Arquitos Capital Management’s returns since inception have been second-to-none. Last year the fund produced a return of 54.9% net of fees in 2016 compared to 12.0% for the S&P 500. Since launch (April 2012) the fund has delivered an annualized return of 28.3% net for investors (35.4% gross) outperforming the S&P 500 by 68.5% over the period.
Arquitos is modeled after the partnerships managed by Warren Buffett from 1956-1969. The fund uses a bottom-up, company-specific approach, identifying situations where significant mispricing exists. Many of the fund’s largest holdings are micro-caps, with no analyst or media coverage whatsoever, which makes them the perfect hunting ground for value-seeking investors. Steven Kiel featured in the upcoming issue of Hidden Value Stocks, ValueWalk’s exclusive quarterly magazine on small caps. Below is an excerpt.
Hedge Fund Interview: Steven Kiel: Arquitos Capital Management
Arquitos Capital was founded with a goal of emulating the success of Warren Buffett’s early partnerships. Even your mission statement is lifted directly from the Buffett Partnerships. A lot of people have tried to replicate Buffett’s success in the past and failed. What made you think you could succeed?
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
Buffett has been an inspiration to a generation of investors, myself included. Investors should learn from him, but ultimately you have to apply your own personality to the way you approach research and the construction of the portfolio. You should try to emulate the process, but in a way that fits you.
The goal for any investor should be to compound funds at a better than average rate with less exposure to long term loss of capital. How do you improve on that statement? It’s kind of like the Declaration of Independence. The ideals stand the test of time. If you were starting a new country, just copy the first 273 words of the Declaration of Independence as the foundation of your country. That’s how I felt about the mission statement.
As far as what made me think I could succeed, it’s a constant process of proving it. Just like a baseball player, you’re only as good as your last year.
Do you have three special investment buckets similar to those of Buffett?
I break the portfolio into several segments but in a different way from the Buffett Partnership approach. We have core holdings that I would like to own as long as the company has internal reinvestment opportunities and as long as they effectively allocate capital. I also have a portion of the portfolio focused on arbitrage or special situations such as mergers, spin-offs, or other short term opportunities. I also keep on a more general market hedge.
Arquitos returned 54.9% for its investors during 2016, a tremendous result. What would you attribute this return to?
Well, we definitely had a great year. I would not expect that our run over the first five years of the fund is sustainable, but I’ll certainly keep trying. It’s important to remember that you can only control the inputs, not the outputs. Because our portfolio is fairly concentrated (12-20 stocks) good results will come when the largest holdings do well. The results haven’t historically been connected to the general markets. The timing is just luck and can’t be controlled, but the goal is to be consistent on the process. This may sound trite, but our biggest holdings went up the most, Intrawest Resorts, Berkshire LEAPs, and Bank of America warrants. There is still value in all of them, though I exited the Berkshire LEAPs.
Want to find out more?
This is just part of the interview with Steven Kiel featured in the next issue of Hidden Value Stocks, ValueWalk’s exclusive quarterly magazine.
In the magazine’s first quarter issue, as well as the interview with Steven Kiel we also speak with two other under the radar hedge fund managers and discuss four potential hidden value stocks.
If you are interested in learning more, feel free to download this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here.