Ann: Becoming a substantial holder-KBL.AX, page-11

L1 Capital builds $1bn fund on a face value philosophy
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Contrarians . . . Mark Landau, left, and Rafi Lamm look at stocks in the same way. Photo: Josh Robenstone
by John Stensholt
It was on a study tour to Europe in late 2011 when Mark Landau and Rafi Lamm learnt the value of having one additional conversation and doing a little bit of extra research.

The founders and joint managing directors of Melbourne fund managers L1 Capital had done the rounds talking to management at the European Central Bank, Bank of Spain and Bank of England in an attempt to fully grasp how the euro zone crisis was going to unfold.

“We ended up talking to a pretty senior guy at the Bank of England, and right at the end of our conversation he let slip that he was taking his own money out of the pound and putting it into gold," Landau says.

“We thought that was a pretty extraordinary thing to say. So we were pretty negative on the pound from there and it showed money printing was going to keep happening and quantitative easing was here to stay."


Landau and Lamm have travelled plenty of miles since they formed L1 in 2007, just before the global financial crisis, visiting places such as Senegal, the Dominican Republic, regional Brazil and the Arctic Circle on site visits of the assets of Australian-listed companies in which they invested.


For them, getting out of the office and talking to as many people and doing as much research as possible is what they believe sets their firm apart from competitors.

“It’s about having knowledge of a company and then also a view on the industry and the inner-working of the company," Lamm says. “It’s formed through collecting information from a variety of sources, not just relying on information from the company."

Other factors are their age and performance, and the circumstances around the pair striking out and founding their firm six years ago, when Landau was 29 and Lamm 30.

Landau and Lamm are close friends who met through the industry while working at Invesco Australia and Cooper Investors before establishing their own firm.


“We quickly realised we thought about stocks in pretty similar ways," Landau says. “We are both pretty similar in terms of the research, the travel and the level of detail we both need to be confident in investing in a stock. We think it’s better to get out and talk to people one-on-one.

“You learn a lot more on site visits and getting to know people there than normal meetings with management.

“We thought there was a space in the market for a more concentrated and long-term contrarian approach. The market is rapidly moving towards one that is looking for a more convicted portfolio. Not every fund manger is able to cope with a smaller number of stocks and a bit more volatility in the short-term. Long-term performance is what we are obsessed with."

Index outperformance at 6 per cent since 2007

L1 Capital’s Australian Equities Fund has about $1 billion funds under management and has outperformed its benchmark S&P/ASX200 Accumulation by an average of 6 per cent annually since 2007.

More recently, in the three months to September, it has returned 12.7 per cent compared with the index’s 10.2 per cent.

The fund typically has about 30 stocks at any one time, with 80 per cent large cap and 20 per cent small, with an investment style that combines valuation mainly via the discounted cash flow method and qualitative considerations such as management quality and long-term industry trends.

The company has only five staff and almost all investors are institutions.


Striking out on their own was a tough enough challenge for the pair at what was a relatively young age for the industry, but they also faced the immediate issue of dealing with a rapidly falling market when the global financial crisis hit in 2008. L1 had received two mandates from institutional investors after six months and was on its way. But the GFC hit hard.

“I didn’t know anyone who had coped with an equities market falling by 60 per cent," Landau says. “In hindsight it was a great opportunity for us to prove the mindset that we have.

“There were great bargains to be bought in that time and that period was a huge benefit to us. In 2009 a lot of stocks we bought went up two or three or four times, and it’s more difficult to find those opportunities today."

Stocks such as Flight Centre, SEEK and Rio Tinto were particularly strong for the firm.


It has not all been plain sailing, however. In 2012, L1’s fund underperformed the index for the first time, with Landau saying, “We simply didn’t participate in the yield trade that was going on."

He and Lamm are confident, however, in some of the market’s unloved stocks they have been buying into recently.

Lamm says Challenger Financial is “underappreciated compared to its financial services peers" and that its share price reflects a value “that is only slightly more than the runoff value of the annuities book" and that freight company Aurizon has a “huge opportunity" over next five years to improve its profitability through improved contract terms, fleet optimisation and streamlining its cost base.

He also believes Seven Group Holdings, which recently announced an earnings downgrade and large job cuts, will bounce back due to its Caterpillar mining truck business. “They had really strong new product sales from 2010 to 2014 but the repairs and maintenance earnings will not kick in until 2015," Lamm says. “So we think there will be a strong upturn in earnings."

In contrast, L1 is underweight on bank stocks, with Landau arguing valuations are stretched and the outlook for bad debts is being underestimated by the market.

“I think the risk is as an investor you capitalise virtually zero bad debts into perpetuity, if you look at price-to-book or price-to [net tangible assets] the Australian banks are pretty stretched by global standards," he says.



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