“It’s pretty rare to have the same team running a fund for 20 years. That doesn’t happen so often,” says Philip Best during our interview on the occasion of the Argonaut Fund’s 20th birthday. Quaero Capital’s fund, an article 8 fund that invests in small European companies, has made 321 company investments since its launch and has, as of 30 September 2023, €261m of assets under management.
The fund has been run by Best and Marc Saint John Webb for the last 20 years. “And I guess that means Marc and I must see eye-to-eye on those things!” laughs Best. “Right from the start, we set out to run money in a certain way. And that’s still the same thing that we do now. What we’re trying to do is, we’re trying to look under the stones, we’re trying to do stuff that other people don’t do, to look at companies that other people don’t, to invest in a way that’s different.”
So what’s their “edge?”
“We look at companies that other people aren’t looking at,” Best highlights. “We follow a bunch of stocks that actually don’t even have analyst coverage. Those are called orphan stocks.”
Argonaut looks at “European small-caps below €1bn market cap,” explains Saint John Webb. There’s a universe of around 9,000 quoted stocks, and “depending on what criteria you take, you can take some of those as being non-investable, and you get down to a workable universe of three, four thousand, which we exclude quite a lot and come down to maybe 2,000 or so.”
You’ve got all this ‘little stuff,’ which people aren’t looking at
But “those 4,000-odd stocks below €1bn of market capitalisation account for like 5% of the total size of the market,” says Best. “You’ve got a handful of large-caps that represent a huge part of the market. And then you’ve got all this ‘little stuff,’ which people aren’t looking at.”
And that makes these little-covered companies the perfect opportunity for the Argonaut Fund.
Emphasis on primary research
To get the information that they need, Quaero Capital focuses on “primary research,” says Saint John Webb. What exactly does this entail?
“There’s people who say, ‘Listen. I’ve done a lot of research on IBM.’ And that actually means they’ve read the 40-page research reports by JP Morgan, Goldman Sachs and Morgan Stanley,” he continues. “And after reading those three pieces of research, you’re going to know IBM pretty well. But that’s secondary research.”
We have to do primary research, which is based on going to visit a company, meeting the CEO, meeting the CFO, the chief operating officer
Argonaut focuses on companies that don’t have any research. “We have to do primary research, which is based on going to visit a company, meeting the CEO, meeting the CFO, the chief operating officer, meeting the person in charge of product, in charge of marketing, walking around the offices, or the factory, or whatever food service facility they offer, seeing the coffee machine. Just sort of trying to appraise the company.”
“We’re going to see the companies, but at the same time, we’ve got to be careful not to just be polluted by the enthusiasm of the company staff, because they’re obviously never going to be negative on their outlook,” adds Saint John Webb.
Best offers an example of an Italian company making steel mills, Danieli, based an hour and a half north of Venice, as one of their success stories. “You’ve got to really want to go there. It’s nowhere near an airport, and they used to have no analyst meeting at all,” he says. But they did have an open day in 2003, where the chief executive gave some comments on the past year, followed by a concert. “And that was it! That was their investor relations,” says Best. “That was 20 years ago, and you don’t quite find that sort of thing now. It was, at the time, a) one of our best investments and b) it just felt so extraordinary to be there with nobody, on a Saturday.”
And how did this investment turn out? “That was a stock that we made almost 1,000% in.”
“What is it they say? Luck is when opportunity meets preparation,” says Saint John Webb, citing the Roman philosopher Seneca. “If you see 500 companies a year, you keep on looking, you’re going to come up to a situation where you say, ‘I think we’re probably better placed than everybody else to actually recognise there’s something here.”
Fighting against trend of “easy” solutions
So it has been 20 years since the Argonaut Fund was launched. Have there been any changes in the way the fund operates, or any new trends in the industry that they’ve noticed?
“Over the past 20 years, a lot of private individuals and institutions have gone to a sort of ‘easier’ way of investing, which is to buy ETFs [exchange-traded funds], and ETFs will give you exposure to a market. So you can buy a European small-cap ETF,” answers Best. “That, of course, didn’t exist 20 years ago.”
ETFs, however, tend to end up buying larger, more liquid companies. “Stocks that are in the index have benefitted from more liquidity, because they’re in the index,” he adds. “And stocks like the ones we’re looking at have just been even more forgotten than they were in the past.”
Forgotten means opportunity
“But forgotten means opportunity, because it means that you’ve got a lower valuation,” says Best. “Because we’re looking at stuff that is less liquid and less covered, we’re making a better return than the index.” That being said, a lot of people are saying, ‘I’ll just buy the ETF,” adds Best.
“And that’s a real pity, because they should be trying to access the higher return by buying funds like us,” he says. “We’re fighting against that trend. But people want to have an easy solution--or what they think is an easy solution--which actually gives them a lower return.”
“More reactive”
Another change has come around as a result of the covid-19 pandemic, Saint John Webb adds. “Because of covid and Teams and Zoom, and all that different stuff, smaller companies learned what video conferencing means,” he says. “That’s changed a bit the way we operate. It means that we’re more reactive.” Instead of waiting several weeks to do an in-person visit, for example, a conference call can be organised within a few days.
And as the fund as gotten bigger over the last 20 years, “we now often take between 5% and 10% of a company, versus, in the past, half a percent,” he continues. “Now you’re buying a sort of a small minority stake, which basically means that you have a closer proximity with the management of the company.” This allows for what Saint John Webb calls “constructive engagement.”
Our advantage goes from just stock selection and timing, to being able to sort of borrow a little bit from what private equity guys do
“It means that our advantage goes from just stock selection and timing, to being able to sort of borrow a little bit from what private equity guys do--they buy the entirety of the company and transform the company into a better company.”
A word on valuations
“The main message today is that people have forgotten why they invest in small-caps. And the reason you invest in small-caps, as we said before, is because they outperform a long period, particularly when you buy them after a period of underperformance. It’s sort of like an elastic band that you stretch. And today, valuations are very low. And that’s probably something that excites us,” says Saint John Webb.
“We’ve probably got, sort of, valuations, at the moment, which are as attractive as they would have been in 2003--when we started after the tech crash--or 2009, after the financial crisis,” argues Best.
“These things move in cycles,” he adds. “When you’ve been doing it for 20 years, you see these cycles and you kind of know when valuations are out of line, and we feel very strongly at the moment that our end of the market is just too cheap. And what’s been happening, as a result, is that small quoted companies are saying, ‘What’s the point of me being on the stock market?’” They’re seeing companies that are moving from public to private operations and de-listing.
Best and strangest company visits
After 20 years of visiting companies and conducting research, Best and Saint John Webb have quite a few anecdotes to tell. Their “strangest” visit was to an Italian company, where “we were really pressuring the [CEO] to keep his balance sheet under control. He was one of those guys who just couldn’t resist making an acquisition here, an acquisition there. And we started actually getting quite angry with him. We had a meeting when we were sitting waiting for him to go in the room, and when he came into the room, he looked at us, then just got down on his knees, and said, ‘I’m really sorry!’ One of the most absurd things that could have ever happened!” says Best.
And their “best” company visit? A Swiss company where the brewers said, “Please feel free to take as much beer as you can carry.”
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .