Back to Basics

“I went to Harvard Undergrad and got an MBA from the University of Michigan,” Tim Hartch begins, when asked about his investing pedigree. “I also got a J.D. from Michigan Law School.”

Too bad it’s all for naught; wasted time, wasted money. Okay, we won’t go that far, but when asked what makes them overlooked managers, the investment process Hartch and co-manager Michael Keller describe is something even a state school journalism major can immediately grasp.

“We’re focused on strategy,” Hartch says. “We have a buy-and-own approach that’s focused on very high-quality companies. We have a goal of protecting capital and we utilize a discount-to-intrinsic value framework that is a core part of our approach.”

Over the last five years, Hartch explains, his investment team has executed extremely well, putting together a strong track record, but they’ve been overlooked due to the fact that the funds were not marketed externally from the 192-year-old privately-held Brown Brothers Harriman. They’re now looking to attract potential investors, but want to focus on people who understand their approach and where they align in terms of objectives.

“When we say ‘like-minded,’ I mean our objectives are to protect and grow capital over time at an attractive absolute compound return,” Keller adds. “The primary focus is our strict investment criteria and a margin of safety that we employ in the evaluations in the types of businesses that we have in the portfolio. The more we’re able to preserve during weaker markets, the more capital in which we have to compound in the good markets. There are quantitative attributes that matter to us, but really understanding the business and whether it fits with our investment criteria comes first. We narrow the universe by qualitative attributes, not quantitative.”

When asked to expand on the strict investment criteria he mentioned, Keller says they begin by looking for companies that meet specific business attributes, financial attributes and management attributes. Speaking first to the business attributes, the team looks for companies that provide essential products and services either to business customers or to individual consumers. They look for a large and loyal customer base, and companies that have a sustainable competitive advantage that are leading in good markets.

The financial attributes they look for are companies that generate after-tax free cash flow and have strong balance sheets that are self-financing or have manageable amounts of debt. The companies have high returns on invested capital which, he says, is often an obvious manifestation of a profitable business model that can execute and grow without consuming a lot of incremental capital.

“So high ROI is certainly an attribute that is in many ways intertwined with the other qualitative business attributes that we look for,” Keller says. “And often, you get a higher ROI just by a company fulfilling those other characteristics.”

Finally, he says, the management attributes they look for are a high-quality and trustworthy management team with an “owner mindset,” one they allocate capital to effectively over time.

“With these types of cash-generative companies there’s a lot of capital that continues to come through the door,” he adds. “The capital allocation exercises are important for us. We study this very carefully because it drives so much of shareholder return over a long period of time.”