Evermore Global Advisors: Alpha Through Corporate Catalysts
August 23, 2016
by Robert Huebscher
Michael Mauboussin: Here’s what active managers can do
Evermore Global Advisors was established in 2009 by David Marcus and Eric LeGoff. David and Eric bring the methods of their mentor, renowned value investor Michael F. Price, together with their 50+ years of collective experience as entrepreneurs, business operators, and asset managers to provide investment management services to investors.
David, Evermore’s Portfolio Manager, began his investment management career in the late 1980s at Mutual Series Fund, and later founded two European special situations hedge funds and a family office for a wealthy Swedish family. While managing these organizations, David gained significant operating experience as a board member of public and private companies where he led strategic initiatives like operational and financial restructurings, management changes, recapitalizations, and business and asset sale efforts.
As of August 11, the Evermore Global Value Fund (institutional share class, EVGIX) had a five-year annualized return of 8.14%, versus 4.62% for its benchmark, the MSCI All Country World ex-US index (ACWI ex-US).
I spoke with David on August 12.
Evermore Global Advisors
You come from a distinguished background. You went to work at Mutual Series the year before Max Heine passed. I’m sure working for Michael Price must have been great training. What are some of the most important lessons you learned from Mr. Price?
I am a disciple of Michael Price, and yes, my path started at Mutual Series while in college as an intern. I answered the phones and just tried to be a sponge and absorb everything I could about trading, stock picking, idea vetting. All of the research and trading worked in one big room with Michael in the center. Basically everyone worked for him. After graduation, I came back and began to work for Michael, first on the trading desk, and then as an analyst.
I would say one of the most important lessons learned from Michael was the notion that, when you buy an investment for a particular reason, if that reason does not pan out as expected, do not find a new reason! This is usually when you will end up with bigger losses, or, fighting to get out of a position without a gain or a loss.
It sounds so simple, but it is a key component to nearly all that we do. We are very focused on types of strategic changes at companies that have historically been value creative in similar situations. We buy businesses going through change and where change will ultimately benefit the shareholder. Sometimes, things do not work out as planned, and many investors will justify continuing to own a business citing a wider price discount. We have no problem admitting we were wrong in any instance, and will move on. We are here to make money for clients not excuses which frankly is another key lesson I learned from Michael.
You founded two hedge funds before founding Evermore in 2009. What were the lessons you learned in that part of your career?
I left Mutual Series after 14 years and launched a hedge fund in 2000. I closed that first fund because my partner suddenly died only two years in. He was a billionaire industrialist from Sweden who controlled many businesses around the world. Remarkably, he ran his empire from his phone. His passing left a void for his family and companies. I suggested we set up a family office to help his kids, the eldest of whom was 24 at the time, to organize and consolidate all their investments This transition from business analyst to business operator was invaluable. The extensive operating experience I gained by helping them restructure their many private and public companies allowed me to become much more well-rounded as an investor. By taking board seats, I learned about businesses from the inside out, I built a vast network of capitalists around the world, and importantly, I believe I became a better judge of restructuring plans in general and their overall viability.
These experiences help us here at Evermore tremendously on a daily basis. They are additive to what we believe are our investment edges, which can be informational, analytical, behavioral or even structural perspectives on businesses
What led you to start a mutual fund?
Evermore is the culmination of all of our professional careers. The foundation of what we do includes everything we have discussed so far, what I learned working for Michael Price, the hedge fund and private equity experience, the operating experience, and our extensive network. When Eric and I got together in 2008 with the idea for what became Evermore it became clear to us that there were very few mutual funds out there doing the kind of investing that we seek to do. This differentiation was key, because with over 20,000 mutual funds out there, you can’t just be another fund. That would be a waste of time.
Today, this differentiation is even more important because in a world where there is a stampede to low cost passive investments, many investors are going to soon realize that they have no means of capturing any real alpha in their benchmark-like exposures.
We envisioned Evermore’s strategy as being a strong complement to most any asset allocation plan, be it Global, European, International or Alternative allocations. Today, that has absolutely borne out, and we play an important role for our clients and provide exposures that cannot be easily replicated by passive investments.
In a way, our sweet spot has gotten sweeter!
What is the mandate of the Evermore Global Value Fund (institutional share class, EVGIX)?
Our mandate is to seek special situations around the world that are undergoing strategic changes (catalysts) whose securities trade at a substantial discount to our assessment of their intrinsic values. By maintaining a narrow focus on catalyst-driven ideas, we’ve developed a systematic and repeatable investment process.
Our Fund has a nimble and flexible investment approach that enables us to invest in any asset class, geography or capitalization, though we tend to have a small- and mid-cap equity bias.
While we aim to create compelling compounded returns for investors over we are also very mindful of risks associated with our exposures. We spend a lot of time focusing on our margin of safety and seek a deep understanding of the finer nuances of what we own, and, what our true exposures to any one market or sector may be hiding below the surface.
Lastly, to ensure that we can continue to manage our strategy optimally in the years ahead, we intend to limit our capacity while maintaining a concentrated portfolio of our best ideas. We cap our Fund at 40 investments, and today we have about 35 positions.
As of August 11, the fund had a five-year annualized return of 8.14%, versus 4.62% for its benchmark, the MSCI All Country World ex-US index (ACWI ex-US). What were the key contributors to your performance over that period?
Yes, it has been a decent run, and many of our key contributors were in special situations outside the U.S., especially in Europe.
The contributors were not the usual suspects you would expect, but instead were in businesses that some investors would have considered to be out of favor only a few years ago, European small- and mid-caps. Generally, under-researched and mispriced small- and mid-cap companies are a less crowded opportunity set, especially those that are going through change. This is because a lot of investors willfully choose to ignore these companies until after the restructuring or turn-around is complete. They cite uncertainty about the future when declining to invest, but then wake up to the attractive nature of say, a freshly right-sized business only after the cleanup begins to show in their financial statements. For us, finding them in the midst of the change gets us the most compelling discount. Over the years, it was companies like Sky Deutschland in Germany and Bolloré in France, which have been excellent investments for us.
We don’t have to cover every stock. We are looking for key characteristics. If it doesn’t have the characteristics that we are looking for, we are not interested. We have a very tight investment process. We throw a lot of ideas into our filter, but very few come out the other end. That helps develop longer-term returns. That said, returns are not going to be smooth over time because everything we do is a special situation. Special situations have their own market independent timelines, and that mean that our performance will not end up being highly correlated to the market returns.
We want to beat the index over time, but we couldn’t care less what is in the index. I don’t know what weightings are in the index. I focus on where we can find the best risk-adjusted investments, and really, since the start of Evermore, that has been in Europe.