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McElvaine annual report


rogermunibond
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I agree Tim is a great person, one that I have had the pleasure of meeting on a couple of occasions and one that I have a great deal of respect for.

 

Having said that, there is no denying that Tim has had a rough go of it lately. Six consecutive years of under preforming the index and most notably the last two where he unfortunately exceeded the index by a wide margin on the way down in 2008 and then significantly underperformed the index by a wide margin on the way back up in 2009. This is a value investors worst nightmare.

 

I suspect it will be sometime before Tim surpasses his high water mark and he is able to enjoy some incentive fees again from the trust. I silently wonder if this had something to do with his decision to go back and work for Mackenzie Financial. The cynical side of me believes that his shift in focus away from the trust and towards his new Mackenzie fund may have been a contributing factor to the trust's recent under performance.

 

I truly hope that Tim gets back on track and my gut instinct says he will.

 

<IV

 

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"my experience has been that if you believe in their philosophy/process and that they are still faithfully executing that process, the time to purchase those companies/management teams or their underlying holdings is after a period of meaningful underperformance (which often calls into question their talent or process)."

 

valuegeek,

 

I definitely agree that the time to invest in good talent/assets is after a period of under performance. Like you, one of the key characteristics that I like to see in any investment opportunity is a management team with skin in the game. This is what originally led me to Tim years ago and his trust. In fact, I am constantly scouring his holdings for new ideas that I can steal/research. I sincerely respect and genuinely like the guy.

 

But I think it's important to have some perspective. I think most would agree that 13 years is a reasonable time frame to measure ones talent. In Tim's case, he has lived a double life to some extent. The first 7 years of his trust were absolutely wonderful. The next 6, not so much with his biggest two mistakes happening most recently. The result is a 13 year track record that is slightly better than an index fund. It's true to say, at this point in time, that his long term accomplishments have been buoyed by his early successes.

 

Personally, I don't question Tim's process or philosophy. I think it's in his blood. I do question, however, his focus and execution of that process/philosophy as of late. Facts are, however unpopular, he dropped the ball.

 

I am cheering as loudly as anyone for him to pick up the ball again, focus, and execute. And, as I suggested earlier ... I think he will.

 

<IV

 

 

 

 

 

 

 

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Interesting to see what he is holding. I am pretty familiar with Glacier (GVC) but not the other names. Glacier looks to be pretty cheap. The challenge to their share price in the near term is what will be the catalyst?

 

Our portfolio at 31Dec2009 looked approximately as follows:

Indigo Books & Music Inc.      14%

Glacier Media Inc.                  14%

EGI Financial Holdings Inc.        9%

TimberWest (units & convertible debentures)7%

Sun-Rype Products Ltd.            6%

Arlington Asset Investment Corp.5%

12 Other Canadian Holdings      23%

5 Other Foreign Holdings            8%

Cash and Net Working Capital 14%

 

 

 

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I talked my father into investing some of his portfolio with Tim back in about '05 or '06 because I thought McElvaine's Trust would preserve capital better in difficult markets.  I was wrong, but still think he will significantly outperform the indexes over the next 10 years.  I have advised him to stay invested with Tim for the same reason that The Sequoia Fund went on to crush the indexes after underperforming for it's first 3.5 years as a new fund in the early '70's.

 

I don't think that Tim rejoining Cundill has much to do with underperforming lately.  It may have been a bit of a distraction, but if anything over the long term, it may be a benefit as he is exposed to many more international and larger company ideas that he can add to his own portfolios.  Don't forget that he ran the fund part time while he was crushing the indexes in the last half of the '90's and early '00s while working as full time portfolio manager/CIO at Cundill Group.   

 

My biggest criticism of Tim (and it's not that big, otherwise I wouldn't have rec'd McElvaine to my dad) is that he holds onto positions too long that become fully valued such as Sun-Rype in the mid-teens (although there are worse things in life than holding fully valued high ROIC companies).  With the small size of his asset base, he has the ability to move in and out of positions a lot easier.  I actually like the fact that he has become a little more active in the portfolio selling positions that have run up a lot over a short period, such as Sotheby's, even though they have gone on to higher highs.

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Unfortunately, investors always view things in short time frames...that goes for most people who consider themselves die-hard value investors.

 

Munger ran the Wheeler, Munger investment partnership from 1962 to 1975. It did exceptionally well for the first eleven years, compounding at 28.3 percent gross vs. 6.7 percent for the Dow, without a single down year. But the partnership was hit hard in the vicious bear market of 1973 and 1974 when it fell 31.9 percent and 31.5 percent in back to back years. This decline was despite as Charlie puts it, "having its major investments virtually sure of eventually being saleable at prices higher than the quoted market prices." The partnership rebounded strongly in 1975, rising 73.2 percent, bringing the overall record over fourteen years to 19.8 percent vs. 5.0 percent for the Dow. After this difficult experience, Charlie followed Warren in concluding that he no longer wanted to manage funds directly for investors (Warren had closed his own partnership in 1969).

 

I think for the most part, in investing, like anything else, you are only as good as your last game.  The measuring stick for an investment manager by investors is about as rigid as a flag waving in the wind.  Over a long period of time, you could have outperformed 99% of investment managers in the industry, but in the short-term...you can be a God for a few years, and then you can be considered an absolute fool...expectations are often very irrational.  I remember how many people, including the die hard value investors, were critical of Buffett in the late 90's and Prem in the mid-2000's.  Today, they cannot do any wrong.  In a few years, they will be called idiots again by the same people praising them today.

 

If anyone feels like criticizing Tim, you should probably start with me.  Unfortunately, I was the one that convinced him to go to Omaha about three years ago...roughly the time period his results began to suffer.  Before that he was shooting the lights out and had never been to Omaha for the Berkshire AGM...so feel free to blame me!

 

I've told my family that if I get hit by a bus tomorrow, keep the Fairfax and Steak'n Shake shares, and put the rest with Francis and Tim...don't worry if there are years when their funds are down by alot...just hold on to it and keep adding if you can.  I'm sure there are managers that may have protected the downside a bit better, or may have better absolute results, but I know my family will always be treated ethically by them.  That they will never have to worry about the honesty or integrity of their investment manager.  In today's world, trust is something more valuable to my family's welfare than pure performance.  Cheers! 

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I don't know nearly as much about Tim McElvaine as you guys do, but it seems to me that he's simply been fishing from the same pond for too long (high concentration in small-cap equities). Nothing wrong with this per se, however if you concentrate your portfolio in one area, there will be times when you underperform the market simply because your niche is out of vogue (small-cap has been frankly a disaster in the past two years). However, because small-cap has been so lousy and looks relatively cheap these days, I think McElvaine is making a mistake by talking about moving into larger-cap equities.

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If you look at the track record, the results are basically matching the index.  Now, that may have been accomplished with lots of cash, his style maybe out of favor, he maybe the nicest guy on earth, a good friend of Prasad, extremely etchical, he may be great in the future...

 

But basically, he is not adding much if at all vs holding an index.

 

In Canada alone, there are plenty of guys that do so I don't know why anybody doing a bit of homework would want to invest with him.  But maybe this is just me...

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I too was once a partner of Tim's in his Trust.  I had a need for funds and liquidated this position in Aug 2007...by blind luck, at the very apex of its asset value. It's been in the tank ever since and is still trading substantially below that point, having done worse that all the usual benchmarks.

Tim is of course, a highly ethical, modest and fine fellow all round. As an aside, I attended his excellent 10th Anniversary fete in Victoria and believe I may have met Sanjeev at that event. I also believe that he will turn the performance of his trust around and that now may be a reasonable time to jump in. I do think however that he needs to resign his directorships and concentrate on being a shareholder and a fund manager instead of an advocate for a company... falling in love with an investment can cloud one's critical eye.

 

Best of Luck to him

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In Canada alone, there are plenty of guys that do so I don't know why anybody doing a bit of homework would want to invest with him.  But maybe this is just me...

Care to share? I'm looking for something similar to Fairholme in Canada. I'm shocked at the fees though, compared to the US funds.

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One characteristic of outperformers is they do things differently from others in their "line of work".

 

Quite all right to trust someone to manage some funds, who has a mix of participations / activities.

 

Best to evaluate for the positives that a person brings, not ask them to be like rest of the crowd.

 

Just like companies.  Risk that GAAP / MBA-think can get in the way of understanding strengths / value.

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My biggest criticism of Tim (and it's not that big, otherwise I wouldn't have rec'd McElvaine to my dad) is that he holds onto positions too long that become fully valued such as Sun-Rype in the mid-teens (although there are worse things in life than holding fully valued high ROIC companies).  

 

In all fairness, Tim was blindsided by the Sun-Rype strike in late 2007.  Sun-Rype was doing really well up until this point -- and is the major event that pushed the Sunrype cart off the rails.  The mistake made on this one would seem to be miscalculating the risks with Sun-rype's labour relations.  Tim actually took actions later by selling a big chunk of his Sun-rype position to the controlling Pattison Group.  The position he now holds is a lot smaller than what he sold to Pattison.  Meanwhile Sun-Rype seems to have the cart back on the rails - the food segment remains a gem in my opinion (I no longer hold a position -- but follow it some).  

 

If I had one criticism of Tim's Trust/LP -- it would be the management and incentive fees.   The series B & F are the most prudent -- charge is 1% for admin & management.  On top of it he takes an incentive of 20% over a 6% hurdle.  I realize that he has a lot of ground to make up before any incentive is again charged -- but this is still the structure.  Tim's philosophy in a lot of ways is similar to that of Bill Ruane and the very successful Sequoia Fund [Tim might be considered more of a restructuring/transitioning specialist -- but as a side note: fund holders and outside observers also criticized Sequoia for holding too long. Bill Ruane criticized himself for selling too soon and was known for not sleeping at night when he held a high amount of cash].  The straight 1% management fee that Sequoia has charged over the years puts Tim's fee structure to shame. Sequoia is an outstanding comparitive though.

 

With that said - I agree that Tim will have a strong chance of outperforming in the years ahead.  There are some very excellent (and seemingly cheap) companies in the portfolio - at least of the ones I follow.  Tim got hit with a perfect storm in 07/08.  It started with the Sunrype strike, followed by the Maple Leaf Foods listeriosis disaster, then a couple of high debt media companies (Canwest & Citadel) were bought just before a major financial freeze.  Some of the other companies held have recovered - others will in due course (including Sunrype and Maple Leaf - Maple Leaf is still very cheap imo).  Underperformance in 2009 seems to be a result of holding too much cash and selling some positions too soon (Sothebys, CBS, etc).  I am pretty sure that he will retain the core philosophy that he makes (or loses money) based on what he purchases and at what price -- rather than when or at what price he sells.  More trading only makes sense if offered excellent prices to sell and/or cheaper opportunities to buy.  I am pretty confident Tim will figure it all out.  In the end though, I bet his turnover will remain lower than average.  

 

If Tim is shifting a portion of small caps to large -- I hope he takes a look at Ingersoll Rand.  Should be right up his alley especially at the <$32 recently.  Similar to Maple Leaf - IR is transitioning itself toward similar performance of it's peers.   The difference though is IR's capacity utilization is very low (<35%).  Meanwhile IR is generating significant free cash and reducing debt quickly.

 

UCP / DD

 

 

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In Canada alone, there are plenty of guys that do so I don't know why anybody doing a bit of homework would want to invest with him.  But maybe this is just me...

Care to share? I'm looking for something similar to Fairholme in Canada. I'm shocked at the fees though, compared to the US funds.

 

>>>  Sprott Canadian Equity has beaten the market by a dozen plus points over a dozen plus years for instance.  Not quite the same approach as Fairholme but definitely same league results.  Check out FrontStreet or Patient Capital (this one needs 500K though) for superior returns.

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I've told my family that if I get hit by a bus tomorrow, keep the Fairfax and Steak'n Shake shares, and put the rest with Francis and Tim...don't worry if there are years when their funds are down by alot...just hold on to it and keep adding if you can.  I'm sure there are managers that may have protected the downside a bit better, or may have better absolute results, but I know my family will always be treated ethically by them.  That they will never have to worry about the honesty or integrity of their investment manager.  In today's world, trust is something more valuable to my family's welfare than pure performance.

 

Sanjeev just curious why you dont have BRK in the mix? Is it because of Buffett's age?

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Sanjeev just curious why you dont have BRK in the mix? Is it because of Buffett's age?

 

Age and size of Berkshire now.  We own only a single post-split BRKB share in our corporate account at present.  Not that we wouldn't buy Berkshire.  We bought some a few months ago, and we would buy it again whenever it's cheap.  But at it's size in particular, the returns are going to be very difficult to generate unless you see markets collapse like they did a year ago. 

 

With $130B in equity, if Berkshire wants to allocate the equivalent of 5% of equity into an idea, you are talking about $6.5B.  If they want to own 15% of their target company, it would have to be a company worth a minimum of $43B.  If they want to own 7.5% of their target company, you are talking about a business worth $86B! 

 

Their universe of potential investments is just so small now.  That's why Buffett is doing deals like Burlington Northern and at an average price.  You now have to buy mountains to move the needle a tiny bit.  Good investment managers will be able to do far better on their own.  For the average investor, you are still better off owning Berkshire than the S&P500, but there are much better alternatives out there now for investors who know what they are doing.  Cheers!

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