Idea Brunch with Diego B. Milano of Quercus Fund
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Diego B. Milano!
Diego is currently the chief investment officer of Quercus Fund, a global equity deep value fund he founded in December 2020. Before launching Quercus, Diego worked as a prop trader at Itaú and an equity analyst at GWI Asset Management and Gradus Management. The fund has returned 111% net of fees since inception, compared to 78% for the S&P 500.
Diego, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch the Quercus Fund?
Hi Edwin, thank you for having me. After more than a decade working in the corporate financial industry in Sao Paulo, I decided to live in the countryside of Portugal, have a more quiet life and be a full time investor, focusing on deep value global opportunities. A few years later, some of my friends and brothers asked me to invest part of their net worth, exactly the way I was investing mine. So I decided to launch a proper fund, independently audited and administered.
Your fee structure, 25% of the profits after a 6% hurdle rate, is similar to what Warren Buffett used in his original investment partnership rather than the standard hedge fund 2% management fee and 20% profit fee. Why do you opt for your fee structure rather than the conventional route? How else do you differ from traditional funds?
Since the fundholders are essentially my friends and family, I believe it is fair to only charge them anything if I am adding value. It didn’t seem right to charge management fees from them.
I think Quercus Fund is significantly different from most funds. The portfolio tends to be highly concentrated - 5 to 12 positions -, and holds no similarity to any index. Volatility is summarily ignored, and benchmarks are not really taken into consideration. Unless the investor is fully aware and comfortable with this philosophy, it can be a recipe for mutual disappointment.
Within this framework, risk is the probability of permanent loss of capital. This is paramount (and I did experience investments going to zero), because 1: essentially all my money is invested in the Fund, and 2: I would never put in jeopardy my personal relations (or their savings), which are much more important than money.
In your investor letters, you’ve mentioned using ChatGPT as a research aide. How are you using AI tools for investment research? Can you share any useful findings discovered through AI?
I would not say I have discovered any investment opportunity through AI. However, it can speed the research process, and lead to some interesting insights. The example I gave in my latest investor letter was related to the dominance of the leading noodles player in any single country. The market leader usually has more than 40% market share, with robust margins. That is true for Indonesia, South Korea, Japan, Vietnam, India, Egypt, Brazil... How come there is no competition from imports? After all, its value per ton is certainly high enough to allow seaborne trade. After a few iterations with ChatGPT, I came to the conclusion that its value per cubic meter is too low, rendering large scale, containerized international trade uneconomical.
AI allows a much faster understanding of most industries. On a day-to-day basis, it is much easier to find (ballpark) information than using Google. About anything (beware of hallucinations). However, for details, or when you don’t even know what you are looking for, raw data continues to be the way.
You have a pretty diverse and concentrated portfolio including, a Kazakhstan bank, a Chinese chemical company, and a French media company. How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?
In almost all cases my interest is in extremely undervalued securities. I can only find them in unconventional places (e.g. overlooked geographies, complex structures, distressed industries), and/or through unconventional behavior (e.g. equanimity with drawdowns, longer holding periods).
The informational and analytical edges were mostly eaten up by regulation and technology. Numbers and reports are available across the globe, at the same time, for everyone. AI is one more example of a tool that levels the informational and analytical fields.
We have to fish where the fish are. Securities that institutions would not touch and retail cannot access, a country where most people know little about, a hated industry in a so-called uninvestable country, a company which most analysts would have a hard time to find out even how many shares are outstanding…