e-fundresearch: Which benchmark do you adhere to?
Powers: The S&P 500 Composite - Total Return Index is the reference index for the fund. It is important to understand, however, that we do not manage the fund to adhere to the S&P 500 or any benchmark. Since our goal is absolute performance over the long term, benchmark sensitivity is not a primary concern.
e-fundresearch: Are you also responsible for other funds at the moment?
Powers: I am not responsible for any other funds sold in Europe. Most of my firm’s assets under management are invested in separately managed portfolios. These investors tend to be U.S. based institutions and high net worth individuals.
e-fundresearch: What is the total volume that you manage in all your funds?
Powers: As of year-end 2009, the total assets under management of Private Capital Management were $1.8 billion.
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003-2008? Absolutely and relatively to the relevant benchmark?
e-fundresearch: How content are you with your own performance in the last years and this year?
Powers: Clearly last year’s 54% gain was something we were proud of, particularly in relation to what I considered to be a frustrating and disappointing 2008. Fortunately, though, that humbling experience provided a catalyst for re-assessment and an internal environment for critical thinking as to what we felt we had historically done very well and also where we felt improvement was needed. Resulting from this period of reflection was the addition of two new senior analysts, as well as a broader sector allocation and less concentration in our fund’s top holdings. Perhaps the most noteworthy takeaway was that there was no change to our valuation discipline and free cash flow methodology, since we did not in any way conclude that our methodology was impaired or outdated – actually, quite the contrary.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Powers: Since it was launched in 1997, the Nordea 1 – North American Value Fund has more than doubled the return of the S&P 500. This outperformance is a result of our disciplined, value-based investment process that is designed to achieve long-term capital appreciation while avoiding investments that can lead to a permanent impairment of capital. We seek to do this by investing in publicly traded businesses trading at material discounts to their true long-term economic value.
Undervaluation is determined through a detailed analysis of a business’ free cash flow generation capacity, through a full business cycle. We believe that the fundamental value of any business is directly related to its ability to generate cash for its owners. The value of this cash flow must be discounted for time, predictability and other identifiable risk factors.
Consideration of corporate governance is another important element of the equation. We seek to invest with management teams that respect our position as co-owners of the business. We expect compensation levels to be appropriate and congruent with the interests of shareholders.
We do not participate in the quarter-to-quarter earnings derby. We evaluate performance recursively over the business cycle, with an understanding and appreciation of current challenges, but with recognition that bottom line results create shareholder value over appropriate periods of time.
e-fundresearch: How long have you been a fund manager already?
Powers: Prior to launching the Nordea 1 – North American Value Fund in 1997, I managed separate client portfolios at Private Capital Management, where I have worked since 1988. I was named President of the firm in 1999 and CEO in 2008.
e-fundresearch: What were your biggest successes and your biggest disappointments in your career as fund manager?
Powers: Successes included our large investment in Qualcomm in the 1990s, which contributed to our fund’s 87% return in 1999, as well as in Apple Computer in the early 2000s, when it was trading near the value of its cash and real estate holdings. Our sale of much of the fund’s technology holdings in late 1999 and early 2000 helped the fund deliver positive aggregate returns during the market downturn that stretched from the beginning of 2000 through 2002.
Decisions to reinvest in technology, telecommunications and other out-of-favor sectors following the market decline earlier this decade supported our fund’s outperformance in 2002, 2003, and 2004.
My profound disappointment with our fund’s performance in 2007 and 2008 led to our hiring of two new analysts with experience in sectors in which the fund historically has been under-allocated: energy, materials, utilities, medical devices and consumer staples. While we always will be bottom-up investors first, stock selection in our fund will not exist in a vacuum that ignores macroeconomic circumstances. It is necessary to incorporate lessons from the past in order to excel in the future.
The fund benefited in 2009 as we remained invested in beaten-down stocks such as Quantum Corporation and Health Management Associates that subsequently rebounded strongly. We also added new positions in energy, consumer staples and logistics companies that are profiting from international growth, as well as medical device companies that were undervalued at least partially as a result of the uncertainty surrounding U.S. health care reform legislation.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Powers: The U.S. market still offers sufficient opportunity for patient value-conscious buyers. In contrast to last year when most equity market investors fared well simply by nature of market participation, we believe that we are transitioning into a period where portfolio composition, including individual stock selection and sector allocation decisions, will determine who performs well and who does not. In this environment, we feel that the Nordea 1 – North American Value Fund with an overweight position in technology and healthcare is positioned to perform well over the next year or two. Furthermore, recent opportunities to add energy, utilities and industrial stocks have allowed us to further diversify the fund, and valuations have allowed us to add these names within the parameters of our price discipline. Therefore, on the whole, even though the markets have moved dramatically in the past 12 months and the fund has performed exceedingly well over that time period, we are pleased with the opportunity that we see in front of us.
e-fundresearch: What are the special challenges in this environment?
Powers: While one can declare a statistical end to the Great Recession, we believe that the outlook for the U.S. and global economy will remain uncertain until trends in employment materially and sustainably improve, consumer balance sheets strengthen and real estate values stabilize without government intervention. Accordingly, investors must be prepared for market volatility, keeping in mind that equity market participants should have a 3-5 year time horizon. Because we feel that the consumer remains under stress, in 2009 we reduced the fund’s exposure to companies selling discretionary products and services to U.S. consumers. In addition, we sold shares in various banks that had a significant amount of loans on real estate in the U.S. for which the value and cash flows are uncertain.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Powers: Our focus tends to be over the longer term as we think short-term performance goals can be a distraction. Our approach looks for businesses that are most likely to be repaired over multiple years, rather than in a quarter or two. As such, our goal is to construct a portfolio that offers substantial upside potential over the next 3 to 5 years.
e-fundresearch: Do you model yourself on someone? Any ideals?
Powers: I try to treat my clients and those around me respectfully and honestly. The “golden rule” goes a long way in conducting yourself in the business world. Although I do not have a specific role model in my professional life, I appreciate all that I learned from my retired partner, as well as the lessons from the firm’s original co-founder, Miles Collier. My late father has always been my real hero.
e-fundresearch: What motivates you in your job?
Powers: Over many years, my firm and the Nordea 1 – North American Value Fund gained a reputation for being smart, opportunistic value managers. However, as a result of a disappointing 2007-2008 period, that reputation was somewhat diminished. I am motivated by a desire to return the fund and my research team to a position of recognized excellence and industry respect. As a fund investor, this means that I am motivated to run an outstanding research team of independent, agile thinkers who focus on what truly differentiates a business over a full economic cycle. If we execute as I expect, my goal will be met and our investors will be very pleased with their results.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
Powers: It is gratifying to be able to positively affect lives by being a good steward of the capital invested with us. Therefore, my aim is rather simple: I want to participate in a process that is special, in that it conducts truly original research, protects capital, and gives the fund investors the opportunity to achieve very good returns, such as those produced during the NAVF’s first 10 years following its launch, as well as last year.
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
Powers: I can’t really say as I enjoy my work and have not given alternative career choices much consideration. Outside of my work at Private Capital Management, I enjoy spending time with my family, which keeps me busy. I also love recreational aviation.
e-fundresearch: Thank you for the interview!