Idea Brunch with Marc Werres of Hinde Group
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Marc Werres!
Marc is the founder and managing partner of Hinde Group, a San Francisco-based investment firm that manages a concentrated portfolio of publicly traded equities. Most of the Hinde Group’s investments are in the equities of great businesses that are out of favor, misunderstood, or underappreciated. Hinde Group also selectively invests in special situations. Since the firm’s inception in 2015 through September 30, Hinde Group’s portfolio has achieved a 330% return net of fees compared to a ~205% return for the S&P 500.
Editor’s note: We’d like to give a huge shout-out to Jacob Rowe! In the six weeks since his September 15 Idea Brunch interview Jacob’s stock pick, ASP Isotopes (NASDAQ: ASPI — $532 million), is now up ~188%. Well done, Jacob!
In addition, Sunday’s Idea Brunch is looking for new guests! If you know of a great, off-the-beaten-path investor we should interview please email us at edwin@585research.com or hit reply.
Marc, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Hinde Group?
Thanks for having me, Edwin. It’s my pleasure to be here.
To give you the full story, I have to take you all the way back to 1992 when I heard about how George Soros "broke the British pound," making over $1 billion in the process. I had just turned 11 years old and had only the vaguest understanding of what he had done. I actually pictured him filling up two suitcases with British pounds at a bank in London, hopping on a commercial flight to New York, and then heading into a grand bank with lots of pillars and marble to exchange the pounds into dollars and deposit the dollars. To close the trade, I figured he just did it all in reverse. Even though I didn’t have the details quite right, it was the coolest thing I had ever heard of – 30 years on, it is still pretty darn close to the top of the list – and it captured my imagination like nothing else ever had. My interest in markets and investing only grew from that point forward. I always knew that at some point I would start my own investment firm.
After graduating from NYU’s Stern School of Business in 2002, I started my career at Houlihan Lokey Howard & Zukin where I worked on a broad range of investment banking engagements, including creditor-side financial restructurings and sell-side distressed M&A. The restructuring business was going through its biggest-ever boom up until that point, with large and high-profile bankruptcies like Enron and Worldcom. I left Houlihan Lokey to join Vardon Capital, a consumer-focused long/short equity hedge fund. Vardon had about $250 million under management when I joined and peaked at around $750 million. I covered the retail sector for Vardon.
While my interest in investing and financial markets has always been as high as can be, my investment philosophy really only started to take shape over my time at Vardon Capital. Some things resonated with me and others didn’t. I am a fundamentally oriented value investor by nature. I view stocks as fractional ownership interests in businesses, not numbers or lines on a screen, and I’m naturally drawn to securities that are out of favor. Vardon was pretty trading-oriented; the founder came from Tudor Investments. I have no inherent desire to trade securities. I am not philosophically against trading, I just only rarely see sufficiently attractive opportunities in short-term trades. I’m completely indifferent to the “action” that comes from trading.
Vardon ran into trouble at the onset of the Global Financial Crisis. The handful of funds-of-funds who accounted for the vast majority of its assets all redeemed most or all of their capital at the end of 2007.
Leaving Vardon at the end of 2007 allowed me to evolve my approach to investing in the direction I felt was best suited for me. I put more of my focus on value-oriented special situations, like spin-offs, post-reorganization equities, rights offerings, etc.
A friend of mine who worked in equity research at the time was evolving in a similar direction. We shared investment ideas over the course of 2008 and 2009. We both had a good amount of success investing through that turbulent period. We ultimately decided to start a firm together.
We ran that firm together from 2010 until the end of 2014. While we generated good returns overall, we ended up having differences of opinion on individual investments and overall portfolio management. Differing views are healthy to some extent, but our differences left us holding around 40% of the portfolio in cash on average over time. We still delivered a double-digit compound annual return to our investors despite the large cash position, but both my partner and I felt we would each do better running our own firms. We split amicably at the end of 2014.
My investment philosophy continued to evolve over the course of running that firm. While I still loved great special situations, I came to appreciate that there are more securities with a special situation story than special situations that offered the risk-adjusted returns I was looking for. Focusing exclusively on special situations has its drawbacks. Some of my worst investments have been in companies that were spun-off without quite being ready for prime time. At the same time, I came to appreciate the merits of Munger-esque quality investing and saw it as an excellent complement to special situation investing.
My appreciation for quality investing came out of the biggest investment mistake I have ever made. In mid-2012, my former partner and I invested in Netflix after its stock collapsed amid the disruption to its business from the split of its hybrid service into separate streaming and DVD-by-mail services. We purchased a 20% position in NFLX near the lows (those interested can read what we wrote about it toward the end of this quarterly letter from back then). Viewing the investment through the special situation lens we used for all of our investments, we sold the position in 2013 for a gain of 150% or so. I then watched in horror and disgust over the ensuing decade as NFLX soared to more than 50-fold what we paid for it in 2012. Missing out nearly all of the potential gain in NFLX – despite having a deep appreciation for how great of a business it was poised to be – led me to reflect extensively on the experience in an effort to learn from it. I came to the conclusion that open-ended investments in high-quality companies can be a great approach to investing and a terrific complement to the most attractive special situation investments. The key is that you need distinct lenses to evaluate each type of investment. I missed out on a track record-making and life-changing profit in NFLX simply because I applied the wrong lens – a special situation lens, the only one I had at the time – to it.
Hinde Group is the firm I founded in 2015. The firm’s strategy reflects the evolution of my investment approach that I just walked you through. Most of the firm’s investments are in the publicly traded equities of great businesses that are out of favor, misunderstood, or underappreciated. In other words, there is still a value orientation to my style of quality investing. The firm also selectively invests in securities involved in event-driven special situations, such as spin-offs, restructurings, litigation, and mergers & acquisitions.
Nine years into running your own fund how has it been going? What have been some of the positive surprises or unexpected challenges so far?
I have been passionate about financial markets and investing since I was a kid. I love what I do, and running my own firm allows me to invest exactly how I think I should invest to be the most successful I can be over time. Life is not a dress rehearsal. It would be hard for me to feel I was being true to myself if I were doing anything else.
I’m proud of the returns the firm has achieved to date – 18.0% annualized net of fees since inception – and I am optimistic about what returns will look like going forward. A few of Hinde Group’s investor-partners were also early investors in the firm I previously ran with a partner. Those long-term investors are getting close to realizing a 10x return on their initial investment. I get a lot of satisfaction from rewarding the confidence that my investor-partners have placed in me over time, and I look forward to adding as many additional orders of magnitude to their capital as I can over the coming decades.
While I would love to have grown the firm more significantly than I have so far, I am confident the firm is poised for success over time. The question is only how quickly I can get there.
There are a lot of emerging manager long/short equity funds. What are some of the ways Hinde Group differentiates itself from the crowd?
Hinde Group is at the extreme end of the spectrum when it comes to investment time horizon. Some positions have been in the portfolio since the firm’s inception more than nine years ago. I have no plans to sell them. That long-term orientation applies not only to the holding period for individual investments but also to the time horizon over which the firm aims to deliver returns. Hinde Group does essentially nothing to influence its returns over a period shorter than two years. The vast majority of the firm's investment and portfolio management decisions are made with a much longer time frame in mind. Most other equity market investors face constraints that force them to actively try to deliver mark-to-market returns over the next year or quarter or even month. They might avoid a security that clearly offers attractive long-term returns because they are concerned "the bottom might not be in yet" or that "it might not work" over their investment time horizon.
I am a firm believer that the equity market operates as a Keynesian beauty contest due to the mismatch between the decades over which future dividends might be paid and the months over which most investors expect to realize their return. An investor can gain an advantage in the equity market simply from facing fewer and lesser constraints with respect to investment time horizon than other market participants. That is exactly what Hinde Group aims to do, and an important part of doing so is having investor-partners who are strongly aligned with the firm's long-term orientation.
Hinde Group also has its own unique ways of gathering, processing and analyzing information. While the firm's people, processes, tools, and partners are similar to those used by other firms, there are differences in both the individual components and how those components work together. Every investment firm is unique to an extent. Those differences might not seem all that significant individually, but collectively they add up and can create a distinct and sustainable advantage.
For example, Hinde Group has its own qualitative criteria – What Makes a Business Great? – that it applies to most of its investments. The firm uses alternative data and macroeconomic data more extensively and probably differently than many other firms with similar strategies. In addition to using certain expert transcript libraries, Hinde Group also engages proprietary consultants as part of its due diligence process. My experience and skills are at least to some extent unique relative to those of other investors. While those distinct characteristics may not seem all that significant individually, they add up and multiply when they are brought together to produce the firm's investment decisions and ultimately provide it with an advantage, in my view.
The combination of advantages from an unusually long-term orientation and an advantage from the firm’s unique ways of gathering, processing, and analyzing information is the foundation of how Hinde Group expects to outperform over the long term.
Your investor letters seem to emphasize a macro view of the world. Can you tell us a little about how you form your macro views and how it affects your stock selection?
I certainly appreciate how my investor letters could give someone that impression. The goal of the first section of my quarterly investor letters is to explain the factors that drove the change in the mark-to-market value of the portfolio during the quarter. Those factors are most often changing conditions in financial markets and the economy, not company-specific developments. That has been especially true since the onset of the pandemic, an unprecedented shock to the global economy in terms of both magnitude and abruptness.
That said, I do pay more attention to developments in financial markets and the economy than at least some of my peers. In addition to reading the financial press and certain economics-focused publications, I also review certain statistics on financial markets and the economy for two to three hours once a month. That analysis is in part inspired by what Howard Marks describes in his book, Mastering the Market Cycle. Marks sums up his view on how “macro” factors should fit into an investment process with the quote, “We may not know where we're going, but we sure as heck ought to know where we stand.” I feel the same way. I don't believe I have any ability to predict how the economy will perform, but I can tell you where GDP is relative to estimates of its potential, what the market expects the path of monetary policy to look like over the next two years and where credit spreads are relative to their historical distribution. All the economic and financial market statistics I look at provide incredibly helpful context for not only evaluating individual investments but also managing the overall portfolio.
I'll give you two examples, one historical and one current.
First, it was essential to understand how the composition of consumer spending in the economy between goods and services evolved over the course of the pandemic. At the onset of the pandemic, spending lurched away from services, like dining at restaurants and travel, to goods, especially home-related goods. Reviewing macroeconomic statistics on the composition of spending in the economy not only allowed me to monitor and better understand the evolution of those changes but also to appreciate how distorted the balance of spending between goods and services had become relative to long-term historical norms. While I could not predict what the "new normal" composition of spending would ultimately be nor when it would arrive, it was helpful just to know that demand for goods overall - and especially certain types of goods - in 2021 was potentially unsustainably high. That might sound like an obvious statement now, but I encourage you to pull up the stock chart of pretty much any retailer of home-related goods. You'll see a big run-up and subsequent crash in their stock price that suggests most market participants didn’t appreciate how unsustainable the demand those companies were seeing at the time was.
Second, one of the most significant macro-related distortions in the economy at the moment is the so-called "rate lock-in effect." Although the unemployment rate is just 4.1% and the average rate on a 30-year mortgage is now lower than it was for most of the '90s, the volume of existing home sales is plumbing the same depths it hit during the most acute moments of the Global Financial Crisis. The reason is that a significant portion of homeowners have a mortgage rate well below the current market rate, so those homeowners would face sharply higher mortgage payments if they were to sell their current home and move to a new one. Existing home sales drive other types of economic activity, like furniture and mattress sales. Any investor who is considering an investment in a furniture or mattress company would benefit from understanding that the company's current financial results reflect a level of demand depressed by the "rate lock-in effect." You could take the analysis further, quantify certain things and analyze different scenarios for mortgage rates, but I think it is safe to say that the analyst that simply understands the context of the impact of the rate lock-in effect on a given company is at an advantage over the analyst who doesn't pay any attention to what is going on in the overall economy or financial markets.
More generally, I find it helpful to have some historical context on the overall valuation of the equity market, including relative to interest rates. Most valuation approaches rely on some from of comparable market or transaction multiples. It is important to understand whether the comparable multiples you are looking at right now are likely to prove relatively high or low over time. That is especially true if your investment time horizon is long. The longer your investment time horizon, the more significantly financial market conditions may change over your holding period.