The Seilern Investment Management CIO’s self-deprecation could almost fool you into forgetting that he is the man to beat when it comes to investing in US companies, as he outpaces virtually all other fund managers in this hotly contested field.
The Citywire AAA-rated manager is gaining recognition among professional fund buyers, particularly for his US equity fund, which he manages alongside the Stryx World Growth fund.
When I ask about his best and worst investment calls, he immediately identifies one of the best – Estée Lauder – but struggles when it comes to his shortcomings. ‘There are a lot. I need to pick the right one,’ he jokes.
Outside the office, Pitoun’s calm, carefully judged nature has helped him find the perfect outlet for his interest in politics, acting as an impartial moderator on discussion panels.
Likewise, in fund management, Pitoun puts his success down to the fund’s harmonious investment team. He works closely with company founder and chairman, Peter Seilern-Aspang; the manager of the European fund, Tassilo Seilern-Aspang; and research analysts Michael Faherty, Corentin Massin and Fernando Leon.
Tight and tidy is a good way to describe both the team and its strategy, as the six investment experts narrow the global investable universe of all Seilern funds down to a basket of just 60 companies.
Targeting a very small niche of the equity market, the team works on an exclusionary basis to create a concentrated set of firms with very little turnover. It is this exhaustive and determined approach to creating an investment universe that has generated the bulk of the alpha for the funds, Pitoun says.
‘It is a very stable universe of stocks. You can see it as a kind of oil tanker that is moving very slowly.
‘If you consider this room as the capital market, what we invest in is the size of a shoe box. We are not value and we are not growth. We really want to focus on those exceptional companies and leave the rest aside.’
Kicking the tyres
Although Pitoun does consider valuations, what really counts is the quality, growth and predictability of the business, he explains. Even when a company ticks all the boxes, it can still take up to a year of intensive investigation before it is added to the investable universe. This belt-and-braces approach to research is undertaken in-house by the investment team.
The research helps to keep the portfolio’s turnover low – something that is most obvious when comparing the latest presentation for the fund with one from a decade ago, Pitoun adds.
It was Pitoun’s dedication to thorough research that first forged a bond between him and Peter Seilern-Aspang four years ago, when the two first met.
Pitoun has been an equity and research specialist for more than 20 years, starting on the sell-side, before moving to the buy-side – all the while maintaining a fascination for what makes a company exceptional over the long term. At Seilern, research continues to be central to Pitoun’s work, and the final portfolio construction is only a small part of what he does, he says.
Of the 60 companies in the global universe, only 32 are American, from which the manager builds a portfolio of around 20 stocks.
The Stryx America fund runs a similar strategy and process to the global and European funds in its range, Pitoun says, targeting the best companies in the world in terms of quality and growth.
It is important not to be lured by the waves of fashion or short-term hype in stock picking, says Pitoun, and to focus instead on the predictability of a company’s returns and business practices.
This naturally excludes certain sectors where the manager doesn’t find quality companies. One such sector is banking, where the level of transparency and earnings growth are both too low for Pitoun, while volatility is too high.
Similarly, Pitoun doesn’t invest in commodity stocks – including oil and gas, steel and mining, and iron ore – because the cost base is too variable.
He also steers clear of sectors or industries that don’t provide enough growth, such as utilities, telecoms and real estate.
On the other hand, the industries he favours are those where scale and innovation are important, where the barriers to entry are sustainable and where capital is not a competitive advantage. ‘As capital is very cheap today, it’s a very weak advantage,’ he says.
He offers the commodities sector as an obvious example of this: with more capital you can try to extract more oil. The same goes for the hotel business, where with capital you can build more hotels, or the airline industry, where cash can buy more jets. ‘We want to have companies whose competitive advantages are sustainable and not driven by capital.’
Advantages, meanwhile, can include the quality of a distribution network or the market configuration, such as an oligopolistic environment.
The largest holding in the fund at 8.3% as of April, Mastercard, is a strong example of this as it has a number of competitive advantages that make it exceptional, Pitoun says.
First, its distribution network would be very difficult to replicate, because a competitor would need to talk to hundreds of thousands of retailers and get them to accept the payment method. Second, the brand is associated with safety, which is very important and hard to replicate, especially when talking about transferring money.
The global group also has a reputation for innovation, which is why it is no mystery that both Visa and Mastercard have a good market share offline. However, the market share online is actually much greater, Pitoun says. The two groups have managed to deploy the right products online to capture e-commerce.
‘We are definitely not a FANG fund,’ Pitoun exlpains when asked about the fund’s largest sector exposure, which is a 35% weighting to information technology.
The portfolio does not include Amazon, Netflix or Apple, because none of them fulfil the criteria the manager is looking for.
‘Take Amazon for example,’ he says. ‘Most of its profits come from Amazon Web Services Cloud business and very little from e-commerce, so we don’t know where the margins are going to land. The predictability is not high enough.’
The exception to that rule is Alphabet, which is the second-largest holding in the portfolio at 7.1%. It is more predictable, Pitoun says, because it relies on the digital advertising market, where there are plenty of projections and where you can predict operating margins.
Pitoun is not after dividends, though. In fact, an increase in dividends often acts as a red flag, as it could mean that the company doesn’t have any potential to reinvest cash profitably, he explains.
‘We pay a lot of attention to monitoring the payouts of companies. If that increases, most of the time it’s a bad sign.’
This can be seen in consumer staples, a space that the manager is reluctant to invest in as there has been an increase in the number of expensive and risky acquisitions. Companies have started to leverage their balance sheets, adding more debt to give cash to shareholders.
This is counterintuitive, Pitoun says, arguing that it is incredible that companies choose to add more debt to their balance sheets when they have little predictability in their business models.
Large food companies such as Nestlé, Unilever, Pepsi Cola and Colgate have fallen out of favour since the team carried out a deep dive on the sub-sector. These firms and others like them used to make up between 15% and 20% of the portfolio, but Pitoun has since concluded that the space was at risk of going ex-growth.
‘In the past, these companies had been delivering a mediocre level of growth but with a very high level of predictability, so it helped the predictability of the portfolio as a whole. But then we realised after doing this investigation that the algorithm of the growth they were living on for decades was actually fading and that the predictability of this growth was being questioned.
‘They were growing more and more through pricy acquisitions, so we became a bit more sceptical and lowered massively the exposure to consumer staples over the past two years.’
Following the investigation, Pitoun sold the Stryx America fund’s exposure to Pepsi and other consumer staples, reducing the exposure to the sector to approximately 8%.
A steady hand
Riding out volatility is one of Pitoun’s strongest skills, and a skill that was put to the test during February’s market correction.
Pitoun’s fund weathered the majority of the market risk, with the total return dropping by just 1.8 percentage points from 60% in January to 58.2% in March. The average manager’s return fell by 7.7 percentage points over the same period of time.
When asked how he protects his portfolio from volatility, he says it’s all in the stock selection, finding companies with a long track record, strong corporate governance and alignment between shareholders and managers, and critically a healthy balance sheet.
‘The strength of the balance sheet helps to mitigate the volatility of the stock market,’ he says.
‘The companies we invest in are listed in the equity market but they don’t need the stock market in terms of reputation and raising new assets, so they are listed for random reasons. We take advantage to buy them for the long term.’
As a result, Pitoun and his investment team’s extensive research and conviction-based approach have propelled the fund into the upper echelons of the US equity sector. The fund is certainly one to watch for the future.
This article originally appeared in the May issue of Citywire Switzerland.