Interview: Mikael Tarnawski-Berlin – Pandium

Stockholm (HedgeNordic) – Pandium Global is a Swedish fund running a concentrated portfolio of companies the portfolio manger, Mikael Tarnawski-Berlin, sees to be good value picks. The strategy, which has been running since 2011, is available in a public fund structure since 2014 has returned in excess of 20% annualized despite holding large cash positions at all times. We had the opportunity to catch up with Mikael in Stockholm, and here is what he had to say:

HedgeNordic: Your strategy focuses on a value investing strategy in the equity space. Can you describe what a value investment is to you and which factors determine a company to have value for your portfolio?

Mikael Tarnawski-Berlin: A value investment is one where the intrinsic value is higher than the market price based on fundamental analysis. We aim to invest in simple businesses with good prospects that are run by honest and capable managers at attractive valuations, with both downside protection and upside potential.

HedgeNordic: Have you identified a sweet spot where your approach works best, be it a geography, a certain sector, market cap or other factors that weigh in? Are there in contrast such areas you shy away from by design?

Mikael Tarnawski-Berlin: My approach works best in areas of the market that are ignored or unpopular since that is where the likelihood of mispricing is the highest.

Since I need to be able to estimate the value of the company I am investing in, and therefore make projections about future cashflows, I avoid industries and businesses that change fast or that I don’t understand. I also avoid situations where I don’t have a behavioral or analytical edge.

HedgeNordic: Can you talk us through your asset allocation, how do you identify investment candidates, perform due diligence and determine time and size to enter a position. What makes you exit an investment?

Mikael Tarnawski-Berlin: It ‘s fairly simple. I invest if I find investments that fulfill my criteria otherwise I keep cash. I have two main methods of identifying candidates. First, I have a list of good companies that I have analyzed and track. If a company’s stock price goes low enough compared to my estimated value I review it again. Another way is that I go through regions or industries that have short term problems and try to find good and cheap companies among those.

The fund is concentrated, we usually have 10-15 positions that we hold for many years. Given the high concentration the due diligence becomes very important and that is how I spend the majority of my time.

We sell positions either when the current price does not give us enough upside potential and downside protection or if we realize that our thesis is wrong.

HedgeNordic: How much “private equity” DNA is in your strategy given your previous role of working in a private equity firm?

Mikael Tarnawski-Berlin: Private equity investing and value investing are both based on fundamental analysis and long term focused, so my background has obviously helped. Stocks are part ownership of companies so if you can analyze companies you can analyze stocks.

HedgeNordic: Do you use any other instruments than equities, such as futures or options, and be it only for hedging purposes (other than currency hedges)?

Mikael Tarnawski-Berlin: We mainly invest in equities, but we have the mandate to invest in most instruments. An important part of the strategy is to be able to do investments that make sense from a risk reward perspective no matter what asset class it is. That said, I feel that my strength is analyzing companies so I would not do investments or instruments that were not related to a company analysis.

We have communicated two main restrictions in the fund. We do not use leverage and we do not take positions with unlimited downside. That’s a decision we took from a risk management perspective.

HedgeNordic: Doing your research and number crunching, you are bound to find companies you clearly see as being overvalued by your standards. Why do you not make use of the ability to short them?

Mikael Tarnawski-Berlin: Because I like sleeping at night. I don’t like the unlimited downside and capped upside in short selling. You need to adopt an investment strategy that fits your personality and temperament and short selling is just not something I would enjoy doing.

HedgeNordic: You hold a fairly large position in cash at most times, typically around 25%. What is the reason for that?

Mikael Tarnawski-Berlin: I do not have a target for the funds cash position. It’s just the result of the bottom-up investment approach. I would rather be 100% invested in great companies at cheap valuations but if I can’t find enough of those, I keep the rest in cash. Regarding your question about asset allocation, I actually think this is a fairly good method of deciding on how much of your fund is exposed to equities.

HedgeNordic: Pandium Global has fairly long lock up periods. Why do you need those?

Mikael Tarnawski-Berlin: The strategy requires being long-term. I have no idea what a stock will do next quarter but I have a view on how the company will perform a couple of years from now. Being long-term is actually one of the fund’s most important competitive advantages. The edge in being one of very few that care more about what happens to a company five years from now instead of next quarter is huge.

So the lock up is just a way making sure that I can pursue that strategy. If you ask me, it is probably not a good idea to invest in equities if you can’t commit your money for more than three years anyway.

HedgeNordic: What are the specific risk factors you see for an investor investing in your strategy in general, and Pandium Global in particular? Can you talk us through your risk management process?

Mikael Tarnawski-Berlin: Given how concentrated the fund is my first priority is to protect the downside. And by that I mean the risk of a permanent capital loss. The risk that the stock price will go down in the short term is not something I care about. Managing the risk is a key part of the investment process, from where I’m searching for ideas, to how I evaluate them and how I structure the portfolio.

I narrow my search to stable and simple industries and companies that I understand. Then when analyzing companies, I discard all that I perceive to have too high risk, be it from a financial, operational, legal or other perspective. And finally, I always try to invest with enough margin of safety in the valuation, making room for mistakes or bad luck.

For all the companies in the portfolio I map the individual risk exposures. Then I make sure that there is not too concentrated exposure to individual risk factors.  

HedgeNordic: You chose a fee structure that has your interests much aligned with that of investors, charging no fixed management fee but only a performance fee of 25% above the returns on the MSCI World index.  Can you elaborate as to why you chose that fee structure, and how you are paying bills?

Mikael Tarnawski-Berlin: I think that the fee structure combined with the fact that the owners and employees of Pandium have a combined investment in the fund representing 50% of the total asset creates a unique incentive structure where we share both the downside and upside with our investors. Also, given that it is all active managers job to beat their index it just felt reasonable to only start charging fees once we had accomplished that.

Regarding costs, we have a very well-funded management company and have covered the costs for at least 6-7 years. If that is not enough the owners of the management company are long-term and can support the company further.

HedgeNordic: You mentioned the fact that the largest part of managers fail to beat their index and launching your own vehicle only made sense if you could actually surpass benchmark performance. Can you share your thoughts on why you believe this is the case and what your edge is to be one of the rare group of managers that does succeed in beating the index consistently?

Mikael Tarnawski-Berlin: Of course, nothing is guaranteed. But what we’ve tried to do is to set up a fund with a strategy and structure that maximizes the probability of us beating the market. The first component is our long-term concentrated value strategy. The second is our incentive structure, which will always keep us on our toes. The third is our wide investment mandate that enables wise capital allocation and does not force us to hold overvalued companies, over diversify or prevents us from holding cash when needed.

Also, if track record is an indication, the strategy has so far beaten the index with c. 5% per annum since the start in 2011.

HedgeNordic: Can you share a piece of market wisdom with us?

Mikael Tarnawski-Berlin: My wisdom, if any, is related to individual companies and not the market. But I think it will fluctuate, to quote J.P Morgan.

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