Reinhart Partners: 2014 Small-, Mid- and SMID-Cap 2014 SMA Manager of the Year

Reinhart’s mid-cap strategy may not be as impressive in a stable market, but its ability to navigate a bear market still makes it a winner

The Mid-Cap PMV Equity strategy shines in a volatile market but holds its own in a more stable one, too, according to Brent Jesko. (Photo: Tom McKenzie) The Mid-Cap PMV Equity strategy shines in a volatile market but holds its own in a more stable one, too, according to Brent Jesko. (Photo: Tom McKenzie)

This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor's July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

Mequon, Wisc.-based Reinhart Partners is a 100% employee-owned firm in which a small team, selected with great care through the years, works closely together to leverage the best of their experience, expertise and skills in order to deliver their clients top-class returns, particularly in volatile markets.

In today’s more stable market environment, “our numbers may not look that special,” said Brent Jesko, lead portfolio manager of Reinhart’s Mid-Cap Private Market Value Equity Strategy, which has $950 million in the portfolio. However, “investors have continued to choose us because we have been able to navigate the bear markets and we do very well in volatile environments.”

That was clearly the case back in 2008.

When all major indexes were down by 30% or 40%, Reinhart’s portfolio was down by just 26%. And in the last seven years, the Mid-Cap Private Market Value Equity strategy has posted annualized total returns of 9.92% compared to 6.85% for the Russell Mid-Cap Value Index.

Jesko—who manages the Mid-Cap Private Market Value Equity strategy with Matthew Martinek—credits Reinhart’s success in the mid-cap space to its core investment strategy: assessing the intrinsic value of a company by determining how much an acquirer would be willing to pay for it in a private buyout.

Figuring out private market value (PMV), as Jesko terms the approach, anchors a disciplined investment process that gets to the heart of a company’s value. The “beauty of it,” he said, “is that we can customize to any industry, so we’re very well diversified across the mid-cap space.”

Jesko and his team derive a company’s PMV by first crunching actual M&A takeover valuation multiples over the past three to five years to get a sense of how private buyers value companies in different industries. They use different metrics for different industries—“in banking, for example, we look at book value, whereas in manufacturing, our focus is cash flow,” Jesko said. “Every industry is different, and the key is to look at what drives those differences and what private buyers paid for them, so that we can create our own customized comparisons.”

This detailed M&A analysis then allows Reinhart to focus on stocks that are priced well below PMV and thus embed low expectations. However, the firm doesn’t stop at price, and its due diligence drills deep into looking for those companies that are a quality franchise and have strong attributes and competitive advantages that will, over time, generate superior returns on capital and increase shareholder value.

This reduces the possibility of falling into “value traps,” Jesko said, and enables Reinhart to pick out companies with upward-sloping PMV lines. Quality is crucial, he said, and only those companies of a high enough caliber are worth purchasing at the appropriate time and valuation levels. 

Finally, the team buys companies that are priced at a 30% discount to their PMV and they sell when a particular company reaches its PMV. Along the way, the gap between price and PMV guides decisions to either trim or add to existing holdings.

Currently, the Mid-Cap Private Market Value Equity strategy holds about 40 or 50 names, Jesko said, that represent “the best ideas” in different industry sectors ranging from consumer discretionary and consumer staples to energy, telecom, health care and financials. The portfolio limits individual position sizes to no more than 4%, and sector weights are held within 10% of the benchmark.

The Benefits of a Long-Term Approach

Because Reinhart focuses on companies’ business models and competitive advantages in the long term, and does its own research and modeling, the firm can tune out much of the noise coming from Wall Street, Jesko said, and avoids falling prey to short-term ups and downs.

In 2008, for instance, the consumer sector was badly beaten up and many companies were affected by the recession. Reinhart, however, found buying opportunities in companies like Guess, whose share price was $13 and, according to Reinhart’s analysis, was at 30% of its PMV.

“Back then, Guess was taking its brand to China and to Europe and gaining considerable momentum overseas,” Jesko said. “So the stock doubled in the next year and we sold it.”

Spice giant McCormick is another company that did well by Reinhart.

“In 2008, they were hit along with many other companies, but we felt that their business was steady, not to mention that in tough economic times, people will cook more at home, so although the general herd in the public markets took the company down, we bought it and we held it for three years. It ended up being a very good stock to own.”

For Jesko and the rest of the Reinhart team, private market value is a great tool with which to not only measure the volatility in the public market but also take advantage of that and leverage it to their benefit.

Jesko first started working with PMV in the 1970s, when he trained at Strong Capital Management. Reinhart’s founder, Jim Reinhart, encouraged him to apply the same methodology to Reinhart’s mid-cap strategies when he joined the firm in 2000.

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This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor's July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

 

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