Original interview source:
Editors note: Special thanks to KM & Co. analyst, Troy Marchand, for arranging this interview.
Mark Foster was formerly associated with American Fletcher National Bank (now JP Morgan Chase, Indiana, NA) as a research analyst from 1980 to 1982 and with Merchants National Bank as a portfolio manager/research analyst from 1982 to 1984. From 1984 to 1987 he was associated with Merchants Investment Counseling Inc. as Director of Equity Strategy, directly responsible for managing approximately $200 million of equity assets. Mark joined KM & Co. in 1987 and has been the firm’s Chief Investment Officer since 1997. Mark is also the Portfolio Manager and Managing Director of KM & Co. Mark received has been a CFA charter-holder since 1985. Mark graduated with a B.S. Finance (with Honors), from Ball State University in 1979.
Mark was ranked the Multi-Cap Manager of the year in 2010 by Emerging Market Monthly.
Can you tell us a little bit about your background?
I’ve been in the business for 32 years, the last 24 have been with Kirr, Marbach & Co. I’ve always had a passion for the business and a desire to compete.
Why did you decide to join KM & Co.?
I was familiar with the firm and liked the value focus. I also wanted to be in an environment where investing was the focus, not marketing or other ancillary services. In addition, having ownership and the opportunity to build a business was very appealing.
Can you tell us a little bit about your team at KM & Co ?
I function as the portfolio manager and we have 3 analysts. We are all generalists, so we have the ability to look at many different companies. It’s a small group, which makes it easier to move quickly on an idea and to make sure everyone is on the same page.
What inspired you to start the mutual fund?
We started our fund at the end of 1998…we clearly weren’t early and it wasn’t an ideal time for a value investor. Our business historically had always been separately managed accounts and we would turn away smaller accounts that didn’t meet our minimum. The fund gave us an opportunity to capture those dollars and it also gave us a daily priced vehicle for the 401K and other markets.
What do you attribute your fund’s long term excellent track record to?
The value focus has helped. In addition, we have an edge in terms of where we look for ideas. We are not constrained by market capitalization, and in fact we manage under an all cap umbrella. We can go wherever we find value regardless of size. Additionally, we spend a lot of time looking in areas that are less efficient. These would be spinoffs, post-reorg equities and companies with management changes. These areas are less followed and can produce some real bargains. A typical example would be a large company spins off a smaller division as a separate company. Now the management of the spin has more control over capital allocations, expansions, growth opportunities, etc. Plus they are incented based on what they produce, not on what the parent does. Additionally, the existing share holders of the parent stock now have this small piece on the spin company and most of the time they just sell it. This temporary price pressure usually sets up a good buying opportunity.
Whose investment philosophy do you follow more; Benjamin Graham, Warren Buffett or someone else?
Well, we use a pretty plain vanilla value approach, finding stocks selling at a large discount to what the company is worth to a private buying. Nothing cutting edge here. We do think some firms like Southeastern Asset Management run their business extremely well. One of their key points is that you want to find businesses selling at a discount but you also want growing businesses….so the value of the business will compound over time. And do so at a decent rate. It’s easy to identify cheap stocks. The key is finding those at an inflection point where the business is about to get better.
What is your process?
We look in those under researched areas that we discussed earlier. So each week we look at all the spins that have been announced, all the CEO changes, etc. These represent over half of our portfolio currently. We then have an analyst do some detailed work to understand the business and the key issues. We try to visit or talk by phone with each company as we are working through these issues. Our valuation work is key as we need to have a large enough discount to warrant purchase.
What are the main metrics that you look at for a company; ROIC, low PE/EBITDA, P/B etc.?
Three key areas: valuation, balance sheet and cash flows. Valuation needs to be cheap enough. This can take many forms depending on the type of company, buy usually P/E, EV/EBITDA, P/Sales are some of the standard measures we would use. We also want to pay some attention