Askeladden Capital Partners letter for the fourth quarter ended December 31, 2016.
Askeladden Capital letter below
On January 11, 2016, Askeladden Capital Partners LP placed its first trades with $25,000 of my own personal capital; I had another six figures of savings set aside to fund operations. I had no idea when my lawyers would get around to finalizing my registration paperwork, nor a clue if prospective investors would look past my age and unconventional background, and bore the sobering burden of knowing that my delayed circadian rhythm eliminated most white-collar jobs as “fallbacks” despite my repeatedly demonstrated motivation and accomplishment.[i] In other words, while my friends and colleagues praised me for some supposed bravery, in reality, launching Askeladden Capital felt more like falling off a cliff without a parachute. (Or so I imagine – fortunately I’ve never fallen off a cliff!)
From inception through 12/31/2016, we found a parachute or three:
- We returned ~+69% gross and ~+56% net of all fees without using any leverage and while maintaining a double-digit cash balance, compared to a ~+31% gain by the S&P 1000 Total Return Index. 
- We secured our first 7-figure client, plus several tenured value investors as friends, investors, and mentors.
- Most importantly of all, we refined and upgraded our process for identifying, analyzing, and tracking potential investment candidates, with a clearer understanding of the sorts of ideas we can evaluate well.
Looking forward to 2017 and beyond, we expect that:
- We will likely never again achieve another year of absolute or relative returns remotely like those in 2016, as we were significantly benefited by a confluence of luck, favorable timing, trading nimbleness related to our small size, and an abundance of dramatically undervalued securities that fit our investment profile,
- We will secure more clients big and small, on our path toward scaling to $50 million in FPAUM,
- We will continue to improve our process and build additional mental models.
If you take away one thing from this letter – or from any of our conversations – I want it to be that I’m extremely focused on building a sustainable, repeatable investment process that allows us to achieve solid returns over the long-term without using leverage or bearing excess risk. There are many emerging investment managers who, due to factors similar to those described in (1) above, have one great year, then fizzle out. I do not intend to be one of those managers, and continue to strive toward a goal of achieving robust, 13-15%+ annualized long-term net returns[ii] for investors no matter when they join the fund. While there is obviously no guarantee that this is achievable, and this is at the very high end of reasonable expectations, such results would necessarily require consistent application of a rigorous process to identify high-quality, low-risk, high-return investment candidates. We continue to methodically build our database of interesting companies and patiently await opportunities to buy them at attractive prices.
Askeladden Capital Partners – Portfolio Management
Long-term, of course, does not mean quarter to quarter or year to year – and looking ahead to 2017, I would be remiss to not mention the dearth of opportunities currently available. While we remain confident that owning high-quality businesses at attractive valuations is one of the best paths to generating wealth over the long term, in the short term, we aren’t seeing many such businesses at attractive (or even remotely reasonable) prices. Since Election Day, the market is near-universally pricing in a lot of optimism and not a lot of risk. [iii]
You will remember that at the end of October, our cash levels were slightly below the low end of our target range, as we had very easy pitches on securities we were very comfortable with. A combination of good fundamental performance and the market rally has revalued these names materially higher, particularly executive search and talent consultancy Korn Ferry (KFY), which was a 10% position at around $20 (representing ~9x run-rate free cash flow with de minimis debt and no immediate existential risks) and is now a small, sub-3% position at $29+ (we value it at $30 – $31). The story with other names such as Liquidity Services (LQDT), Fogo de Chao (FOGO), and Franklin Covey (FC) is similar, albeit less dramatic, and all three have been trimmed significantly on recent price strength. These remain our #1, #2, and #4 positions, but position size is dictated by the attractiveness of their valuation.
As we have sold down these and other names, despite adding ~1000 bps of exposure to three new really under-the-radar companies, and bulking up our LGI Homes (LGIH) position (now #3) on non-fundamentally-driven price weakness, we are still left with plenty of dry powder – our cash position is currently in excess of 30%, well above our target range of 15 – 25% over time. As always, our cash position is not an explicit market timing move (that’s not our style), but rather an acknowledgment of the paucity of opportunities available to us based on conservative, bottom-up underwriting. When excellent opportunities present themselves (as they did numerous times during 2016), we will willingly and aggressively deploy capital to create future returns. Indeed, as always, we are closely following interesting businesses that we believe might be actionable over the next twelve months, as well as building our broader long-term database. In the meanwhile, we will not loosen our underwriting standards and pretend risk doesn’t exist just because others are doing so. After all…
Askeladden Capital – Updates to the Process
Earlier this year, I discussed my disappointment in my disorganization, which was leading to significant rework on names that we had previously reviewed, as well as missed opportunities to purchase securities that we were familiar with and were materially undervalued but simply fell off my radar amidst the day-to-day of research (ahh, Kadant below $37…). I also realized that while a constant idea-seeking process had significant behavioral risks, I needed to put more weight on working on securities that were closer to potentially being actionable than those that would likely not provide any opportunities for many years (due to excessive valuations, idiosyncratic business factors, and so on.) Without boring you with details[v], over the past few months, I have developed a series of tools that allows me to more clearly and consistently document our work on names and strike when the iron is hot without subjecting us to excessive, distracting noise. With these upgrades in place, more time can be spent on research, more effectively.
While I’d love to take credit for all this progress, most of it should go to my new friend Zeke Ashton, who has run a firm called Centaur Capital for the past 15 years and is a cult hero among value investors (though he’s too modest to admit it). Zeke has consistently achieved strong returns on invested capital, delivering above-market returns over a full cycle with minimal drawdowns and substantially below-market risk. Over this time, Zeke has developed many of the tools that I was looking to build, and he has been generous enough to assist me with mine (including a position sizing and risk management framework that I hope to distribute in early 2017). We’re also collaborating on mutually interesting ideas, which builds the “force multiplier” effect I have discussed previously (building our own proprietary “dealflow” of high quality investment ideas, without the costs or organizational dynamics of a salaried internal team.)
Zeke insists on calling us peers, but I’ll call it for what it is – he is a valuable mentor. Even within the context of value investing, it is rare to find someone with whom I share so much in common – while Zeke and I run our portfolios in very different ways (diversified all-cap long-biased vs. concentrated small-cap long-only), we share a strong sense of fiduciary duty, a drive to be great, an intense focus on process, a relatively similar underwriting framework, deep self-awareness and a growth mindset, and most importantly, a love of big fluffy dogs and an insatiable appetite for Tex-Mex. Zeke is even paying me a nominal amount to assist him with projects I’d work on for free for the sake of learning – which boosts my expected 2017 cash flow into the green after all fund and personal expenses, assuming no incremental AUM. Last but not least, Zeke has generously offered to serve as a reference for prospective Askeladden Capital investors who desire a tenured professional’s assessment of my approach, so please tell your friends to call him!
Askeladden Capital – Business Updates
If experience is what you get when you don’t get what you wanted, then we got loads of, uh, “experience” from our erstwhile relationship with our initial legal counsel. We decided on Andrew Rosell of Winstead PC as our new counsel after extensive vetting; we are confident Andrew will provide a higher service level, and at his recommendation, are deciding between two Texas-based compliance consultancies for routine filings work. With our “infrastructure” fully in place, we will spend 2017 fully focused on the fun stuff.
After refraining from business development for the last quarter of the year to focus on research and process, I will return to strategically posting thoughtful whitepapers and sourcing interviews, speaking engagements, and so on to raise Askeladden’s profile and add to our pipeline of inbound inquiries.[vi] Given that our strategy benefits from small size, my current plan is to close Askeladden Capital to new investors at $50 million in fee-paying AUM, and perhaps to begin returning capital just shy of the $100MM mark. While this may seem like a far cry from our current level of AUM, the reality is that a few serious investors could get us there, and we are in conversations with several. Stay tuned.
Our intern Bryan Wagman will likely be leaving us this summer for someone who can actually afford to pay him. His support work on Franklin Covey this summer helped a great deal, and his independent work (especially management interviews) yielded several other prospects and a small position. While we will miss him greatly, we look forward to continuing to collaborate with him as he progresses in his career. Meanwhile, we have a new intern named Matthias Herskind (Matt for short), an extremely bright high school senior from Denmark who has somehow managed to read more pages of value investing material than me (props)[vii]. Matt, a fellow INTJ and Deadpool admirer, provided valuable editorial suggestions on this letter and has already helped me vet some potentially interesting companies. I remain the sole decision-maker, but I find that talking through my ideas with other smart people versed in the Askeladden Capital framework helps me prevent potential oversights and avoid the echo chamber / “tunnel vision” effect. In addition to Matt and Bryan (and of course Zeke), we often collaborate with a select group of smart investors – from known fund managers to off-the-radar individuals – who provide fresh perspectives and insights.
As always, we are grateful for your investment and remain committed to doing our absolute best for you. (And for ourselves – for those who care, over $100,000, or the majority of my personal capital, is now invested directly in the fund, and three-quarters of my father’s retirement assets are co-invested alongside in an SMA.)
Westward on! =)
Askeladden Capital full letter and presentation below