We would like to share with you a new item on our investment checklist. We refer to it as our “comfort test” and it is a subjective overlay that provides an “escape clause” from the strict rules that otherwise would stipulate we invest in a company. It applies when we believe a company’s business is likely to lead to, or to perpetuate, poor societal outcomes.
“We consider some investments unacceptable because they take advantage of others or are anathema to our values…” – Seth Klarman
We feel it is appropriate to provide examples of the impact this has on our portfolio, and to explain some businesses that do not pass our “comfort” test.
If we were impartial as to a company’s activities, then our portfolio (at time of writing) would hold less cash and it would have positions (totalling in excess of 10%) in the following four businesses:
- an Australian finance company which engages in short term, high interest consumer lending;
- a Hong Kong listed product manufacturer and distributor to the tobacco industry; and
- two businesses that are listed in the US and involved in the manufacture and sale of firearms. Incidentally, we find it timely that recently one of these companies changed its name from its gun brand to a name that simply associates it with “outdoor activities”.
All of those four enterprises are trading at levels which, if we were to rely solely on our objective assessment, would likely provide attractive returns going forward.
We recognise and accept that our “comfort test” involves subjective judgement, and accordingly it introduces behavioural biases into our process. And, because it results in us foregoing seemingly attractive investment opportunities and at times holding higher levels of cash than otherwise, it may also result in lower Fund returns (although over the longer term this point is debatable).
“You have to invest in a way that’s comfortable for you.” – Walter Schloss
We need to strike a balance between our aims to avoid biases (through our process/discipline based philosophy) and our “comfort test”. Ultimately, we are strong believers in Walter Schloss’s mantra and we will continue to adhere to it as our primary guiding principle.
Stuart and Alexis
This article has been prepared solely for the purpose of providing general information about Alluvium Asset Management Pty Ltd (ABN 69 143 914 930) which holds an Australian Financial Services Licence Number 476067 (“Alluvium”), and the Alluvium Global Fund, which is managed by Alluvium. The article has been compiled in good faith in relation to the activities of Alluvium. Alluvium believes the statements contained are reliable, however no representation is made as to the completeness or accuracy of the information it contains. In particular, you should be aware that this information may be incomplete, may contain errors or may have become out of date. Use of this article is entirely at your sole risk. Reproduction or distribution of this article without written permission is prohibited. The information is general in nature and does not take into account your personal circumstances, financial needs or objectives. Statements contained are not general advice or personal advice and should not be considered as a recommendation in relation to an investment in the Fund or any company referred to, or that an investment in the Fund or any company named in the article is a suitable investment for any specific person. Further, it is likely that at the time this article is published, Alluvium’s and/or the Fund’s position or opinion in any identified company may well be different to that at the time of writing. You should seek independent financial advice and read the relevant disclosure document prior to acquiring a financial product. Alluvium, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in this article, or for any negligent misstatements, errors or omissions.