This is the final part of a five-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.
Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.
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 Zeke Ashton interview has been divided into several parts and is downloadable as a PDF at the bottom of this part. Stay tuned for the next interview in the series!
Interview with Zeke Ashton of Centaur [Pt. 5]
Continued from part four…
Are there any companies at all that interest you in this market, and if so, what do you think makes the businesses stand out from the crowd?
What fascinates me at the moment is the flood of capital pouring into the stocks of companies that happen to pay out most of their income in the form of dividends in the search for “safe” income. Valuations of stocks that might be considered any form of alternative to the contractual income offered by bonds of reasonable credit quality have gotten extremely steep and may now have gotten extreme enough to call a bubble. I think before long the market’s current craze for “safe dividends” is going to get ugly, and investors will discover that a 3% dividend doesn’t feel like a lot of comfort if the stock declines 30% and you lose 10 years worth of income. But I guess we’ll find out.
Since inception, Centaur has outperformed the S&P 500 by 2.8% per annum or 134.2% on a cumulative basis. Which traits in your opinion have helped Centaur beat the market over the years?
I think avoiding really big losses or huge mistakes has been the most important factor. I would say the one element of our track record at Centaur that I am most proud of is the fact that we just haven’t had any significant losses that we couldn’t recover relatively quickly. Even in the mutual fund, when we lost 20% in 2008, we made 44% in 2009 and were back to even by September. Still, I always remember the words of former football coach Bill Parcells: success is never final as long as you are still playing the game. That’s especially true in the stock market, where we’ve seen many great long-term track records wiped out with a few really poor years or in extreme cases with just one poor decision. At least in football, if you win a championship it’s forever. In investing, you always have to keep a part of your focus on protecting what you’ve made.
Our performance in the hedge fund has really come in three chapters. There were the years from mid-2002 to mid-2007, when we performed so well it almost seemed too easy. Then there was mid-2007 to 2010, when the Fund’s absolute performance was not as good but was strongly positive and the market was significantly negative. Then we’ve gone through a third chapter from 2011 through mid-2016 where we’ve been able to make money, but we have not been able to generate the kinds of returns we did pre-2008 and we’ve not been able to keep pace with the fully invested market indices. You’ve probably read a lot of articles about value investors having trouble in the market the last several years, and I think that’s largely true. And you may not have read any articles about it, but I can assure you that short sellers have struggled, particularly in 2013.
Since the late fall of 2012 we’ve really been unable to find enough good stocks to stay consistently fully invested on the long side. So instead of running exposures of 100-110% long and 25-30% short, we’ve been running 75% long and 15-20% short. While the net exposure difference between these two theoretical portfolios doesn’t seem that great (110% long and 30% short is 80% net long, while 75% long and 15% short is 60% net long) the difference between running total exposure of 140% and total exposure of 90% is a very big gap. Also, we’ve really found making money on the short side is much more difficult in recent years, as borrow costs have increased and of course fundamental value doesn’t seem to matter as much to the market as it once did. Obviously, hedge funds that try to be market-neutral have performed very poorly in this environment, so we are really glad we haven’t tried to play that game. We’ve done far better than the average hedge fund, at least based on what I can gather from the published hedge fund industry returns. I think we’ve produced a respectable performance relative to the amount of risk we’ve taken, but we just haven’t had a high-conviction hand to play in what seems like a long time.
Hedge funds in general are now out of favor as much as they’ve ever been, which I think is interesting given the amount of talent that the hedge fund industry attracts. Short selling is hard and a lot of people have given it up. Value investing has been difficult to practice lately, and many value investors are suffering similarly to what happened in the last couple of years of the late 1990s. I sense that this environment cannot continue indefinitely. We have tried to use this tough stretch to refine our skills and to learn whatever lessons it has to teach us. Still, I am reasonably optimistic. If the market environment changes to one that rewards the skill set we bring to the table of valuing businesses and assessing risk, we will be ready to capitalize on it.
And lastly, what advice would you give to value investors who are just starting out (or even experienced value investors) to help them navigate today’s market?
I’ve come to believe that learning to master the art of investing really boils down to finding a game that you can win, and then playing that game really well. I’ve come across all kinds of investors in my career, and all of the successful ones learn to differentiate the ideas that they can handle where they have some sort of system or approach that really works for them from ideas that they can’t handle or where they really aren’t any better at than the market at large. Value investing as a philosophy is actually a very broad framework, and there is a lot of room for many different styles, but starting with the idea that you are looking to buy underpriced securities is a pretty good place to start. Once you’ve mastered the basics, it is about developing a