Value Investing

HIDDEN CHAMPIONS FUND 2017 LETTER: Perennial. Evergreen. Enduring

HIDDEN CHAMPIONS FUND interim letter to investors for “Q3 2017”

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Your funds in listed Asian equities achieved a calendar year-to-date 2017 return (net after fees) of 20.1% as at 30 September 2017 against an increase of 21.1% for the MSCI Asia Pacifc index and 11.8% for Singapore’s FTSE STI index over the same period, with our Hidden Champions Fund (“HCF”) benefting from the fight-to-quality effect as the overall market retreats in 3Q2017. This September 2017 marks the 2nd year anniversary of our Fund since her birth in September 2015. The YTD 2017 returns of 20.1% has brought our cumulative consolidate absolute gains to 37.6% since our inception when we adopted the focused investment strategy of investing in successful yet low-profle underappreciated Hidden Champions.

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Conclusion
Perennial. Evergreen. Enduring. In every industry – from aviation to books to movies and software – certain creations like the Changi Airport can be described as “perennial”. Works that seem to last forever. These products, services or solutions become timeless, dependable resources that have found continued success and more customers over time. In his thought-provoking book “Perennial Sellers: The Art of Making and Marketing Work That Lasts”, Ryan Holiday illuminates the brilliance of perennials in that they grow stronger with each passing day.

Perennials like Star Wars isn’t suddenly going to stop making money – in fact, the profits from the franchise are actually now accelerating, some forty years after conception. Despite getting little radio airplay, heavy metal group Iron Maiden has defied every stereotype, every trend, every bit of conventional wisdom about not just their genre of heavy metal but the music business, selling more than 85 million albums, 24 world tours and 2,000 concerts in 59 countries over the course of a four-decade-long career. They sell their own beer, they are one of the highest earning acts in the world, and they travel from sold-out stadium to sold-out stadium in a Boeing 757 piloted by the lead singer, often shuttling loyal fans and crew along for a ride. How can perennials endure and thrive in an impatient, flustered world demanding quick success? How can we make works and build businesses that achieve longevity? Is there a common creative mindset, behaviors and decisions behind work that lasts? Is there a pattern to perennials that both entrepreneurs and value investors can learn from? So that their success can be your success.

If making money is all you care about, and making it sooner is preferable to later, then building and investing in perennials is not the path for you. There are better, faster way to make a profit: work on commission somewhere, start another fusion restaurant, get a sellside finance job on Wall Street or Raffles Place. Creating something that lives – that can change the world and continue doing so for decades – requires not just a reverence for the craft and a respect for the medium, but real patience for the process itself. By patience, it’s not just to the amount of time that creation will take, but also theLong View with which you evaluate your own work. It takes time and effort and sacrifice to make something that lasts.

Picture George Lucas literally ripping out his own hair as he struggled to complete the first draft of Star Wars. Consider stories of struggling artists who give up everything – even steady meals – for their work. Think of the writer working into the night well after everyone in the house has gone to sleep because it’s the only quiet time she gets.

Whether these are clichés or inspiring images, there is very real pain involved. From sacrifice comes meaning. From struggle comes purpose. If you’re to create something powerful and important, you must at the very least be driven by an equally powerful inner force. In the course of creating your work, you are going to be forced to ask yourself: What am I willing to sacrifice in order to do it? A willingness to trade off something – time, comfort, easy money, recognition – lies at the heart of every great work.

The Work is what matters. To be great, one must make great work, and making great work is incredibly hard. It must be our primary focus. We must set out, from the beginning, with complete and total commitment to the idea that our best chances of success start during the creative process. The decisions and behaviors that bring you to creating the product – everything you do before you sit down to build whatever it is you’re building – trump any individual marketing decisions, no matter how attention-grabbing they turn out to be. It’s why all the pre-work matters so much. The conceptualizations. The motivations. The product’s fit with the market. The execution. These intangible factors matter a great deal. They cannot be skipped. They cannot be bolted on later.
It starts by wanting to create a classic. People who are thinking about things other than making the best product never make the
best product. It must be the highest priority of the creators – they must see this as their calling. They must study the classic work in their fields, emulate the masters and greats and what made their work last. Timelessness must be their highest priority. They have to learn to ignore distractions. Above all, they have to want to produce meaningful work.
The fact is, many people approach their work with polluted intentions. They want the benefits of creative expression, but they desire it without any of the difficulty involved. They want the magic without learning the techniques and the formula. When we look to great works of history as our example, we see one thing, that powerful work is a struggle and that it requires great sacrifice. The desire for lasting greatness makes the struggle survivable, the sacrifice worth it.
Having the Long View is critical in a time when many entrepreneurs whom we observe are running harder and harder to opportunistically chase after short-term gains just so to stand still. Taking the Long View to build a multi-year lasting wide moat means having an ecosystem approach towards building and scaling up the work with various key players in a win-win partnership, having the strategic mindset to cultivate a multiplier effect instead of thinking about merely the addition of capital in a show of might, and a willingness to sacrifice and reject short-term opportunistic gains in posturing up to look good and focus on what matters for the long-term.

During the investment process, many investors are led astray by shortcuts. It’s hard to see how it could be otherwise when the experts and thought leaders wily talk us with shortcuts, hacks and tricks that optimize for quick and obvious success. How to build something that last through time and crises is a lifelong fascination and a calling for us at the Hidden Champions Fund where we seek to invest in the perennial compounders that last the distance to generate sustainedreturns.