This is part three of a four-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.
Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.
From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.
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 Zeke Ashton of Centaur [Pt. 3]
Continued from part two…
Your top holdings, accounting for more than 10% of the Centaur Value Fund, are bank warrants. Could you talk us through this holding, why did you decide to devote such a large percentage of your portfolio to banks?
Well, first of all you have to understand that the 10% figure that you quote is market exposure, adjusted for the leverage inherent in any option-like instrument. The actual cash exposure for us has ranged between 2% and 3.5% of the portfolio depending on the prices of the underlying warrants and our positioning at any given time.
The attraction to these specific warrants is that at the time we originally bought them, we felt the banks were very cheap relative to their earnings power, and we selected banks that we believed to be either best in class or very near to it amongst their peer group. Also, we tend to buy warrants when the market is assigning very little time value to the instruments, which given the long time to expiry is very unusual for publicly traded options. Our warrants happen to expire mostly in late 2018, and we’ve held positions since 2014.
So the underlying thesis for the position is a combination of 1) high quality banks that have demonstrated a history of strong credit standards; 2) cheap prices relative to historical and prospective earnings; 3) the warrants allowing us to get essentially full exposure to a good case scenario but only partial exposure to the worst case scenario, and 4) the warrants themselves being under-valued relative to the time value premiums usually present in exchange traded options.
The banking sector is facing a lot of headwinds right now, including regulatory headaches and stubbornly low interest rates. Do you see as much upside in the industry as there was say two or three years ago?
Your question implies that there was a large upside in these two or three years ago. JP Morgan Chase stock traded in the mid-50s in the summer of 2013, before the markets blasted off. It traded at below $60 as recently as a couple of months ago following the Brexit vote, and is now trading in the mid-to-high-$60s. So it’s not like these stocks have been running hard the last three years. Still, your question is a good one, and I think that the U.S. banks have done well despite the low interest rate environment. Of course it has been helpful that credit losses have been extremely low for several years prior to a slight uptick in the back of 2015 and early 2016 due to distress in the commodity sectors. It is the credit cycle that concerns me more than low interest rates at the moment. Money has been cheap for a long time now, and the reflexive lending discipline that persisted for a couple of years after the credit crisis has likely given way to a certain level of laxity by this point. I am watchful for signs that we are entering the down side of the cycle with regards to underlying credit quality.
Finally, I should mention that we tend to trim our warrant positions on strength in the underlying bank stocks (usually when for some reason the market becomes convinced the Fed might increase rates in the near future) and we also tend to nibble back on weakness (usually after an event that the market interprets as being unfavorable to a resumption of higher rates). We have tended to maintain a core position, but with flexibility to increase or decrease the positions opportunistically.