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July 10, 2014 at 10:54 PM
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.
