This is part one of a four-part interview with Philippe Desurmont Chief Investment Officer and Portfolio Manager of SMA Gestion. The interview is part of ValueWalk’s Value Fund Interview Series.
SMA Gestion is the asset manager of insurance company Groupe SMA. The firm manages in excess of €20 billion and its leading fund has outperformed the Eurostoxx 50 index by an average of 5% per annum net of fees since its inception 2005. This impressive performance places the fund in the top five best-performing European equity funds since 2010.
The interview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!
Interview With The CIO Of SMA Gestion [Part 1]
Philippe Desurmont: SMA Management is a Paris-based portfolio manager made up of thirty professionals. We manage the financial assets of Groupe SMA, our parent company and in recent years, we’ve begun to offer our expertise to outside investors.
In total, we manage over 20 billion Euros in fixed income (both public and private issuers), European equity markets and commodities. The portfolios we manage follow mainly long-only strategies. We also run arbitrage strategies in equities and commodities.
You search for opportunities in both the equity and credit space using a bottom-up fundamental approach. Can you walk us through this process?
Our investment process at SMA Gestion focuses on analyzing individual securities. We use a bottom-up approach that integrates a substantial margin of safety to ensure against adverse events. The portfolios are the result of “aggregating opportunities”. We don’t consider the benchmark at all in our investment process.
In equities, we invest in companies with strong fundamentals and highly attractive valuations, which is easier said than done.
A company’s fundamentals are considered satisfactory if the company offers high and sustainable profitability (RCE> 10%), a sound financial position (manageable debt levels), operates in a sector that is not in structural decline and where shareholders and management interests are aligned.
If these criteria are met, we then compute our estimate of intrinsic value to determine a price we are willing to pay for the security. We adopt a resolutely cautious bias to benefit from a substantial margin of safety. Concretely, we invest at a discount of around 50% from our intrinsic value of the company.
Despite the importance that we attribute to value, we do not see ourselves as classic “value” investors buying low P/E or P/B. We seek to invest primarily in highly profitable companies trading substantial discounts to our estimate intrinsic value. Three-quarters of our portfolio is devoted to businesses that meet these criteria. The last 25% of the portfolio is used to invest in recovery or restructuring plays (to us everything has a price!).
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We don’t believe in the GARP (Growth At A Reasonable Price) approach. To us, a company that’s growing slowly but does not need much capital will be as valuable as a growing company that may need to raise more capital to grow.
Further, we do not seek to acquire shares in good companies at reasonable prices. We only invest when there’s a deep discount.
Investment opportunities in such companies (high profitability and highly attractive valuation) are infrequent. We are rigorous and disciplined in our approach, especially during periods when the market is too optimistic. When we buy a company that meets our criteria, we keep it for years. We’ll remain investors as long as the business continues to create value.
We sell companies whose fundamentals decline or where valuations no longer justify owning the asset. Overall, our investment process generates a low portfolio turnover, currently below 20% per year.