John Heffern, Founder, KCA/Princeton Advisors
John A. Heffern is Principal and Founder of KCA/Princeton Advisors, LLC. His career includes nearly 30 years of senior level portfolio management and equity research mandates. He leverages a deep background in financial services for investment selection across a wide expanse of companies, themes, and factors. The fund follows a qualitatively oriented process in portfolio construction that is unique in the industry.
In this 4,239 word interview, exclusively in the Wall Street Transcript, the long/short hedge fund manager John Heffern details his investing philosophy and current portfolio positions.
“I would assert that we really are unique in terms of our overarching investment philosophy.
And in the way the world is developing these days in the investment industry, I think we’re increasingly unique. And what I mean by that is that investment management firms and strategies have rapidly evolved in quantitative directions.
We’re unabashedly qualitative in our investment foundation.
We really do believe strongly that people with the right skills and philosophies and incentives are the last mile of execution and risk management, and that’s where we start. We start with the people, and that’s also where we end.
And we hand-select our investments based on our confidence in management, the underlying franchises of the businesses, their operating and governance philosophies. And so we favor long-term reliability over the allure of short-term momentum.
In this way, corporate governance matters in a broad sense that captures strategy, risk, incentives, aspirations, predictability, and reliability.
Given our focus on financial services, we invest in capital-intensive, highly regulated sectors and companies. And you can’t escape the importance of people and culture.
So as the world evolves toward quantitative momentum and artificial intelligence, we know that people are still key, particularly in regulated companies. And that’s where our focus and our experience come together and create a unique advantage.”
The long/short hedge fund portfolio positions are unique as well.
“…In my opinion and based on observations I get from bank managements who I talk to — is yes.
Many, many small businesses initially went perhaps to their core bank relationship with a larger bank. They were disappointed with the service level and the speed and ease of reaction in terms of having their loans underwritten and funded in a seamless way.
So they then turned to smaller local banks in their communities, which responded very quickly and very efficiently. And I think that has generated goodwill which has resulted in relationships moving from larger banks to smaller banks, certainly, at the margin.
I’m not going to say there’s been a groundswell of market share shift from the biggest banks in the country to the smallest banks in the country.
But I do think what we saw and continue to see in the pandemic — from a service perspective — is something that re-emphasizes the use case for community banking and regional banking in America. Now, that’s in the near term.
And the duration of that feeling of goodwill is something that we will only fully understand as we progress through time.
To be fair around all of this, there remain significant structural changes that are occurring in a society that’s becoming more digitally oriented. And those pressures on small banks versus large banks will continue unabated.
This is to say that the very large banks have the wherewithal to invest hundreds of millions of dollars, even billions of dollars, in technology innovation that we’re all seeking.
That ultimately drives market share in their direction. Those pressures will not go away.
But as I said, in the short term, from a pure service point of view at a time of great need, the use case for community banking was re-emphasized during the pandemic.”
The long/short hedge fund portfolio manager is devoting his money to this fundamental economic position.
“I want to go back and re-emphasize the qualitative aspect of our investment process.
We are very focused on management teams, their franchises, and conversations with those teams about how they’re running their banks, their governance priorities, and their perspective on opportunities and challenges going forward.
We also think, as we mentioned, that there will be consolidation — more M&A.
And in the space of community and regional banking, you can benefit both ways.
You can own buyers of other banks in accretive transactions, and you can own banks that sell for premiums.
Our approach has been to pursue a basket of favored investments in a community bank space. And just to name two or three: Atlantic Union Bankshares in Virginia (NASDAQ:AUB); Prosperity Bancshares in Texas (NYSE:PB); Peoples Bancorp in Ohio (NASDAQ:PEBO); and even a tiny bank, which very few investors would have heard of that we’ve owned for some time, Oak Valley Bancorp, out in California (NASDAQ:OVLY).
Banks like these operate all over the country.
They tend not to get Wall Street attention. And we like that. We do our work independently. We like the management teams in each of these companies. And we think that we have optionality either on the buying side or the selling side wrapped in very strong fundamentals and appealing valuations.
So we’ve taken a basket approach with these companies.
We are very happy with the performance we’ve seen from all of them through the pandemic and the outlooks we’re hearing from management as we enter 2021 and progress toward 2022.”
Another side of the long/short hedge fund portfolio are larger capitalization financial institutions.
“We think there is an opportunity on the turnaround side for companies that are cheap, where there has been significant management and cultural change and where valuations remain significantly discounted.
And that for us includes Deutsche Bank (NYSE:DB), which after years and years of regulatory and compliance errors, has embarked on a significant improvement in enterprise risk management and cost efficiency under a new CEO who arrived a couple of years ago.
We think the company has made great progress.
It will continue to make significant progress not just on the cost side, but on the revenue side.
And the shares are trading at a dramatic discount to its peers and to the group generally — well less than 50% of tangible book value.
So if Deutsche Bank can deliver on its financial goals and aspirations over the next year or two, we think the shares have 50% to even 100% upside.”
Get all the top picks and positions in the long/short hedge fund by reading the entire 4,239 word interview with John Heffern, exclusively in the Wall Street Transcript.
John A. Heffern, Founder, KCA/Princeton Advisors, LLC
www.kcaprinceton.com
email: jaheffern@kcaconsult.com
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