Idea Brunch with Pontus Dackmo of Protean Funds
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Pontus Dackmo!
Pontus is currently the CEO and investment manager of Protean Funds, a Stockholm-based equity fund he founded in January 2022. Pontus has 20 years’ experience working professionally with Nordic Equities and previously worked in Institutional Equity Sales at SEB and was a portfolio manager at Nordea Asset Management.
Pontus, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Protean Funds?
Thanks for having me Edwin, it is a good format you have created here. I guess you could say I’m a pretty average middle-aged guy who just happens to have an unhealthy interest in Nordic equities. I live in Stockholm with my wife and three kids
As a typical insecure overachiever, I stumbled into equities as a junior institutional sales guy at a Nordic brokerage house in London back in 2005, ready to work hard. Fast forward a few years and I was lucky to have daily contact with some of the biggest and brightest investors of the day. Providing ideas and inputs to this eclectic mix of investors has shaped my philosophy, which, as an overarching theme, rests on versatility. Pitching a stock idea to a global long only with a 10-year view is something completely different from a fast-paced hedge fund or prop desk. I was also lucky to be naturally exposed to the Nordic countries, it’s four distinctly different local markets, but they share similar attributes such as relative political stability, a smattering of globally leading companies, vibrant equity markets and significant retail participation. I mean, you could pick worse markets to be exposed to. This is a bit of pet peeve for me: I think global investors to a higher degree should be looking at overweighting the Nordic countries. We have structural advantages that are not reflected in relative valuations and there are lots of undiscovered gems up here in the North.
Starting Protean Funds was really driven by necessity. After 18 years of advising clients, and a few years as a PM, managing money in an institutionalized way at a large asset manager, I wanted to put my own pattern recognition and philosophy to the test. The challenge was really that my own savings are not large enough to give access to all the tools you are used to as a large institution or sat at the desk of a big brokerage firm. The way I’ve learned to invest is by having a seat at the table with management teams, broker reports, analyst meetings and conferences. To enable that requires a bit of scale. So, I partnered with a wealthy gentleman and started a small family office outfit in 2021. It turned out I underestimated my network, however, because once that was up and running, several old clients and acquaintances expressed an interest in investing. I partnered with my old friend Carl Gustafsson and started the process of converting the family office to a fund management business. And here we are almost four year later, with good performance, two funds and close to USD 250m in assets under management.
Can you tell us a little more about your research and investment process?
One thing that is difficult to understand for a US or global investor is the benefit of having focused on a niche area for almost two decades. In the four Scandinavian countries, there are maybe 50 proper large caps in total, and say 200 midcaps, plus 500-600 small caps. Throughout the years we have accumulated a lot of knowledge about the various companies by sheer volume of exposure. This enables us to have a decent idea of the drivers, the end customers, the dynamics of different companies. And, crucially, it lowers the hurdle for making a decision when something changes. We are data point junkies here, we consume a lot of media, research, gossip and flow. We like to be in the middle of things.
I guess what I’m getting at is that there is no real easily definable process. Our interest can be triggered by lots of different inputs. And the cases are all different. We are equally happy to have long-term holdings in businesses we really believe in, as to take an intra-day trade when something is out of whack. Given the increasing influence of passive flows, the opportunities that arise from non-fundamental buying or selling are becoming more frequent.
We believe the big returns are made in the stock market by owning smaller companies that grow big over time. That is also what our attribution data shows: our biggest contributions to returns are from a handful of small and mid-caps that we have held since day one.
So, to summarize, we have a low hurdle for getting involved in something, but that is also reflected in our sizing in the portfolios. For something to enter at a 0.5-1% weight, it doesn’t exactly require a full essay and model. But for core ideas, getting to 3-4% of the fund, we park the research bus: meeting the company, often travelling to see their production or headquarters, desktop research, competitors, expert networks, other fund managers, analysts etc. We turn over a lot of stones.
What are some of the ways the Nordic equity market differs from the U.S. equity market? Do you feel U.S. investors have any misconceptions about the Nordic markets?
I think a key difference is that the number of companies is much smaller. As I mentioned earlier this means we have a decent idea of what most of them are up to at any given moment. It’s also tough to do any thematic investing here given the are not too many companies in any given sector. To generate sustainable returns, I think you need to be a pretty versatile generalist, and open for many types of ideas. I imagine a US investor can have a very niche strategy and still have new companies to look at every week, that’s not the case in a more limited market.
Another difference is that the companies that grow big here in the Nordics are forced to go international pretty early. The home markets are simply too small. Many of the biggest companies up here have less than a couple of percent exposure to the Nordics.
In past interviews you’ve mentioned that you typically meet with one or two companies every day. What are the red flags or positive signs you look for in these meetings?
There’s no rocket science to it really. Can they answer our questions about the business properly? Do they have a sensible approach to capital allocation? What do they choose to focus on in the meeting? Does their description of the business rhyme with what the numbers are telling us? One really off-putting thing is management where you get the feel they are in it for a quick buck, glossing over any weaknesses. Trust is an important part of judging the value of a management team in my view.
You’ve previously written about some of the performance problems in the investment management industry. What are the necessary ingredients for sustainable outperformance, and how are they embedded in your firm?
The way funds die is either from concentration, leverage or size. Most funds with talented managers and a good strategy generate the bulk of their outperformance in the early years. But as assets follow strong performance, the size eventually gets to them. It’s very hard to be active with a big fund. This is why one of our key points is we do not want to become too big. We have committed to hard closing the hedge fund at 200m USD and the small-cap long only fund at 400m USD, way before they become big enough to be difficult to manage.
The other point I would like to make is that fees often eat much of long-term performance. What the multi-managers are doing with feed-through fees on top of the 2 and 20 is ridiculous. We have a performance fee element on both of our funds, but the hurdles are challenging, and they should be challenging! In fact, on the topic of fees, we are about to launch a fund that is completely different compared to our existing niche strategies. Actively managed funds fail to beat the index over time because of high fees. When you start the year 1.5-2% behind the index, that drawback compounds over time. This is why most appear happy to buy cheap index funds and just get the market’s return. An index fund cannot, by definition, beat the index. But an actively managed fund can, and given low enough fees, should. I could go on about this for hours. I think there are so many sub-optimal structures out there. A small fund with experienced nerds and incentives that are not unnecessarily tilted to the manager should be able to outperform. It is telling that we have a lot of other fund managers investing with us in private. They see the same problems we do with funds and agree with how we are trying to solve them.