Street Stories: Managed Futures
George Michaelis of Source Capital profiled at StreetStories
Market Wizards Index: +18.6%
Compound annual over 15 years
Fund or affiliation
Source Capital
Methodology
Emphasizes on sustainable ROE with low tolerance for risk. To "buy earning power at a discount".
Asset Categories Employed
Stocks, distressed finance company senior debt, convertibles.
Avoids complex derivatives.
Research/ Valuation Techniques Employed
Rarely invests in themes like "Americans are getting older" type.
Looks at companies with these features:
1. High ROA & ROE, high ROE should be sustainable;
2. Earning power not hostage to business cycle;
3. Successful for identifiable reasons.
Debt averse - average debt level at 15% of total assets.
Never buys AA bonds, as against AAA ones. For 30 b.p. it is not worth it.
Trading Techniques Employed
The lowest cash level was 10%; he had 20% cash before the 1987 crash.
Michaelis tries very hard to avoid significant losses. He doesnt mind lagging the averages if the market breaks away on the upside.
Philosophy and beliefs
"Invest with the one hundred-year storm in mind."
Not primarily motivated to maximize return because of low tolerance for risk.
On derivatives: "Intellectual people are attracted to intellectually elegant conceptions, such complicated instruments are likely to distract them from the more fundamental truths."
History and other facts
Train quoted Robert Kirby, head of Capital Guardian Trust, "Stocks are much more volatile than the businesses they represent."
Warren Buffett often asks someone hes talking on the phone "What are you buying?"
Examples
Kellogg - economy of scale: being 2.5 times larger than its next competitor, even the management does a bad job for 4-5 years, basic profitability will not erode.
Marsh & McLennan - tollgate for the largest companies.
Bristol-Meyers - 35 years of consecutive earnings growth, at 25% ROE, excess cash, no debt.
Performance Record
18.4% over 15 years: "A calculation in the summer of 1988 showed that over the past 15 years the total return of Source Capital was exactly 3 times that of S&P 500: The gross gain was 1200%... exceeded by only 16 other funds...".
