Hedge Fund Manager Interview Series - Ori Eyal

In November, we announced we would be conducting interviews with emerging hedge fund managers (defined as less than $250M in AUM) as a regular feature on the blog. It gives me great pleasure to bring you the second edition of those interviews.

Ori Eyal is the portfolio manager for Emerging Value Capital Management, a global value fund based in NYC with investments around the world. In a recent speech to students at NYU, he remarked "Most of my investing knowledge comes from studying Mr. Warren Buffett and his value investing philosophy." Since 2008, he has materially outperformed the S&P 500 and a comparable world index. This is a fantastic interview and we hope you enjoy it!

In addition, if you or the fund you work for would like to be interviewed for upcoming editions of the emerging manager series, please send me an email (hunter [at] distressed-debt-investing.com)

Tell us a little bit about your background and the people that influenced your investment style?

While I started out as a Computer Scientist, I was always interested in finance and economics. Around the year 2000 I read “The Essays of Warren Buffett” and became a value investing addict. Studying the writings of top value investors including Warren Buffett, Joel Greenblatt, and Seth Klarman has helped lay the foundations for my investment framework. The basic tenets of value investing make intuitive sense to me: buying something for less than its worth, investing within your circle of competence, demanding a large margin of safety, and the power of compounding over time.

Ever since, I have been on a journey to learn from the masters of value investing and to develop my global value investing framework. I earned my MBA at the University of Chicago’s Booth School of Business in 2006. I worked for Deutsche Bank as an analyst at one of their global investing funds. I also interned for several hedge funds, including Deephaven and Aquamarine.

In 2008, after a decade of developing and practicing my global value investing framework, I finally felt ready to launch my own fund, Emerging Value Capital Management (EVCM). EVCM is a long-biased global value fund. At EVCM, I strive to integrate my global value investing framework with the best practices and ideas from the value investors I have studied. My life savings are invested in EVCM fund so I “eat my own cooking.”

What were some takeaways from your experience with notable value investor Guy Spier?

I was very fortunate to work for Guy Spier at Aquamarine Fund while studying for my MBA. Guy Spier is an extremely talented and thoughtful investor who looks at the world as one global integrated market. Using his deep insights into how the world operates, and his latticework of mental models, Guy has been able to successfully identify and invest in some of the world’s greatest businesses.

At one point, Guy and I traveled to Israel together and we went to visit and research about 15 undiscovered companies in Israel. In some cases I think we were the first international investors that had ever visited them. Watching Guy interact with the management teams of these companies was a key learning event for me. He has the ability to quickly develop rapport with everyone in the room and get to the main business issues that each company faces. By the time the meeting is over, Guy has a better understanding of the business than the company management team does. Working for Guy helped me develop my global value investing framework. He taught me how to analyze great businesses and how to approach and interact with company management teams. He has been a great mentor, role model, and friend over the years. When I launched EVCM fund, Guy Spier was my biggest supporter and my first investor.

Zeke Ashton of Centaur Capital has also been a great mentor, teacher and friend. After I launched Emerging Value Capital, Zeke was kind enough to invite me to his office and has helped me further develop and refine my investment approach. Closely studying the fantastic investing framework that Zeke has developed as well as many of his specific investments, has been a tremendous learning experience for me. Particularly helpful has been studying Zeke’s excellent risk management framework and his covered call methodology.

I have also learned a lot (and continue to learn) from my interactions with great investors including Monish Pabrai, Whitney Tilson, Glenn Tongue, Mathew Richey, and Rick Reiss.

How do you balance "embracing short term volatility" and raising capital for a fund?

I don’t like volatility any more than other investors. However, I do recognize that some volatility is inevitable when investing in stocks. In general, all of my fund investors are disciplined, value oriented investors with a long term (multi-year) time horizon. Smart investors focus on the investing strategy and the logic and research behind the fund holdings while ignoring short term volatility in results. EVCM fund investors have earned a excellent return to date. Those that added capital when the fund had an occasional down month ended up earning fantastic returns.

You dedicate a substantial amount of your time and resources investing globally? Is that a function of the lower number of opportunities in the United States or more of sense that overseas markets are less efficient?

Even today, most value investing takes place in the U.S. and is applied to U.S. stocks. Having an international background, I became convinced that value investing can and should be applied to global markets. Therefore, one of the main tenets of my investment strategy at Emerging Value Fund is global value investing. I invest in various countries based on where I find the best investment opportunities. When I invest outside the U.S., I look for investment opportunities that are so attractive that they more than compensate me for bearing additional geo-political and macroeconomic risks. Portfolio construction is a bottom-up process driven by where I find the best investment opportunities at any given time. I don’t have a target allocation for any specific country. Rather, I keep my “idea radar” open for opportunities around the world in both developed and emerging countries. I search the world for the best investment opportunities and use them to construct the portfolio.

My favorite international investing theme is the growth in the number and in the wealth of emerging market consumers. It is one of the most powerful secular investment themes of which I am aware. As the emerging markets population urbanizes, it rapidly embraces capitalism, creates wealth for itself, and increases its purchasing power. To profit from this trend I seek to invest in businesses that sell to emerging market consumers. Willi-Food (discussed below) is an example of a company that is well positioned to benefit from this long term trend.

There are a few key benefits that EVCM fund expects to gain from global investing. These are currency diversification, exposure to emerging markets consumers, a larger investment opportunity set (more stocks and bonds to choose from) and less efficient asset prices (more mispriced assets to invest in). The Euro, the U.S. Dollar, the British Pound, and the Japanese Yen all face severe problems, making it difficult to determine which developed market currency is “the worst.” In general, I think that emerging market and commodity based currencies are likely to appreciate over time versus developed market currencies. Global investing allows me to diversify EVCM fund’s exposures between developed market currencies and, when possible, to shift our exposure from developed to emerging market currencies. In the best of cases, I can find investments in emerging markets where I expect to make a strong return both from the asset itself and from the local currency appreciating over time.

One of your main investment types is dubbed "Great Business at a Good Price" - can you give us an example or two today that would meet this criteria?

When evaluating potential investment opportunities, it helps to have a detailed framework or mental models for thinking about investing. My model tries to categorize investment opportunities into 4 different types:

• Great business at a good price
• Cheap Growth
• Special situation
• Global Macro

Obviously, real world investment situations are complex and don’t always exactly fit these models.

A good example of a current EVCM fund investment is Carrefour, the French retailer. It is the second largest retailer in the world, with operations in France, Spain, China, and Brazil. It is a great business, with a long history of profitability, and dividends, a strong balance sheet, a wide economic moat, and a recession resistant business model. At the same time, it is also a special situation investment. New management was instituted in 2007 by Colony Capital and Bernard Arnault and they are working hard to increase efficiency and cut costs. Also, there is a good chance they will spin off Carrefour’s significant real-estate assets into a separately listed company. I see a potential 50%+ upside when either of these 2 initiatives work out.

Do you prefer special situation investing? Where are you seeing the most opportunities amongst your various investment strategies?

Special situation investing is an attractive strategy that can provide high returns that are less correlated to the general market movement. Special situation also tend to have catalysts which unlock value when they occur. Having catalysts helps prevent the situation where you invest in an undervalued company and it remains undervalued for a long time. So yes, I like special situation, but I also like my other investment categories (great business, cheap growth, and global macro).

If you had to pick one investment today, that you had to hold for 10 years, what would it be?

That is a difficult question. The world today is changing at an accelerating rate which leads to the rapid erosion of economic moats. If forced to choose, I would pick Nestle which I believe is the world’s greatest business. Nestle is the world's leading food manufacturer with operations in more than 70 countries and with products in coffee, bottled water, milk and dietetics, prepared dishes, pet food, chocolate & confectionery and pharmaceuticals. Its brands include: Nescafe, Nestea, Nespresso, Carnation, Coffee Mate, Hot Pockets, Lean Cuisine, Kit-Kat, Dreyer’s Ice Cream, Eddy’s Ice Cream, Gerber baby food, Purina, Dog Chow and Friskies dog food. In addition, Nestle itself is an umbrella brand signifying quality and great taste to consumers around the world.

Nestle has excellent long term growth opportunities in emerging markets as the rising middle class shifts its discretionary spending to Nestlé’s brands.

I think Nestle is a safe way to invest in the growth of both developed and emerging market consumers and I expect that it will be larger, more dominant and more profitable 10 years from now.

Favorite long / short today? Reasons?

G. Willi-Food International (Nasdaq: WILC) is one of Israel's largest food importers with a focus on the Kosher and Health-Food segments. WILC designs, imports, manufactures, markets and distributes more than 1,000 food products. Products are sourced from 200+ suppliers throughout the world to more than 2,000 customers in Israel including all the major Israeli food retailers, wholesalers, and the Israeli defense forces. Imported products include: canned vegetables, fruits, pickles, canned fish, bakery products, lemon juice, high-quality oils, dried fruit, nuts, pasta, halva, coffee creamer, snacks, dairy products, noodles, and more. The Company adds 40-60 new products to its offerings each year.

In many cases, Willi-Food works with global food manufacturers to re-engineer both the food contents and the production lines into a kosher end-product. This end product is then imported and distributed in Israel under the Willi-Food brand. All Willi-Food products are certified Kosher according to strict rabbinical authorities, which positions Willi-Food as a strong competitor in the lucrative kosher products market. Although most of the Company’s products are sold under its own brand, Willi-Food distributes a variety of items from world-leading manufacturers, such as Completa coffee whitener (Netherlands), Zanetti cheese (Italy), Breda butter (Netherlands), Nobleza Gaucha Yerba Mate tea (Argentina), Lurpak “spreadable” butter (Denmark) and Arla Foods dairy products (Denmark). In addition, Will-Food provides some products on a private label basis.

While 80% of revenue is from Israel, the company's activities extend beyond importing into the Israeli market. Willi-Food distributes its products in both the USA and Europe and is actively working on expanding its sales in these and other international markets. The kosher food market is estimated to be over $14B/ year in the USA alone. It is growing at 15% per year and is underserved with few branded kosher products. Among others, kosher products appeal to Jews, Muslims, and Health conscious consumers. Willi-Food is actively targeting this huge international market and any success here could dramatically increase the company’s revenues and profits.

WILC is owned and managed by the Williger brothers who co-founded the company. They are conservative managers that have done a good job at slowly and steadily growing shareholder value. Under their management, revenue has grown from $30M in 1999 to $120M in 2010 while net income has grown from $1.8M in 1999 to $8M in 2010. I visited the company in Israel and I was favorably impressed by what I saw.

WILC’s market cap is $88M. The company has about half its market cap in net cash and is looking to deploy this cash to acquire a US distributor. Net of cash, WILC trades at 5X 2010 earnings, a cheap price for a profitable, growing, recession resistant business with strong competitive advantages (brand, distribution, kosher know-how, global supplier network), a team of experienced and proven owner-managers, and with an attractive growth runway (global kosher food market).

What is the greatest piece of investment advice you like to adhere to in managing a portfolio on a day-to-day basis?

The key to long-term wealth creation is not earning high returns. Rather, it is earning good returns while avoiding (or minimizing) the blow-ups. The biggest mistake that investors make is not investing in a conservative enough manner. The world is a dangerous place for capital. Inflation, expropriation, revolution, currency devaluation, industry declines, wars, natural disasters, depressions, market meltdowns, black swans, theft, fraud, and taxes all pose a constant and lurking threat to growing (or even just maintaining) wealth over time. In any given year, the probability of disaster is small. But over many years and decades anything that can go wrong eventually will.

As long as we can stay in the game, the long-term power of compounding will work in our favor. A 10% real annual return will multiply our money over 117 times in 50 years. But having even one single year with catastrophic losses undoes years of great performance. Simply put, the key to amassing wealth over time is avoiding catastrophic losses and never having to start over from scratch. When things go wrong, we can avoid catastrophic losses only by investing conservatively and without leverage. Conservative investing is like insurance—it seems like a waste of money until something bad happens and then you are glad to have it.

I see funds that use leverage (either at the portfolio level or by investing in highly levered companies), and I see funds that are too concentrated. Over the long run, leverage and excessive concentration usually end badly.