Interesting conversation with Geoff Oldfield, the founder of Ennismore Fund Management. He set up the firm with Gerhard Schöningh in 1998 to invest primarily in smaller capitalisation European companies. The European fund has returned ~12.5% p.a. since inception, with no leverage and average net exposure below 50%. In 2016, the firm also launched a global equity fund.
He spoke with Jeremy McKeown of Progressive Equity Research about his journey into investing, the key principles of Ennismore, some of the lessons learned over time, and the future plans for the firm. Some of my notes from the interview are included below. These are for personal reference only and not intended as a comprehensive transcript; any mistakes are my own.
On his journey into investing: he came into investing relatively late in his career. He was trained as a credit analyst, and for many years he thought it was a lot better to be a debt provider than an equity provider, as he liked the security of being able to get his money back. He started out in 1984, working in a receiverships role for Midland Bank. That was an instrumental experience in seeing what could go wrong with businesses and how you get your money back. He later worked in an internal audit role at the merchant bank Samuel Montagu, which sparked his interest in learning about businesses. In that role, they audited many parts of the group, and he spent time in Japan, Australia etc. doing site visits to the group’s different business. One business that really stuck out to him was their private client stockbroking business. Auditing them was a lightbulb moment for him, and he found it fascinating they were analyzing real companies, meeting the management teams, and ultimately trying to assess whether they were good investments or not.
He then managed to worm his way to the investment side at Midland Montagu Asset Management. He started out with them in a marketing and sales job in 1987. His job there was to sell the star portfolio managers at the firm and he got a lot of experience cold calling and handholding clients. He knew he wanted to get onto the investment side, but back then it was very much about did you know the right people, did you have the right background etc. He definitely did not have the right connections or academic background, with a 2:2 from Loughborough University. But then, as luck would have it, one of the guys on the European small cap team left, so he joined that team and they gave him a tiny fund to run pretty much straight away.
On starting Ennismore: he has always had this approach that if you are not settled in a job, then don’t just put up with it, keep moving until you find the thing that is right for you. That was an unusual career mindset at the time. He joined Gartmore in 1992 and although he was given quite a large fund to run, he did not like the macro angle of the work he had to do. He found it a distraction from what he wanted to do, which was just to find good companies. So he left the buy side to join Enskilda in Frankfurt, and that is where he first worked with Gerhard Schöningh. There, they were researching and broking German small cap stocks back to the UK. They worked at Enskilda for about 3 years and then they joined Baring Asset Management at the start of 1995. They were about to be given a large co-mingled fund where they would just be running internal money and no one would have heard of them. But then Barings went bankrupt thanks to Nick Leeson and the firm had client outflows, so they were instead given a small unit trust, the Europe Select Trust, to run. They had 3 great years of performing very well and that gave them the platform to leave and set up Ennismore. They didn’t intend to leave but were frustrated due to institutional pressures (pushing them to raise more money, which they saw as detrimental to performance), and because the remuneration they were initially promised was not honored.
On the key principles of Ennismore: The main one is performance over asset gathering. They have a multi-manager system. They don’t want any one person running the whole fund, so they typically have between 3-5 PMs running the fund. One feature they introduced was a clawback. Say one PM is up 20%, the other is down 20% and they are running the money 50/50. There is no performance for the clients so there is no performance fee. But the PM that is up 20% is expecting, rightly in his view, to be paid for that performance. They would then claw the money back from the PM who has lost money and put that into the pot, which enables them to pay the PM who has made money. As a result, their remuneration system is very transparent and meritocratic. People manage a discrete portfolio and they can have a share of the management fee, but also earn a share of the performance fee (up to ~85% of the performance fee if they generate a very good return on capital).
On the firm’s culture: the main attraction is that they can genuinely think long-term. The company is completely internally owned, and a reasonably high percentage of the assets under management is internal money. So people know the money is there and are aligned with their way of thinking, which is to invest for the long-term and with a margin of safety. PMs also have an enormous amount of freedom, almost the opposite of the pod shop approach these days. They are also very risk averse in that they have never used any gearing. The approach either appeals to a certain type of person or not.
On their absolute return focus: they believe very strongly that each individual position, long or short, should stand its own merit. They do not like to do baskets or pair trades, just individual names. On the short side, they are looking for almost the exact opposite of what they are looking for in a long position. So, for example, a company with a weak competitive position that is overexposed to a few customers that have a very strong negotiation position, low barriers to entry etc. The difference with shorts is they can hurt a lot if you get them wrong, so they mitigate that by making the weighting of a short a lot smaller than that of a long. But the key is that every PM (they have 7 across the two strategies) genuinely enjoys the shorting side. They short primarily to make money, but the secondary benefit is that it provides a hedge if markets correct significantly. On average, their long/short spread has, since inception, added value of ~20% a year over a 24 year period.
On defining quality companies and valuation: he defines a quality company as one that can generate a high and sustainable return on its capital employed. If you look at the P&L, you want a decent operating margin. If you look at the balance sheet, you want a relatively small balance sheet in terms of the operating assets. You put the two together and you are going to get a deluge of cash. In terms of valuation, they use a wide range of measures, but he particularly likes EV/NOPAT, which factors in the gearing of a company. His basic principle is that a stock needs to be knocking you over the head that it is mispriced, rather than requiring a complex valuation exercise (i.e., “it is better to be roughly right than precisely wrong”).
On the lessons learnt from market crises: they were down just under 6% in 2008, but did not bounce back with the market in 2009. What happened was that when the world was in crisis in 2008, a lot of their clients had got themselves in lock up situations with other funds, whereas their UCITS fund offered daily dealing and their hedge fund offered monthly dealing (both structures were set up day one and run exactly the same way with the same fee scale). He has become more convinced over time about the importance of offering very liquid terms to clients, as it creates a really good discipline all round. But that did not work in their favour back then, because a lot of their hedge fund clients used them as a cash machine, and that meant that coming into 2009, they weren’t able to invest with the confidence they would have liked because they were shaken by the redemptions. Currently, however, more than two-thirds of their external clients in the European fund have been with them for >20 years, so if there is another big market correction, he is more confident they would be able to exploit it.
On their edge: one is the ability to think long-term, and he thinks that advantage is actually increasing as market participants have become increasingly short-term over time. Another significant advantage is fishing in the right pond. The way he thinks about it is that you have got a lot incredibly clever people focused on large companies, doing incredibly detailed spreadsheets and trying to gain an edge. So you want to look somewhere less crowded. His partner Gerhard has a saying that investing in small caps is just like taking candy from kids. You just walk past, grab the candy, and eat it.
On why they launched a global fund strategy: it was launched in 2016 with one of their senior PMs being instrumental in wanting to launch it. He had developed quite an interest on the shorting side looking for fraudulent shorts, and as a result of the work he did on European companies, he found himself working a lot on US businesses. They had a decision about whether to keep him or let him go set up on his own, and they thought it made sense to set up the fund with him leading it. The strategy is focused on developed markets and investing in slightly larger companies, to avoid treading on the toes of the European fund.
On his return to managing money: he was semi-retired from ~2010-2020. But he started running money again in 2020 and then became the senior PM of the global fund in August of 2022, after it had run into substantial troubles in 2020. He enjoys the freedom to invest globally and discover all sorts of interesting companies. They are still finding a lot of ideas in Europe, but also in the US, Japan and selectively in the rest of Asia (e.g. HK, the Philippines). Covid-19 was a tough period for them, and it was in part the meme madness that caused the trouble for them. The fund was down -21% in 2020. They did a detailed internal review after that period and the bottom line was that they were too stubborn, and the portfolio wasn’t in enough balance as the madness developed. Even though they had controls in terms of position sizes, they let certain positions run too much, and when stocks suddenly became correlated that hadn’t been in the, they were caught off-guard. They have since put into place a number of things, including an improved risk framework, which should ensure that sort of situation doesn’t play out again.
On his future plans: the key for him is that Ennismore is here for the next 25 years and for many years after that. He wants people at the firm who will be stewards of the business. One of the keys to that longevity is developing talent in-house, but the starting point is that they have the right approach to investment. They started an internal academy in 2020 and 2 of the 4 new graduates they hired are already at the stage where they are going to give them a small amount of money to run. Other focus areas for him include making sure the firm is focused on performance vs. gathering assets, that they stick to their knitting etc. Because they offer people a chance of running money at a relatively early stage, they are an attractive place for a senior analyst at a hedge fund who might not ever get the chance to run money in their existing firm. That means they are punching above their weight in terms of the calibre of people hired (in context of their relatively modest assets under management).