Mr. Wenzler: Rick Lane and Glenn Primack originally worked at Fiduciary Management back in the late 1990s, managing the FMI Focus Fund. Rick and Glenn started Broadview Advisors in May 2001 and continue to subadvise the FMI Focus Fund. The FMI Focus Fund is predominantly a small to mid-cap portfolio. We also manage separate accounts for institutions. The rest of the firm has been built out over the last six years with the people who we just mentioned - Aaron Garcia, Rick Whiting, Faraz Farzam, Paul Baures, Owen Hill, Ethan Hill - and we've had no turnover in the firm. That's the brief background.
TWST: Tell us about your investment philosophy and your style of investing.
Mr. Lane: On the historical side of our firm, on December 16 this year, we will
enjoy the 13th anniversary of the FMI Focus Fund, so it's been through a number
of cycles now. I will break it into a couple of different pieces. From a
philosophical standpoint we consider ourselves opportunistic investors. I am
always reminded of Warren Buffett's famous saying, "growth and value are joined
at the hip." As you know, there is a tremendous focus on the part of consultants
in our industry to put you in either the growth or the value categories.
We consider ourselves to bridge both of those camps in that we look for good,
well-managed companies that are selling at bargain prices. We spend a lot of
time looking at private market value; we want to buy companies at a fairly
substantial discount, perhaps 20%, 25%, often much more than that, but that
offer good, two- to three-year earnings growth prospects. That's like wanting to
have your cake and eat it too.
Here is how we are typically able to find companies that are selling at bargain
prices and yet offer strong earnings growth potential. Typically, our
investments would fall into one of three camps. One would be undiscovered
opportunities, and this is perhaps the easiest group to understand what we are
trying to find. Here a typical company would be one that is either underfollowed
or is going through an overlooked change; perhaps it could be an IPO, perhaps it
could be a spinoff, perhaps it could be a restructuring where the fundamentals
of the company are either strong and not seen by investors for, let's say, lack
of Wall Street sponsorship or the company's going through some major change that
investors have not understood. The second category would be strong franchises
that are currently either misunderstood or out of favor, thereby allowing you to
buy a good, well-managed company at a bargain price. The third group would be
cyclicals, where you would have a company that is simply going through the
bottom of its particular cycle and has been overly depressed and as you
anticipate an improvement in either their particular industry or the economy as
a whole, you get an opportunity to buy good companies at really depressed prices
because investors tend to overreact on the downside. So those would be the three
areas where we typically find bargain prices and yet companies that offer good
two- to three-year earnings per share growth.
The companies that we evaluate go through our rigorous five pillar process.
Those five pillars are first, a discount to private market value. We maintain a
database by industry and then get down to the company level of transactions, so
we keep track of what private market values are that would be pertinent to the
companies that we're analyzing.
Second, there has to be attractive growth potential. This gets back to that
bridging of the value world to the growth world in that though we are picky
bargain hunters, at heart we still need to see strong earnings growth potential
or we are not going to invest in that company, because earnings do drive stock
prices. So we need to come up with a pretty strong thesis that shows us how this
particular company is going to have strong earnings per share growth.
The third pillar is a defendable market niche. Another way to think about that
is, again to use Warren Buffett's phraseology, we want to invest in companies
that have wide moats around their businesses. Another way to think about that is
that those companies occupy a strategic position within an industry that other
players in that industry would covet, and so if the management doesn't deliver,
often your downside is protected because that company could get acquired by one
of the industry players.
The fourth pillar is that we do think a lot about cycles. Every company in every
industry has its own unique cycle. It took a lot of years for us to really
understand that subtlety and we try to understand where a company is in a
particular cycle such that we are investing new money in the early part of that
industry cycle. For years, people thought Cisco was just a one-direction growth
stock and the Internet bubble laid waste to that claim. That was just a reminder
that even companies with the strongest growth prospects are subject to industry
cycles, and we try to understand that so that we can invest in the earlier
stages of that cycle and perhaps harvest our investments in the latter parts of
that cycle.
The fifth pillar is that we engage management. This is very important. We spend
a lot of time getting to know our managements and we want to see managements
completely aligned with investors' interests through a number of different ways,
one of which is we want management owning a lot of the stock. It is always a
balancing act between equity ownership on the part of management and current
compensation, and we spend a lot of time thinking about that, so that management
is truly aligned with investors' interests. That's not always the case. In fact,
very often it's not the case these days. So we spend a lot of time thinking
about that and measuring the effectiveness of managements. We write letters to
the Boards of Directors if we don't like a compensation plan, or if that
compensation plan perhaps changes during our ownership to something that we
don't buy into, we will be actively engaged with Boards of Directors. We are not
activist investors per se. We are passive investors.
Those are the five principal pillars. There are sub-criteria. We like to see
double-digit operating margins; we like to see high return on invested capital
and other aspects that show that a business is a good profitable growing
business. And, again, we are trying to buy those types of companies at the
bargain basement, which again pertains to typically the undiscovered
opportunities, strong franchises and cycles. That is our philosophy and
strategy.
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