Philip J. Kiernan Jr. and Eckart Weeck discuss the basic investment strategy of Highlander Capital Management, LCC and how it differs from other firms.

 

Transcription:

Phil: Hello, this is Phil Kiernan, and on behalf of myself and Eckart Weeck, we’d like to welcome you to the Highlander Capital Management LLC Premiere podcast.

We’d like to remind you that this interview featured in this episode has been recorded in the past. Any investment theses, data, and other important information discussed has likely changed since the recording date, and should not be relied upon. The content of this podcast is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Of course, past performance is no guarantee of future results.

With that, I’d like to introduce Eckart Weeck, senior managing director, and start off with your basic investment philosophy.

Eckart: Well, I mean, we are considered, I guess, value investors, is what … Is how you would lump us in. What that really means is that we pay a lot of attention to business value and the cash generating characteristics of a business. You won’t find us in a lot of stocks that are fashionable, necessarily. Often they’re very high priced, relative to their earnings or cash generating capabilities. We approach buying shares of publicly traded companies much like we would buy individual businesses that an individual would buy when he’s looking at a car dealership or a restaurant or something like that. It really has to do with how much cash that business generates and the price that it’s being offered at.

Phil: How would you describe your investment approach?

Eckart: Well, we do spend, as I said a moment ago, a lot of time looking at the cash turning attributes of a business, but also the value of it’s brands, the durability of the franchise. Typically they … Management. How they allocated capital. That means whether they … If their shares are cheap, do they spend time re-purchasing the shares when they’re cheap? When they buy other businesses, do they buy businesses that make sense for them to buy? They’ll buy businesses that are not vanity projects, but ones that really enhance the overall value of their business.

When you can check all those boxes: a management that is good at allocating capital, a brand that’s very durable, and a price that is favorable, typically, we’re interested.

Phil: It’s pretty safe to say that you’re not a cookie cutter type approach, or certainly not a robo-office advisor?

Eckart: No. As I said, we’ve been doing this for quite a long time. We know a lot of businesses. We know a lot of industries. We know the characteristics of those businesses. We also know a lot of the managements, typically the people that are running companies that have been around for quite a long time and have had a history with other publicly traded companies.
Frequently events will occur, whether they’re macro-events or industry-specific events, that will have an effect on stock prices, and a lot of our homework is already done. When the prices reach a level where there’s a very reasonably high probability that we can earn a good return, we’re buyers. That also means that typically there’s a margin of safety there, and we’re buying a dollar’s worth of assets or a dollar’s worth of business value for sixty, sixty-five cents. If you do that often enough, you’ll typically have a favorable outcome.

Phil: Common concern of an investors is an advisor selling them an annuity or a handful of mutual funds, and then they never hear from them again. How would you rate your client communications?

Eckart: We correspond regularly with the clients either through an annual letter, or we lay out in fairly, fairly decent detail what we’ve been doing throughout the year. What we’re invested in. Why we’re invested in it. There is a roadmap of those letters going back for fifteen years on our website, Www.highlanderreport.com, and people can compare our results against what we said at the time.

Another thing that might be a little bit different in terms of what we do, is that when you invest your money with us, you’re able to speak directly to the person who is managing the money, and inquire about various positions, whether it’s a fixed income position or a position in a particular stock. We’re not outsourcing any of our investment management. It’s all done internally, and it’s transparent, at least as far as the client is concerned.

Phil: We also produce a quarterly newsletter called “The Highlander Report”, which is archived on the website.

Here on Highlander Capital Management we’re not formula based, we’re not cookie cutter. This is certainly not a robo-advisor office that automatically plugs people into so called investment models. We’re comfortable holding cash in the absence of attractive investment opportunities. With that being said, how is this different from the approach practiced by many of our competitors?

Eckart: Well, as you indicated I think a lot of financial advisors outsource the actual money management to a managed account platform or a program that the firm itself has developed. What they typically do is fully invest the money according to a model, and then they periodically tweak it. Tweaking is really … It’s the sale that typically involves the sale of a security whose short-term performance has been poor in favor of a security or fund whose short-term performance has been good. Effectively what they’re doing is they’re selling low and buying high. It might make you feel good to own something that happens to be popular at the moment, but you’re certainly not buying it cheap by doing that.

The other thing that a program like that typically entails is it results in multiple layers of fees. One for the firm, one for the advisor, one for the manager, and that can very often add up to, in some cases, three percent annually for the clients.

Phil: Tell us about one of the more difficult markets in which you’ve managed investment funds, and how it turned out?

Eckart: Well, I’m going to turn that on its head a little bit. I think the easier markets to invest in are those where the prices have come down sharply across a broad spectrum of industries and stocks. That’s kind of what we had in late 2008 and early 2009 where prices were universally depressed, and you could buy lots of stocks at exceptionally attractive prices. Even a lot of fixed income bonds for solid companies were yielding double digits. Those investments, in some cases, have returned four or five times their purchase price.

As for difficult markets, I would say that late last year and much of 2015 has been difficult because prices are pretty elevated due to the low level of interest rates. Finding bargains has been difficult. This is changing a little bit with some of the volatility and some of the sell offs. That’s where we’re more comfortable is buying bargains when things are cheap.

Phil: You’ve been managing for over thirty years now. Give me an example of some of the types of clients that you’ve managed money for.

Eckart: It’s a wide variety of clients. Some of them are university endowments. Some insurance companies. People in the sports and entertainment industry. Many of them in highly successful entrepreneurs in a variety of industries. Business owners who are very comfortable with our approach because the manage businesses and they see what we’re doing, which is essentially investing in businesses at attractive prices. Rather than being just little flickering symbols on a computer screen, they understand that there’s a business behind it.

Phil: So, Eckart, for the last six to seven years the Federal Reserve has maintained ZIRP, which is a zero interest policy, and that’s certainly affected savers as well as retirees who need their portfolios to generate regular income for them. How do you address that in your client base?

Eckart: You’re right. It is a very large problem for savers, particularly retirees, and the one thing that you don’t want to do is … We refer to it as chasing yield. You have a lot of people that invested recently into Puerto Rican bonds, by way of example, because they were yielding seven percent, eight percent, triple tax free, et cetera. Many of those bonds are likely to default and are trading at levels that are sixty, sixty-five cents on the dollar.

We have invested for people that are looking for income in a variety of vehicles: preferred stocks, corporate bonds, things of that nature, relatively limited duration, not too far. Typically investors can expect a yield on those types of instruments in the five to seven percent range without an awful lot of risk. Now, when you’re buying corporate bonds there’s a risk associated with them because they’re not guaranteed, but the portfolios that we design are widely diversified, and we’ve done pretty well with them.

Phil: What would you say to senior citizens or retirees who look in their bond portfolios and they see that they own bonds, but that the durations are fifteen, twenty years out, which is the exact opposite of what you’re doing?

Eckart: Very often people are invested in bonds through funds, mutual funds or ETFs of some kind or another. Those funds, in order to attract money typically buy the longest dated securities that offer the highest yields. Now, that presents a picture of a very high initial yield, but it comes with a lot of risk in terms of what we referred to before, duration. If and when interest rates go up again, the principal value of those funds is likely to come down sharply because the maturities in the underlying bonds are quite long. We’re trying to limit ourselves to maturities in the short and intermediate range, five to ten years. Even if rates were to go up, the effect on the bonds themselves is not going to be anything like a twenty-five or thirty year bond.

Phil: Like to thank Eckart Week for his market commentary, and also remind everybody that they can visit our website, www.highlanderreport.com, for not only future podcasts, but also to see our quarterly newsletters and our annual shareholder letters. Thanks again.