lbert Meyer, president and manager of the $8.9 million Mirzam Capital Appreciation Fund (MCAF; ticker: MIRZX), understands stock options and why companies give them to their senior executives, but he still despises them. Although Meyer knows that the use of incentive options cannot be completely avoided, he’s made it his goal as MCAF’s manager to only invest in those companies where stock options are minimal.
Even if a company fits every other item on Mirzam’s list of investment criteria. Even if it is a proven leader in its industry sector. Still, Meyer will not consider it for MCAF if it has a stock option overhang of more than 5%. A tough course to take, he admits, since there are so many great companies out there that don’t meet that standard, but ultimately, one that pays off, because Meyer is a firm believer that all stock options do at the end of the day is to bleed a company and put wealth that should go to shareholders into the hands of its executives.
“Some people think that we’re investing in obscure companies because of the approach we follow,” Meyer says, “but there is nothing obscure about the companies we own.”
On the contrary, since some of MCAF’s biggest holdings are top-performing global players like steel giant Arcelor Mittal, Colgate-Palmolive, and Norwegian oil concern Stat Oil. The fund has invested in companies like China Mobile and Israel’s Teva Pharmaceuticals, strong players with solid cashflows and great business potential, and it likes companies like Church & Dwight, Clorox, and Paychex (whose CEO, Meyer says, is paid less than his competitor yet “does better”), but it has also rejected names like General Mills, Dell, and Moody’s Investors Service, which despite their strong market positions, “are bad companies for shareholders” because they fork over far too many stock options to their executives.
“We are invested in companies that are large and own their markets and don’t pay stomach-churning compensations,” Meyer says.
Just Doing His Duty
Meyer believes it is his duty as a manager of everyday people’s money to stay away from those companies that favor their executives over their investors, because most investors have no idea how much of a company’s wealth is lost through stock options. Many companies sell stock to employees at a deep discount to bring in more cash instead of selling products or services to customers, Meyer says, and there are so many examples of companies in just about every sector where chief executives have taken their stock options and sold them in the market, and no one has benefited but these individuals themselves.
While index fund managers have to buy whatever names are listed on the particular index they follow and are therefore forced to invest in companies with excessive stock option practices, Meyer has the independence to weed through the entire universe of companies and to carefully cherry-pick those names where investors, rather than CEOs, stand to gain.
Meyer has championed this approach for the better part of his career, and he remains a proud crusader against improper corporate governance and corporate fraud. A former accounting professor at Spring Arbor University in Michigan and prior to that, assistant academic dean at the University of Natal in his native South Africa, Meyer is razor sharp when it comes to accounting rules and being able to sniff out accounting improprieties.
Meyer’s fellow South African Cliff Morris, founder and president of Mirzam Asset Management, brought Meyer on board to manage MCAF, which launched in 2007.
Currently, the fund is only invested in 60 stocks, but they are all names that have been selected by working through a very detailed qualitative and due diligence process.
The selection process begins with a close examination of …
… a company’s proxy statement. This one document gives Meyer the information he needs about company management, compensation practices, and ownership by executives, and convinces him–or raises doubts–that “we are looking at a company that is being managed by honest people who aren’t taking care of themselves first.”
Financials, Proxies, and 10-ks
Even if a company has great financials and brilliant prospects for future growth, the proxy hurdle must be passed first. But Meyer, who is a CPA by background, is also a real stickler for the financial nitty-gritties of a company he’s considering for possible investment. He reads every paragraph and every footnote of 10-k statements and performs a detailed financial analysis that goes back at least 10 years in a company’s history.
To boot, he does it all himself.
“I don’t rely on anyone else to do it for me and I do my own earnings models, which I can track from quarter to quarter to see if I am too optimistic,” he says. “I really know what I own.”
Since Mirzam is interested in capital appreciation and is investing for the long haul, Meyer is looking for companies in any industrial sector that have high returns on equity that can stand the test of time and make it through various economic cycles. Companies like Arcelor Mittal, for instance, were hurt by the recession, but they have the wherewithal to survive the peaks and troughs, Meyer’s research leads him to believe. Throughout the downturn, Mirzam has held onto Arcelor (in fact, Meyer wishes that he’d had the cash to buy even more of the company’s stock) and will continue to do so going forward, he says.
When the due diligence process is finally over, Meyer–again, on his own–condenses his findings into a 20-page report that summarizes the most important points.
“This is my thesis,” he says, “it lists the competitors of a competitor of a company, its financials, its earnings model, its valuation. Everyone has to then read it, and based on my valuation model, we decide what is a good price to buy it at.”
But being a long-term investor, the fund is in no hurry to buy, and Mirzam usually waits six months to a year before purchasing a particular holding “because we never believe that the report is written at the bottom,” Meyer says. “We still don’t own 10% to 15% of all the companies I have done a report on, but we keep updating them and keep tabs on pricing.”
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At the end of May, MCAF’s top five holdings were: Teva Pharmaceuticals; vessel owning company Ship Finance; mining concern Southern Copper; Syngenta, an important agri-business firm and TransCanada, a company focused on natural gas transmission and power services. U.S. names make up 34.9% of the fund, while Europe constitutes 27.7% and Canada 9.9%.
MCAF has been extremely successful in its unique strategy and Meyer–a frequent speaker at conferences across the country–has been approached by many who are amazed at how MCAF remains a top performer despite refusing to invest in some of the highest-grossing corporate names because of their executive compensation models, especially when those models include the use of options.
But despite the interest he elicits, Meyer believes he is alone in his quest to give investors their full return on investment: “I don’t think there are any other fund managers out there who do what I do, but I want to show the investing world that if you shun companies that take care of their executives, you can still find great companies to invest in and you won’t have to read headlines that your CEO ran off with millions of dollars,” he says. “If all the big funds saw my success, they will do the same, and eventually, maybe all these companies will stop giving out stock options.”
Meyer is the principal and founder of Bastiat Capital, an investment firm that serves as sub-advisor to MCAF and in the management of its own accounts, combines the same passion for true research with Meyer’s in-depth of knowledge of accounting and search for successful business models. Meyer, his family, and all of Mirzam’s employees are invested in MCAF.
Savita Iyer-Ahrestani is a freelance business journalist currently based in New Jersey. She can be reached at [email protected].