Hidden Value Stocks issue for the fourth quarter ended December 31, 2020, featuring interviews an interview with Shreekkanth “Shree” Viswanathan, CFA, CPA, the President and Portfolio Manager of SVN Capital, LLC. In this part of the interview, Shree discusses why he decided to start SVN, and how his investment approach differs from others.
Interview One: Shree Viswanathan, Founder and Portfolio Manager, SVN Capital
Shreekkanth (“Shree”) Viswanathan is the founder of SVN Capital. After growing up in Chennai (then called Madras), in South India, Shree came to the U.S. to pursue graduate studies in 1989.
After graduating from The University of Chicago with an MBA, Shree spent time in the corporate finance world as an investment banker with Alex. Brown, a member of the Mergers & Acquisitions team at Thomas Weisel Partner and as a Corporate Development Executive at Union Bank of California. From 2005 to 2018, Shree honed his craft as a portfolio manager and analyst at Discovery Financial Partners, Advisory Research, Inc. and Keeley Asset Management in Chicago, IL.
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Shree founded SVN Capital in 2018 where he manages capital through a private partnership and separately managed accounts.
Could you tell us about your background and why you decided to start SVN Capital?
I distinctly remember the moment when the desire to set up and run an investment fund bloomed in me. It was March 2010, when Advisory Research, Inc.—a storied Chicagobased investment firm that I was working for at the time—was acquired by Piper Jaffray, an investment bank in Minneapolis, MN. While my desire to invest on my terms alone was born then, it was not yet the right time. I continued to work there for another five years before moving to Keeley Asset Management— another storied Chicago-based franchise—in 2015.
Truthfully, my whole professional life was preparation for launching my firm. My undergrad was in math and physics, but I switched to accounting and pursued the equivalent of a CPA program in India before coming to the U.S. to pursue higher studies in accounting. After finishing my graduate studies in accounting and CPA, I was working as an accountant in the international subsidiary of Principal Financial Group, an insurance company in Des Moines, IA. In August 1995, my cube-neighbor from the investments team was excited about Mr. Warren Buffett’s purchase of GEICO. I was intrigued by the discussions and a big business school itch started. I decided to go to The University of Chicago for my MBA.
Post business school, I spent the first few years as an advisor but the last 20 years as a principal. Right out of business school, I was an investment banker at Alex. Brown in Baltimore, MD, then at Thomas Weisel Partners in San Francisco, CA, and then a corporate development executive at Union Bank of California in San Francisco. Over the last 16 years or so, I have been a portfolio manager/analyst investing across industries and market capitalization.
Over the years, I noticed a number of skeletons in the closets of investment managers, which I’ll address later in this interview, and I also realized that investing is an individual sport. In 2018, after my second son set off to go to college, I decided that it was the right time to pull the trigger and launch a fund. I wanted it to be a fund that, if I were not running SVN Capital, I would be interested in investing in it. So, I set up a fund with the following investment criteria.
First is the circle of competence. As a patient long-term investor looking to compound capital, I am interested in industries where I can contemplate how they may look 10 years down the road. In other words, I am only interested in investments that are relatively stable. By this measure, assets like Bitcoin, or pure exploration and production energy companies, do not fit my criteria. Fortunately, there are a number of sectors—like consumer staples, financial services, or technology— that do fall within my circle of competence. I strongly believe that we only need a handful of businesses, carefully selected and patiently held, to create wealth.
Second is the quality of business. I look for businesses that have a long-term sustainable competitive advantage. We know that the one constant in a business environment is “reversion-to-mean.” Fortunately, there are certain businesses that can either avoid such reversion or at least defer it far into the future. In my effort to find such opportunities, I ask if the business generates high return on capital and whether it has the potential to reinvest such returns. The combined impact of high return and reinvestment is what allows the intrinsic value of the business to grow. I also try to understand what the capital needs of the business are and whether it’s self-funding or has external financing needs.
Third is the quality of the management team. As a part owner of the business that generates the above-referenced healthy return on capital, I’d like to better understand the quality of capital deployment decisions. I often find such quality to be of high caliber in businesses where the managers have a high ownership stake. Many times, I find such businesses to be owner operated or family controlled.
Finally, is the business available at a reasonable valuation? As one of the CEOs wrote in his annual letter, “… using just one metric to evaluate a business is akin to taking a picture of a two-ton elephant: no single angle can capture the big picture.” I use a number of metrics to evaluate a business.
What distinguishes your investment approach from that of other funds?
SVN Capital is a patient, long-term investment platform that is devoid of the 3-T’s that are the bane of investing—transaction cost, turnover, and taxes—and has an equitable fee structure.
When you spend some time in any particular industry, you observe and learn its strengths and weaknesses. I always knew that, when I launched my fund, it would be devoid of such skeletons. So, what are they?
First, lack of alignment of interest. Currently, there are more than 15,000 mutual funds in existence. More than 50% of these funds have ZERO dollars from their portfolio managers. I believe this has a meaningful impact on the actual performance of these funds. I have invested more than 90% of my liquid net worth in SVN Capital.
Second, short time horizon. According to Ned Davis Research, the average holding period of a NYSE stock has declined from as much as eight years in the 1950s to less than eight months now! The birth of high-frequency trading (HFT) is one of the reasons. One of the most powerful forces on earth that I tap into for generating healthy returns is “compounding.” Holding securities for a short period of time not only results in disrupting such compounding, but also leads to detrimental tax implications. Since there are only a limited number of these high-quality businesses, when I find one, I like to hold on to it for a long period of time and use the power of compounding to create wealth.
Third, frequent trading. One of the reasons why fund managers trade more and hold securities for a short period of time is because of more information. However, in investing, more information leads to less return. Prof. Richard Thaler, one of the pre-eminent behavioral economists, gives an example: If you have two groups of investors, where Group A owns only equities (more volatility) and Group B owns only bonds (less volatility), but Group A is given an opportunity to reweight the portfolio every five years while Group B is given an opportunity to re-weight every month, he finds that Group B performs only half as well as Group A. I follow the dictum, “Don’t do something. Just sit there!”
Fourth, over diversification. Currently, an average mutual fund owns about 100 stocks in an equity mutual fund. While there is no perfect answer to the question of how many securities to hold in a portfolio, I think Joel Greenblatt, in his book You Can Be A Stock Market Genius, addressed this in a very practical manner. He said, which I agree with, that about eight stocks in a portfolio provide about 81% of the benefits of diversification; with 16 stocks you get 93% of the benefits, and then it starts plateauing after that. More names added to the portfolio may provide an illusion of intelligent diversification, but in practice, I find the challenges of following these companies distracts me from concentrating the portfolio in the best ideas. I believe holding 10 to 15 well-researched ideas gives me the best opportunity to create wealth over time. I believe concentrating the portfolio in this manner actually decreases risk as I make an investment decision after intensely thinking about the business and building up a level of confidence.
Finally, management fee. Investment management is one of the few industries where a long-running practice has been that the manager gets paid irrespective of the eventual returns generated for the actual investor. At SVN Capital Fund L.P., I have designed a very equitable fee structure, where I get paid only a performance fee and no management fee—a structure where I make money only if I make money for my investors.