At a time of significant volatility in US equity prices, Smead Capital Management is focused on bringing a dfferent message about the asset class to investors in Europe. Cole Smead, managing director and portfolio manager, recently met with InvestmentEurope to outline his company's approach.
Smead Capital Management may have first crossed the radar of fund investors about a decade ago when it launched in July 2007, but its roots go back to the early 1990s.
In 1993, the business was originally formed to offer services in the areas of private wealth and foundations in the Pacific Northwest of the US. However, there was at the time no public vehicle offered to investors. What the work at the time did do was provide confidence to work in open markets in an open way, explains Cole Smead, managing director and portfolio manager.
Thus, there were some 14 years of work behind the business even before it launched its services into the US mutual funds market using the family name of both Cole and William Smead, father of Cole, and CEO/CIO.
Besides the money saved on not trying to develop a ‘brand', this also speaks to the contrarian nature of the management approach, Cole Smead suggests. However, Smead is about more than just one family, and some six months after the launch of the asset management business in 2007, the firm was joined by Tony Scherrer, director of Research and portfolio manager.
Others have followed, and the whole firm now constitutes some 14 staff, still being run on lean, entrepreneurial lines - as Smead puts it: "People have the rope to hang themselves."
An example he notes is that the firm had never taken its Ucits offering to South America until earlier in 2018, when following a single phone call, two people could make the decision to head into the region.
"The autonomy gives people the ability to use their entrepreneurial capabilities.
"People running things from the top down can be sluggish. Those that give local managers the ability to act do better. They are interacting with their customers. We fall into same thing, just on a smaller size."
The firm's core focus is a US large cap equity strategy - which for European investors is offered as the Smead US Value Ucits fund, with AUM of some $102.5m as of the end of September 2018 - which it pursues according to eight investment criteria for determining when to buy a particular stock.
Five of the eight are required over the entire holding period, in which a stock must: meet an economic need, have a strong competitive advantage, have a long history of profitability and operating metrics, generate high levels of free cashflow, and be available at a low price in relation to intrinsic value.
Smead Capital Management has two offices, in Seattle and London. The former serves the Americas, from Canada to South America, while London serves Europe, the Middle East and Africa.
"We are great airline customers! Where we sit isn't as important as where we can tell the story," Smead notes
"We have customers in Asia, but we are learning to walk before we run. Over time it will be a place to have someone serving people locally, but being closer doesn't necessarily mean the client wants to see us more often, but it would be another resource for them."
Meanwhile, as the business grows in Europe, expectations are that more people may be allocated to the region. The two biggest markets for the business currently are the UK and Belgium, which are easy to serve from London.
The bigger question on Europe will be about the circumstances for those managers such as Smead that do not want to participate in the mania of US large cap stocks, including, particularly, technology stocks, Cole Smead suggests.
"Beyond the pure investment discussion, there is a size question," he also notes.
"But as the size question goes away, it leverages places such as Switzerland and Italy, which will come with size. It means being patient, meeting people - for example, we just picked up our first Nordic client recently."
The question of size also depends on the type of investor. Smead sees an inflection point around the equivalent of $150m-200m of AUM in the Ucits fund. For larger investors that would be too small still, requiring $300m-350m.
Currently, the key client groups in Europe are seen as single and multi-family, then private banks and funds of funds. There are good relationships with banks already, and additional inroads into multi-family offices would be seen as a positive development. One of the reasons for this area of focus in terms of client types is that it follows the proliferation of CFA chartered professionals. As they need a certain level of understanding of English, access similar databases, and have links through the CFA as an institution, it throws up similarities to the home market experience, Cole Smead says.
It is clear that Smead Capital Management does not see a need to consider an additional Ucits product to raise its profile in Europe.
"We could run at least $20bn, with Ucits $4bn-5bn of that, without worrying the US large cap strategy.
"We are more interested in doing well for the client than looking for more product.
"Working with local investors is more important than trying to find new product to sell."
Also, while Smead acknowledges that there have been discussions around, for example, partnerships with third party marketeers, it is yet to be of sufficient interest. Acquisition of a European based fund invested in US domestic equity to create size is another thought, but it is highly unlikely that such a fund would be available. The focus remains the own US strategy
"There are things coming from the US we would like to poke holes in," Smead continues.
Cole Smead is managing director and portfolio manager at Smead Capital Management. As a member of the investment committee, he oversees the management of the firm's separate accounts and mutual funds. Before joining Smead, he was a financial advisor at Wachovia Securities in Scottsdale, Arizona. He graduated from Whitman College in 2006 with a degree in both Economics and History and received the CFA designation in 2011. He is a member of the CFA Institute and the CFA Society of Seattle, Washington.
"US equity returns are going to be poor for the next 10 years. Saying that going passive is the way forward, just as tepid returns are reality, means some investors won't want to be in these stocks. From a 10-year perspective, nobody is being honest. We can benefit from this as an active manager."
What is also clear to Smead is that being a boutique entering Europe is not an insurmountable challenge.
"People act like it's a huge hurdle to overcome to go from the US to Europe as a boutique. But, as long as people want to invest in the US, there is immense opportunity. In every market there are investors who understand the opportunities in public stock markets over time, and others that do not. We need to shepherd investors through the steps."