.
Think independently and try to get early into well-run companies with good long-term structural growth opportunities.
Don’t underestimate the power and longevity of structural trends.
– Mikael Randel (found from 99 World’s Greatest Investors)
Background (Source: Bloomberg)
Mr Knudsen is perplexed why any investor would choose to buy government bonds at current price levels, which essentially guarantee a loss of purchasing power, when they could buy companies like Disney or GE at a price/earnings ratio around 12 times, with a dividend yield higher than 10-year bond yields and the prospect of growth on top.
“It’s very clear for me to recommend to long-term investors what to do,” he says.
Our pool of potential portfolio candidates is typically large/mega cap companies with a multi-national profile,’ he says. ‘These are typically higher quality companies with a relatively high return on equity which generate consistent cash-flow over the long term.’
This screening cuts the universe down to about 400 stocks. Then he applies a macro approach. ‘We believe that identifying and focusing on global trends unlocks opportunity,’ he says.
‘In other words, share prices generally perform better when they have the wind in their sails, supported by an underlying trend or theme. Having said this, the remainder of our process is bottom up, driven by in depth, focused stock picking’.
Randel’s investment handbook also includes a preference for long term positions and low portfolio rotation. ‘Ideally we would prefer to hold a position for a number of years. We have held some positions for over 10 years. However, on average we hold a stock-pick for three years. The maximum weight a single security can have in the portfolio is 10%. Typical position size is 3-5%,’ says Randel.
Randel admits that his fund capacity is constrained but still has room and flexibility to continue growing. He forecasts growth coming form large global corporations that he finds particularly compelling at the current stage of the cycle. Especially he hopes for positive long term developments in the Asian region and in particular South East Asia.
Asset Management: Small is Beautiful (In terms of Concentration – i.e. 30 stocks maximum for Billion Euros’ fund)
Preference for Large-Cap, Stable Cashflows
“We typically invest in large cap global companies with a market capitalisation of at least $10bn (€6.45bn). Our aim is to be able to invest and disinvest in these positions within a reasonable period of time without affecting overall portfolio returns.”
The CAM Worldwide Fund investment portfolio is structured like a triangle, he says. “Typically, the base of the triangle, the foundation of the portfolio, will consist of stable growth companies, typically in the food and tobacco industries and electric utilities areas. These are companies where the demand for products is constant rather than fluctuating, and which tend to generate a large amount of free cash flow.
“If you are reasonably clever in picking these stocks, which typically fall in the large cap area, you have a good foundation in the portfolio for holding down volatility.“
Over the cycle, this ‘base load’ of stable growth securities will typically account for half of the portfolio, Knudsen says. “The other sides of the triangle are the more aggressive parts of the portfolio. And the more aggressive part of the portfolio typically focuses on one specific theme.
“Every decade has had its major theme, sometimes emerging into a real bubble. We had the energy stocks in the 1970s, Japan in the 1980s and technology in the 1990s.
“This time it’s China and India, and the emerging markets in a broader perspective. That is the theme of the decade and that’s where we are focusing. The other linked theme is commodities. We see oil commodities, in particular, being driven by the historic rise of emerging markets.”