AINPF - Mayar Capital Q4 2023 Letter To Partners

2024-01-21 01:45:00 ET

Summary

• Mayar Capital provides investment management services to institutions, family offices, and high net-worth individuals.
• For the 12 months ending 12/31/2023, the Mayar Responsible Global Equity Fund (Class A) was up 15.85% net of all expenses and fees, while the MSCI World Index increased by 23.84% in the same period.
• Our focus remains firmly on capital preservation and on sustainable, long-term growth - we believe that our approach will ultimately outperform the market over time, even if it doesn't achieve that goal in every time period.

Letter from the Managing Director

Our Performance

For the twelve months ending December 31, 2023, the Mayar Responsible Global Equity Fund (Class A) was up 15.85% net of all expenses and fees, while the MSCI World Index increased by 23.84% in the same period. Since its inception in May 2011, the Fund has seen a 199.03% increase versus a 200.18% increase for the MSCI World. This corresponds to a 9.03% annualized rate of return for the Fund, compared to 9.07% for the MSCI World.

General Commentary

Despite a turbulent economic and geopolitical backdrop, global equities staged a surprisingly strong rally in 2023, embarrassing all the bearish strategists whose crystal balls turned out to be as useful as snowflake globes.

Imagine 2023 as a lively carnival – roaring roller coasters of rising rates and inflation, spinning teacups of geopolitical jitters, and a haunted house of recession fears. Yet, amidst the screams and thrills, one peculiar booth stood out: the high-flying "Magnificent Seven" tech stocks, soaring skyward like those rocket chairs but with malfunctioning brakes. We, however, preferred the sturdier pirate ship ride of value investing, chugging along steadily even if we didn't reach the same dizzying heights.

While the Mayar Responsible Global Equity Fund produced a satisfactory result in absolute terms, the Magnificent Seven-driven market rally meant the Fund underperformed its benchmark for the year.

As I've emphasized before, our conservative value-driven approach with its high active share – which means our holdings differ significantly from those of the general market – inevitably leads to periods of divergence from the market, particularly during strong rallies. While this means occasional underperformance, it's also the very reason we've outperformed over the long term.

Nonetheless, the magnitude of our underperformance over the past three years falls short both of our aspirations and your expectations. I genuinely apologize for the disappointment this may have caused.

Having navigated such choppy waters before, we fully expect to do so again. Also, it's always crucial to remember during such times that markets can easily be seduced by short-term narratives and hype, while sound fundamentals eventually prevail. As Benjamin Graham aptly stated, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

We remain unwavering in our commitment to sensible, long-term value investing. We won't chase risky hot trends simply to generate short-term gains, for that would not only risk your hard-earned capital but also betray the core values that define our partnership.

Remember the investors chasing crypto in 2021, convinced they'd found the mythical El Dorado? Well that wasn't us. We prefer digging for gold in less obvious places, like finding a perfectly ripe avocado hiding amongst a pile of mushy ones. Sure, it takes some poking and prodding, but the reward makes it worthwhile!

Over the years, I’ve observed many investors try to change their investment style to follow the latest trends. It inevitably ends in tears. Their behavior reminds me of the crow in the old Arabic fable who, charmed by the dove's graceful gait, tries repeatedly to imitate it but fails every time. Then, when he tries to go back to walking like a crow, he realizes he’s forgotten how to do it.

Our focus remains firmly on capital preservation and on sustainable, long-term growth. We believe that our approach will ultimately outperform the market over time, even if it doesn't achieve that goal in every time period.

We’re confident that our current portfolio – one of the most compelling collections of businesses we've ever assembled – is poised to deliver on its exceptional medium- and long-term potential.

Our Portfolio

Nintendo ( NTDOY , NTDOF )

We made a new investment in the quarter, in Nintendo shares; intrigued by its unique position in the gaming landscape.

The company, founded in 1889 in Kyoto, Japan, as a hanafuda playing card manufacturer, Nintendo boasts a heritage in innovative hardware and talent nurturing that’s impressive. They’ve built a foundation of durable competitive advantages, from iconic branding and economies of scale to a loyal network of developers and fans.

In the past, Nintendo's fortunes hinged heavily on its consoles. After the Wii U stumble in the early 2010s, Nintendo Switch hit a grand slam. This versatile device, combining portable and home console features with its signature motion controls, offered a unique low-cost proposition that proved difficult for competitors to match.

Nintendo seems acutely aware of the Switch's success and its potential, especially the Nintendo Switch Online subscription service whose cloud storage lays the foundation for forward compatibility.

Management's actions suggest a shift towards a more iterative approach to innovation, mitigating the risk of boom-and-bust cycles tied to entirely new console generations. We believe this strategy, underappreciated by the market, makes Nintendo's future exciting.

Ashtead ( ASHTF , ASHTY )

Returning to familiar pastures, we also added Ashtead to the portfolio this quarter. Some of you may recall our previous ownership of this straightforward business. Ashtead buys equipment – from cherry pickers to traffic cones – rents it out for short periods to a diverse clientele, and then flips it on the secondhand market a few years later.

Don't let the simplicity fool you though – Ashtead's returns are anything but ordinary. This rental model boasts exceptional unit economics, generating unleveraged returns in the mid-to-high teens over the equipment's lifespan. This strength stems in part from Ashtead's dominant market share in key regions like the US, UK, and Canada. This leverage translates both to discounts from original equipment manufacturers and greater pricing power over smaller competitors.

The combination of a well-run, financially sound business like Ashtead with its strong management team made it a natural fit for our portfolio. We were able to capitalize on market overreactions to potential construction slowdowns in the US, securing Ashtead at an attractive price.

Three exits marked our portfolio activity this quarter:

Danone ( DANOY , GPDNF ): After three years of ownership, we bid farewell to Danone. Our hopes for a turnaround under new management failed to materialize, resulting in a disappointing low single-digit annualized return.

Dropbox ( DBX ) : A bittersweet goodbye. While we exited at around our first entry point two and a half years ago, averaging down over time secured us a decent high-single-digit annualized return.

Ain Holdings ( AINPF ): Recent allegations of corruption, involving a public contract against a member of senior management, eroded our trust in management; prompting an exit despite incurring a significant loss.

Beyond these major moves, we fine-tuned our portfolio further. We scaled back exposure to Alphabet ( GOOG , GOOGL ), SAP , and 3M ( MMM ), while adding to positions in Richemont ( CFRHF ), Kenvue ( KVUE ), UPS , and Johnson & Johnson ( JNJ ).

The Fund and The Company

Mayar Capital welcomed three new team members during the quarter.

Nick Mason: Nick brings in-depth expertise and leadership, having spent 16 years as a Fund Manager and Senior Analyst at Invesco's Asia & Emerging Markets Equities team. Following that, he held oversight responsibilities for diverse portfolios at the Phoenix Group. Nick holds impressive credentials, including the CFA Society’s Investment Management Certificate, an MSc in Politics from the University of Edinburgh, and a BSc in Political Science from MIT.

Saleh Ismail: After completing his MSc in Economics and Strategy for Business at Imperial College London, Saleh now contributes his sharp analytical skills to our team. He previously gained valuable experience in public policy and investor relations at Awtada, acting as an Associate Consultant for two years. Saleh earned his Bachelors degree in Economics with a minor in Business Administration from Boston University.

Hind Elyas: Hind joined us in December 2023, bolstering our operations with her honed administrative expertise. For several years, she excelled in professional services, including through executive-level support as a Personal Assistant at an executive search firm.

We also want to bid a fond farewell to Rachael Alisedaghat, who left us in December to pursue her entrepreneurial dreams. We wish her all the best in her new endeavors!

Mayar Capital ended the quarter with $492 million in Assets Under Management (AUM).

We thank you for your continued partnership and look forward to sharing our progress in the year ahead.

As always, if you have any questions, please don’t hesitate to reach out to us.

Best regards,

Abdulaziz A. Alnaim, CFA, Managing Director

Business Summary: Electronic Arts ( EA )

Electronic Arts wasn’t William ‘Trip’ Hawkins’ first games business. Having borrowed $5,000 from his father as a student at Harvard, he created a sports-based table-top game that was a big hit with other students but turned out to be not viable, commercially. “It was a thorough business experience for me, as I had to design, manufacture, have a marketing plan, and even assemble the product”, he said years later in an interview with Forbes.

Still, as history proves, his ambition was undimmed. After graduating from Harvard and Stanford, Trip became an early employee at Apple just as home computers began to take off. He left in 1982, after spending four years working on the company’s strategy and seeing the company grow to over a thousand employees and completing its initial public offering.

He left Apple to set up a gaming publisher that treated its developers as artists rather than backroom employees.

In his words: “I began to realize I could work with them as independent artists, and treat them as artists.”

This approach permeated almost every aspect of the company. Early promotional magazines would feature photographs of the developers behind the games, and the company name was chosen to emphasize the artistry involved in creating computer games. In fact, the company was almost called Electronic Artists as a nod to United Artists, the fabled film studio.

Today, Electronic Arts is, in some ways, very different. While Trip started the business in the spare office space of Sequoia Capital (an early backer), EA now has over twenty studios and more than ten thousand employees. But the same core idea still drives the company – to develop, publish, and market great games.

Consisting of some of the biggest franchises in the world, their game portfolio includes Madden NFL, Apex Legends, Star Wars, and the Sims. In these cases, EA both develops and publishes the game, sometimes also paying brand owners like Lucasfilm, the NFL, and John Madden himself (who agreed to a $150m perpetual license deal in 2005). Of course, EA’s largest franchise – the FIFA football franchise – has made headlines recently when EA decided to part ways with FIFA, with the new EA football game ‘EA Sports FC’ (more on this later).

In its 40 odd years of life, EA has experienced some big technological changes. For much of the company’s existence, selling games was quite simple – the game was developed, put in a cartridge or disc, and sold in a box to distributors and retailers.

Today, the route to market is generally online. The ongoing shift to digital has profoundly altered the electronic games industry to the advantage of Electronic Arts – with the retailer’s cut taken out as the route to market has shortened. Aside from the way games are paid for, what customers pay for has changed as well. Even just a decade ago, after customers paid for games, they generally had no further contact with the producer. Today, however, customers have the option to subscribe to entire catalogues (like with EA Access) or buy additional content on games they already own. This category of ‘live services’ is a growing business for Electronic Arts.

We believe that the secular trends in the games business are to the advantage of content owners like EA. The company benefits from its massive scale and its ability to attract – and pay for – the best talent. The shift to digital has made EA a more profitable business while the shift to live services has made it more predictable. This comes through in the financials – cash flows have become significantly less volatile over the last decade, and returns on capital have been exceptionally good.

What of the FIFA divorce? It’s too early to come to a definitive conclusion yet, but we believe EA’s football game is considerably more important to customers than the FIFA brand. Customers have often spent hundreds of hours playing EA’s football games and won’t be minded to up sticks to follow the FIFA brand name, especially as EA has signed individual agreements with most football clubs already. Indeed, in the latest earnings call, EA management said early indications for the first non-FIFA branded game are very positive. If, as early signs suggest, management can keep up the football game’s momentum while saving the $300m per year FIFA was demanding in licensing fees, we’ll be very happy indeed.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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