NCMF deploy capital based on the value investing philosophy. The objective is to maximise the investor’s long-term average annual net asset value per unit while minimising the risk of permanent loss of capital. 

In the very long term, the market value of a company follows the development in the company’s intrinsic business value. But in the short term, and sometimes even in the slightly longer term, the market value may be lower or higher than the intrinsic business value. As Benjamin Graham mentioned in his metaphor on the equity market, Mr Manic-Depressive will sometimes set a high market value on businesses and Mr Manic-Depressive will sometimes set a low market value on businesses. In other words, the stock market fluctuates over time between optimism and pessimism. NCMF attempts to exploit Mr Manic-Depressive’s mood swings by investing assets when the market value of a company is below the intrinsic business value NCMF has calculated.

NCMF believes that the concept of preserving capital is just as important as increasing capital. It is important to avoid the risk of permanent loss of capital as additional returns often occur by being able to obtain returns on capital from higher and higher levels. The core of value investing is to only deploy capital when the difference between market value and intrinsic business value, i.e. the safety margin of the investment, is sufficiently large.

NCMF therefore define risk as the risk of permanent loss of capital and not as price volatility or “tracking error”. When a company is priced low according to NCMF’s calculation of the intrinsic business value, the risk is lower. When a company is priced high according to NCMF’s calculation of the intrinsic business value, the risk is higher. It is irrelevant how much a company’s market value fluctuates in relation to the general stock market. NCMF attempts to find investments where the risk/reward ratio is so skewed that the risk of permanently losing capital is limited.

This also involves a willingness to hold cash for some periods of time rather than always being fully invested. When NCMF is unable to find investments that meet NCMF’s criteria, a cash position is a risk-free investment. A cash position may not generate a return right now, but it is an exceptionally good asset to have in hand when the market presents us with exquisite investment opportunities.

Investment icon Lou Simpson was investment manager at Berkshire Hathaway that owns GEICO, an automotive insurance provider. In GEICO’s 1988 annual report, Lou Simpson stated the following:

“In equity investing, when you don’t have any really good ideas (i.e. excellent companies at very attractive prices), doing nothing – or selling – is the best course of action.”
NCMF focuses companies that have certain characteristics resulting in high growth in their intrinsic business value combined with a market value that is significantly lower than the intrinsic business value.

NCMF focus on equity investments as being part ownerships of companies. NCMF believes that the best way to optimise long-term assets is to have an owner-oriented and value-based investment framework that focuses on companies with a high return on invested capital due to a stable or expanding competitive advantage.

NCMF wants to be a form of ‘silent partner’ in quality companies, preferably with owner-managers with a history of financial success and a track record of high morale and high integrity. For instance, when skilled owner-managers combined with a company with certain characteristics are available at the right price, this will be so much more favourable for long-term investment returns. These characteristics include:

  • A high return on invested capital
  • The possibility of reinvesting with a high return on invested capital
  • High net free cash flow
  • A strong and durable business model
  • Specific competitive advantages
  • A competent and shareholder-oriented management

Financial value is created when a company’s return on invested capital exceeds the cost of capital. A company with a high return on invested capital can grow its intrinsic business value when the company has a durable business model that can suppress the competition on an ongoing basis. If the company fails to preserve its competitive advantage, the return on invested capital will be eroded. A company may exhibit earnings growth without the company growing its intrinsic business value in real terms – even though the return on invested capital is relatively high. It will erode the company’s financial value if the growth of invested capital is higher than the earnings growth.

Many of the large, successful companies in the world that generate high returns on invested capital have historically also seen very handsome earnings growth. But some companies that still achieve high returns on invested capital do not possess the same potential for earnings growth going forward. This does not mean that these companies are not interesting. At the right price, they may be excellent investments.

But it will be even better to invest in small and medium-sized companies with a high return on invested capital which are able to re-invest much of their profits at a high or exceptionally high return on their capital. They will still be able to achieve handsome earnings growth by exploiting their business model and thus by developing towards market dominance, or at least towards increasingly larger shares of their market. The internal compound interest effect of such investments is preferable compared to companies that do not have the same possibilities and must consequently pay out a large share of the profit for the year in the form of dividends. Dividends are subject to tax and leave the investor with the challenge of having to once again allocate this at a high rate of return.   

If NCMF cannot identify quality companies that are valued at the right prices, ordinary companies may also be of interest, but only in the presence of a potential and probable event of a narrowing of the difference between the company’s market value and the intrinsic business value over a short span of years. The danger here is that this event may be protracted. This means that One runs a risk of holding a company for a number of years that generates average or low returns on invested capital. And in the long term, One consequently ends up with a return reflecting the company’s lower return on capital.

NCMF is a proponent of concentrated investment in a portfolio when the ratio between the expected rate of return and the risk is sufficiently favourable. The decisions of NCMF is completely independent of how many companies are included in the MSCI World Index or other benchmark, or the distribution among sectors or countries in the particular benchmark. The mutual funds that NCMF is the advisor on are having legally binding distribution rules. All other mandates have very few postions and not above 10 each. Many market participants or investors will dislike this concentration of investments, but it is NCMF’s opinion that by combining value investing with concentrated investing, the results may be extraordinarily positive, provided that this strategy is pursued with a clearly defined investment philosophy and a disciplined investment process. However, one should not fail to acknowledge the inherent concentration risk.

We would only be limiting ourselves if we focused on one single category only. That is why we invest across all categories. We don't care whether a company belongs to one category or another – we don't even think about it when we make our investment decisions. Nor do we think about whether the initial letter in the name of the company whose shares we buy belong to the first or the latter half of the alphabet. It is of no consequence whatsoever for the achievement of our objective. We are both big-cap, small-cap and "first half of the alphabet" investors.
Letter to Shareholders Nielsen Global Value 2003


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