Investing With Insight
2 Investing with insight
3 REQ Capital
4 Generational perspective
6 Responsible investments
8 Shaped by our investment journey
10 Mistakes are part of the game
13 No distraction from index
14 How we generate investment ideas
15
Management & culture
18 Capital allocation
19 Not all growth is good
20 Perspectives on pricing
21 Force of gravity
22 Risk management
24 Thank you for your support
3.
Investing with insight
REQ Capital is a long term active asset manager. We are independent-minded and differ from the crowd both in terms of how we search for investment ideas and how we create extraordinary results. This Investor Manual will provide our investors a deep insight into
our investment
experience and how we intend to take care of and compound capital. Our funds deviate both from market indices and competitors. It is therefore of importance that our investors know how we manage their capital. We believe in open and sincere communication. We will not compromise on what we explain and represent in this Manual. We have devoted a whole chapter to the mistakes we have made over the years. Fortunately, we have learnt a lot from these mistakes. Extraordinary long-term investment results boil down to investing with the right people, the right ownership structures and in unique corporate cultures. We explain how we assess these aspects. These investment principles stand the test of time and do not depend on a specific market climate in order to succeed. These principles form the basis for our investment philosophy. Our investors trust us to make good long term decisions on behalf of them. The investments we make depend on the management teams and cultures in the companies in which we invest. There is a chain of trust from our investors, through our capital allocation decisions to the companies we choose to invest in. Thank you for your support.
4.
REQ Capital
We are an independent partner-owned fund management company with a generational perspective. We have, and aim to keep, a unique culture in our company based on respect, strong values, true partnership and collaboration. We are partners with different skillsets and experiences. We are different personalities. We have chosen to bet big on a set of complimentary skills. We believe that equal ownership is a key to success in building a new business. We have an eternal perspective which we believe is a competitive advantage in a short-term oriented industry. Our values are professional, and fun. REQ Capital is not a job, it is a lifestyle. Our investors will experience a corporate culture of enthusiasm and energy. Having fun is not normally a mission statement in the asset management industry but it is of utmost importance. 5 percent of our net profit will be donated to associations, foundations and non-profit organizations which contribute to the UN Sustainability goals. It feels good to know that the better results we create for clients, the more we are able to contribute. We believe people with passion and dedication can accomplish anything. Unique corporate cultures with an ownership mentality, happy customers, employees with an inner motivation and strong management are elements on which we base our investments and use as a guide in building our own company.
5.
Generational perspective
We aim to create wealth over decades and manage our clients’ capital just like our own. We will only invest in our own funds and seek clients that share our values and long-term perspective. Common interests with clients is crucial for long term success.
W
hen your goal is to compound capital
When you invest with a generational
for a generation you focus on other
perspective you have to get management,
areas than most market participants. We
culture and ownership right. Our advantage
do not have a qualified view on the market
is that most fund managers are incentivized
returns over the next year and do not know
on very short time horizons. Most market
how the macroeconomic picture will look like
participants try to win in the short term.
over the next three to five years. What we
There is far less competition when you truly
know is that we have invested in companies
invest with a generational perspective.
that will grow and prosper over the long haul,
irrespective of market conditions. Ultimately
Over the short run the stock market is a
the value creation of these companies will be
voting machine. Over the long term the
reflected in the stock prices.
market is a weighing machine. As you expand
your time horizon and invest with
Stocks rarely perform in the time frames
6.
a generational perspective you need to
we predict, and that is why the market only
get the fundamental return contributors,
works for investors who have patience.
represented by profitable earnings growth
and dividends, right.
Responsible investments
The world is changing and we want the companies we own to be proactive and change accordingly.
W
e have witnessed companies without
Governance
strong guidelines and action plans in
We focus on companies that put governance
terms of sustainable development, quickly
high on the agenda. Many of the companies
lose reputation, customers and owners.
in which we invest will be led by the initial
founders. It increases the speed of execution
We believe that companies which engage
and facilitates long-term decision making.
proactively in sustainable development gain
a competitive advantage. People graduating
Our experience is that founder-led companies
today who will become potential employees,
often tend to take social and environmental
customers and suppliers, care a lot about
aspects more seriously than companies that
sustainability. These employees will be the
are purely institutionally owned. Companies
future decision makers of the companies
where sustainability is deeply rooted in the
that we own. The quest for the best future
culture are in a better position to create
brainpower will be won by the companies
lasting shareholder value. We address these
that do care about sustainability.
issues in our dialog with companies and we
will make sure we are heard.
We have excluded the same companies as Norges Bank Investment Management,
Social
NBIM. We do not invest in companies that
In order for a strong culture to last you
extract oil and coal. We exclude producers of
need diversity both in terms of sex, age
pornography, alcohol, gambling, tobacco and
and ethnicity. We will clearly represent this
weapons. If you ask us why, the answer is
stance simply because we think it is rational.
straight forward: It just feels right.
Engaged colleagues are the foundation in
We will own companies with management
any company. These employees need strong
that understands the issues of sustainable
labour contracts and sensible incentive
development and takes responsibility in a
schemes. We will work to highlight these
proactive way. We will do our very best
important issues.
as active owners to put sustainability on the agenda.
Social is also about creating corporate
cultures of trust and well-being among
The buzzword in the asset management
employees.
industry is ESG. Our priority is GSE.
8.
Environmental Climate change is one of the biggest challenges we face. Different sectors, industries and geographies face different opportunities and challenges. Our approach will be to challenge the companies we own on how they can contribute to make the world a better place. Companies do not need to balance sustainability and growth. Sustainability is growth. We applaud companies which can invest in environmental-friendly products and services that increase growth, increase return on capital or reduce the cost of capital. These companies create shareholder value and make the right investments in environmental-friendly solutions at the same time. We will create value for our clients, and it makes a lot of sense for us to manage our client’s money in a way that contributes positively to a better world.
9.
Shaped by our investment journey During your investment career you get shaped by your experience. Over the years we have experienced both outstanding investments as well as big losses. Both are needed in order to mature as an investor and find your way of investing.
O
ur investment journey has led us to
We care about accounting figures, valuation
spend most of our time on qualitative
and pricing multiples, but the most important
criterias like evaluation of management and
judgements we make are found behind the
soft factors like corporate cultures. Our best
figures – judgements of management and
investments historically are the result of
the culture of the businesses. Of course,
investing with the “right” people, the best
historical accounting figures are reflections of
ownership structures and unique corporate
both management decisions and culture, but
cultures.
in order to understand if historical figures
can be replicated in the years to come we
Our weakest investments have been
need to make sure to invest in the right
characterized by the opposite. These have
management teams. We explain more about
been situations where we have spent too
the importance of the right management and
little time on management and culture. These
company culture in one of the chapters and
experiences have shaped the way we look at
in our book “Investing in Value Creators”.
investments. When we buy a stock we hire
someone to take care of our capital. You want the right ethics and skills.
10.
On a medium-term view of three to five
An important insight from years of managing
years there is still a lot of noise reflected
capital is that managing risk is more
in share prices. A three to five year view is
important than managing returns. We have
still too short to observe the footprint from
devoted an own chapter to risk management.
management in the accounting numbers. In
the long run you will clearly see the effects
To sum up, we believe our investment
of management and culture reflected in
journey has provided us with some valuable
the figures and share prices. We have a
insights. Under the setup of REQ Capital we
generational view on investments in order to
have all the foundations in place to create
capture these effects.
value for our clients. We look forward to the
journey over the next decades. Hopefully you will choose to join us.
Over the years we have experienced both some outstanding investments but also some big losses
11.
Mistakes are part of the game
We all make
mistakes. Investors who learn from past mistakes and see patterns
in the failures will succeed. These are some of the mistakes we have made over the years and which we strive not to replicate in the future.
Selling too early
Over analysis
One common mistake we have made several
Some of our worst investments have been in
times is selling stocks way too early just
companies that we have spent way too much
because of a strong share price run in
time analyzing. The key takeway from these
the short term. These exits have been in
mistakes has been to try to find companies
companies that have been strong long-
that are easy to understand and where you
term compounders.
do not need lots of spreadsheets in order to
make up your mind. If we do not understand
In 1966 Warren Buffett bought 5% of Walt
the business case in the first place, just move
Disney for 4 million USD. That position is
on to a new research project.
worth 12 billion today! Unfortunately, Buffett
sold that position for 6 million USD in 1967.
This experience has made us much less
Even the greatest investor of all time make
interested in complicated business models.
big mistakes.
We like simplicity. Too much information
about a company often leads to decision
The key lesson for our part has been to be
fatigue. If we are not able to make up our
very hesitant to sell stocks in companies that
mind about the direction of the company
work perfectly. Sometimes these stocks run
because there are too many contradictory
ahead of the underlying performance of the
signals regarding the path forward, we
companies. Do not let a temporary high price
should pass.
of the stock scare you out of an outstanding
company. It is very hard to enter the stock
Over- and underconfidence
again at a higher price point.
One of the big challenges in investing is to balance confidence and humility. We need
Why we sell
confidence in order to make an investment.
We have arrived at three reasons to sell a
At the same time we need to be aware that
stock. The first reason is that you made a
we might be wrong. If we have too much
mistake by buying a company in the first
confidence we will never be able to admit
instance. The company is not as strong
a mistake and will not be able to learn
as you initially thought. You have done
and grow.
a fundamental mistake and should take
the consequence. The second reason to
If we constantly think we will be wrong we
sell is that you do not trust management.
will not be able to make any investments.
Management starts to convey a message that
The stock market is a fantastic instrument
you do not understand. You do not like the
to make you humble. That is the reason
language they use and they do not seem to
very experienced investors often are of
be good stewards of our capital. The third
the humble kind. They have made lots of
reason to sell is a pricing of the share which
mistakes and learnt from these mistakes.
is far beyond what you think is rational.
Charmed by management
We think the last reason to sell is the most
Some investors avoid all management
difficult and therefore we are very reluctant
interaction. Others find discussions with
to sell based on pricing of the share alone.
management very helpful. It is easy to get
12.
charmed by charismatic management. We
development is always accompanied by a
dig deeper if we meet overly charismatic
lower share price and what seems to be a
management. It is often a red flag.
more attractive pricing of the share. It is
better to admit that you were wrong and
It takes quite a few management meetings
sell the share rather than trying to find a
to understand that we should not necessarily
new cause to continue owning the share
invest with the most charismatic and
at a lower price point. We would rather
outgoing CEO in town. We have devoted
average up and buy more shares at a higher
a separate chapter to evaluation of
share price level in companies where the
management. In the long run investing
underlying fundamental development is
with the right management is of utmost
better than expected.
importance.
Failing is part of being an investor. We are
Too much focus on numbers
not ashamed of our mistakes. We will make
Our investment experience has changed a
new mistakes but we will never hide them or
lot over the years. Early on we focused a
look for excuses.
lot on the quantitative aspects of potential investments. We still care a lot about the financial history of companies. But at the same time we have come to the conclusion that our biggest investment mistakes have been a result of investing with the wrong type of management and wrong ownership
It is the investors
structures. Our best investments have been characterized by the opposite. Therefore, we have become more and more interested in how management communicate and how they interact with investors. This is the non-financial aspect of investing.
that learn from their mistakes that will succeed
Qualitative criterias are more difficult to evaluate than financial figures, but we do believe getting these evaluations right increase the odds of good shareholder returns. Not willing to sell losers A costly mistake we have made is not being willing to sell companies that are not performing according to our expectations. When the investment thesis changes you should evaluate the investment again. Weaker than expected fundamental
13.
14.
No distraction from index
We do not compare our investment strategy to an index. Our ambition is to deliver the best returns irrespective of benchmarks and competitors. Avoiding benchmarks makes us look only for the finest companies, irrespective of index weights.
W
e know very well by experience that
We will never discuss tracking error which
professional fund managers with
measures how closely a portfolio tracks
traditional benchmarks spend too much time
the index.
looking at the benchmark, how it performs
and the constitution of it. We truly think that
We want to diverge from the index and
we will be in a better position to generate
believe we need to differ in order to create
solid returns for our clients by avoiding
extraordinary performance.
traditional benchmarks and keep our eyes on the ball.
We do not care about the contents of benchmarks and spend no time looking at how we differ from benchmarks
15.
How we generate investment ideas
We like to look for ideas where most professional fund managers do not look. The traditional way of generating investment ideas is by doing financial screens. The challenge is that you get the same kind of lists of stocks as everyone else, you end up studying the same kind of companies and, in the end, invest in the same companies as everyone else.
Businesses are not spreadsheets, but people. Talk to people and you will gain an advantage that most professional managers do not have
W
e look for ideas through more
the last aspect we look at. The pricing needs
qualitative lenses. We search in
to offer us the prospects of at least double
magazines, through conversations with
digit annual returns over the coming decade
management, through social media, talk
in order for us to consider the stock as a
to people and read investment blogs etc.
potential investment. More about pricing
You need to search for ideas where most
of stocks in the chapter “Perspectives on
professional fund managers do not look.
pricing”
Idea generation is just the first part of the
Due diligence does not end with the purchase
investing process. We do not spend time on
of a stock. It is just the beginning. Our initial
most ideas since they do not pass through
due diligence might get us invested but it is
our rigorous return on capital criteria. We are
our maintenance due diligence that will keep
obsessed with value creation and only invest
us invested. We do not buy and hold, we buy
in companies that are able to deploy new
and verify.
capital at very high return on capital.
We conduct a systematic, qualitative due
If the company in question has a history of
dilligence in order to reveal the true mental
strong value creation and is also run by a
health of the company. The answers we get
management team of the highest integrity,
are of utmost importance to our investment
we listen closely. The pricing of the stock is
decisions.
We like to talk to customers, ex-employees and other external stakeholders in order to understand if and why they are happy
16.
Management & culture
We seek management teams that are willing and able to turn away from the shortterm pressure by investors and analysts and act in the interests of long-term investors of the company.
A
person who wants to lead the orchestra
“The C in “CEO” stands for Culture. The CEO
must turn his or her back to the crowd
is the Cultural Executive Officer” says Satya
and do something different. In order to turn
Nadella, CEO of Microsoft. We could not
away from the short-term pressure it helps
agree more.
to be an owner operator. We like to invest
with founders that have skin in the game. It
We believe the responsibility of building
doesn’t mean the company will
corporate culture belongs to the top ranks
be successful, but it helps us trust
of the company. Management behavior,
management when we know they have to
communication and interaction with
live with the consequences of their decisions.
employees, suppliers, customers and
Incentives matter.
shareholders is important for the creation of
a good corporate culture.
We use own research, external consultants
and third-party insights in order to gain
Our CEOs give priority to customers first,
strong understanding of culture and
then employees and finally shareholders.
management. To form an opinion on culture
Over the very long term, if the customers are
you need to get insights below the ranks
happy, employees will be more satisfied and
of top management, especially from ex-
shareholders will ultimately enjoy the ride.
employees who are naturally more open and
frank about the state of the culture.
Our CEOs treat shareholders as partners
and own a significant amount of shares
We are always impressed by the CEOs that
themselves. A leader who rises to the top
are humble and appreciate their competitors.
of a big corporation and owns none is much
These are leaders who are honest about
more interested in control than he or she is in
challenges and do not blame external factors.
economics. Politics and bureaucracy become
They take responsibility.
the name of the game. It is just the nature of
humanity. Someone who owns his business is
Leaders often do not fully recognize the
used to control. He or she never has to fight
extent to which “who they are” affects
for control. The only thing a CEO, who is also
virtually every aspect of their organization.
an owner, has to fight for is value creation.
We seek leaders who are independent and
Leaders must be able to facilitate high
got an unusual combination of conservatism
performance in large groups of people who
and boldness. We want to invest in CEOs who
are looking for equality and responsible
are down-to-earth and value-based in their
freedom. Employees want to be held
leadership style. We know that the behavior
accountable - not micro-managed and
of CEOs are easily transmitted throughout
supervised every moment of every day.
the organization. There is a strong link
between financial performance and the
We like management teams that do not try
alignment of an organization’s cultural values
to guide investors on short term results.
with employees’ personal values.
Quarterly guidance increases the attention
17.
to short term results which is not good for
The CEOs we try to find spend more
the company or its shareholders. CEOs should
time focusing on cash flow than reported
avoid guidance and rather provide long term
earnings. We want to invest in CEOs who
ambitions which are rooted in the strategy of
care about profitable growth over time.
the company. These are ambitions that both
These CEOs do not pay attention to short-
employees and shareholders can align to.
term movements in the stock price. They are
fully aware that the stock market will put the
Companies get the type of shareholders
right price on the company over time.
they deserve. Long term communication
attracts long term investors. Companies with
We will invest in many decentralized
long term investors do have a competitive
organizations where employees get a lot
advantage in the marketplace since these
of responsibility and where there is a
investors encourage long-term thinking.
strong chain of trust from top management
to group leaders. There is a fundamental
We seek CEOs that act without external
humility to decentralization, an admission
advisors in capital allocation decisions. They
that the headquarter does not have all the
do not need external consultants to tell them
answers. Autonomy will work perfectly as
what to do with their own business.
The words and actions by management is of utmost importance for employees
18.
long as incentives are aligned with long term
No matter how much work we as investors
value creation. We like incentive systems
put into an idea, the future remains uncertain.
that are easy to grasp both for employees
Capitalism brings creative distruction. The
and shareholders. These incentive systems
best insurance against creative distruction is
stimulate profitable growth and are easy to
to partner with a management team that is
stick to year after year.
smart, energetic, honest and who is acting in
accordance with a vision and who has their
How the CEO organizes the business to
own financial future at stake.
foster entrepreneurial energy is important.
Managing human capital is critical.
Over time, great people generate the best
results in pretty much every undertaking. We will do our very best in order to find the best athletes in the field of business.
A CEO needs to manage two aspects of the company well in order to be successful people and capital
19.
Capital allocation
We want to invest in management teams that are outstanding investors and know how the capital market works.
T
he CEO has to run the operations
The main task in capital allocation is to tap
efficiently and deploy the cash generated
the right source and deploy capital at high
by those operations at high returns. They
returns, risk taken into account. Over and
need to be good investors and capital
over again.
allocators.
The pressure on CEOs to do the same type of
When we find CEOs who are very competent
capital allocation decisions as everyone else
at both the human/cultural aspects and also
is huge. But doing like everyone else is the
at allocating capital we pay close attention.
recipe to mediocre results. We like companies
Most CEOs rise up through the sales or
that spend lots of free cash flow to do small
operations ranks but as a CEO you will be
bolt-on acquisitions. We like CEOs that pay
in charge of allocating the capital of the
extraordinary dividends to shareholders
entire business. Capital allocation is a skill-
when there are no other good reinvestment
set. Capital allocation has a large impact on
opportunities. We like CEOs that minimize
value creation of the business and therefore
the spending on outside consultants in capital
stock returns. Two companies with the same
allocation decisions.
operating results and cash flow with very
different approaches to allocating capital will
It is those who have mastered the art of
get two very different outcomes for long-
evaluating management that the stock
term shareholders.
market rewards with gold. That is the reason
we focus on people. Investing with top
Every CEO has three sources of capital;
entrepreneurs and owner-operators gives
equity, debt and free cash flow. Good capital
you a big edge.
allocators know which source of capital to tap into at the right time. Every CEO can deploy capital in five different ways; invest in the business, acquire competitors, pay dividends, buy back shares or pay down debt.
20.
Not all growth is good
In light of the fundamental differences between the calculation of accounting earnings and economic value, it should come as no surprise that all earnings growth does not necessarily lead to the creation of economic value for shareholders.
W
e care about profitable growth.
Restructuring announcements disclosing
Shareholder value will increase only if
management’s intention to cut its losses
the company earns a rate of return on new
and exit value-decreasing lines of business
investments greater than the rate investors
are almost invariably accompanied by
can expect to earn by investing in alternative,
significant write-downs in current earnings
equally risky, securities. Earnings growth,
and increases in share prices. We have
however, can be achieved not only when
seen that in these situations, the market is
management is investing at or above the
responding not to the unexpected decrease in
cost of capital, but also when the company
earnings but to the long-term consequences
is investing below the cost of capital and
of redeploying corporate resources to higher
thereby decreasing shareholder value.
valued uses.
In spite of these facts we witness a lot of
We are obsessed by profitable growth. We
CEOs who believe that stock prices are driven
only invest in companies that are able to
by short-term accounting numbers and EPS-
reinvest at high returns on capital. Value
growth despite impressive evidence pointing
creation is key in investing.
to the contrary. One important reason is that market responses to earnings announcements are often misinterpreted. When investors believe quarterly earnings reports provide new information about a company’s longterm cash flow prospects, reported earnings per share will affect market value. But the market is not reacting to reported earnings per share. Instead, when appropriate, the market uses unexpected changes in earnings as a useful proxy for reassessing a company’s future cash flows. A disappointing quarterly earnings announcement that is seen as a change to the future cash flow prospects will drive the share price down. Research studies have shown that announced changes in accounting methods that affect reported earnings, but not expected cash flows, do not affect stock prices.
21.
Perspectives on pricing
When you are a long-term investor in great businesses, and enjoys the full benefits of compounding, you are going to get used to holding stocks that are not always “cheap” on short term multiples. You only see the effect of compounding earnings after many years. If you take any of the stocks in our current portfolios and go back 15 to 20 years and ask what we could have paid for our stocks and still got the market return, the answer will surprise you. The P/E-multiple we could have paid many years ago is a lot higher than one would imagine.
T
he multiples we pay will of course affect
We do our own valuation of companies.
our long-term investment results. The key
Multiples are not valuation. Multiples obscure
for us is to evaluate if the business still has
the value drivers of a business. The value
a strong competitive advantage many years
drivers are growth, return on capital and the
from now. If we have high confidence in
discount rate.
the competitive position in a decade we are
much more willing to pay a seemingly high
In our search for excellent companies we are
earnings multiple today. We are fully aware
aware of the fact that when you overpay
that paying a too high multiple can destroy a
for a “safe” company, you can turn a “safe”
decade of strong fundamental performance.
company into a risky stock investment. It all
When we face seemingly high multiples we
boils down to your conviction on the long
need to be confident on the competitive
term profitable reinvestment opportunities.
position years into the future and the
A high degree of certainty is needed when
stickiness of the corporate culture.
paying up for quality businesses and
outstanding management.
With our investment perspective it is far better to make a mistake on the price of a business, than the quality of a business. The vast majority of losses in the stock market come from investing in the wrong businesses, not picking the wrong valuation on the right businesses.
22.
Force of gravity
The force of gravity works against you as an asset manager. Too much assets under management will eventually lead to poor returns. One of our major competitive advantages as we launch our funds will be the initial size of the mandates. Small funds offer a lot of flexibility and freedom for fund managers, but very few clients dig into this advantage.
T
he incentive for almost all fund managers
and conviction at high levels which means to
is to grow the funds as large as possible.
only invest in the very best companies we
Unfortunately, clients suffer as the funds
find and build large positions where we feel
grow in size. We plan to close our funds well
risk is low and return opportunities great.
before we feel we have to sacrifice returns
for clients.
On the global investment arena liquidity is
generally better which makes it easier to
The optimal size of a fund naturally depends
run a fund with more capital. But if you run
on the mandate and type of companies in
a concentrated strategy globally with a
which the fund invests. Global mandates
bias towards companies where management
with a large-cap bias can manage billions
or founders own a large part of the
of dollars without running into liquidity or
company, you will sooner or later experience
ownership issues. Narrow, concentrated
capacity constraints.
mandates with a small-cap bias will quite
rapidly face constraints as the funds grow.
Investing in listed real estate in the Nordics
is a niche investment style with some very
We will invest across large and small
good opportunities for long term, quality-
companies in our funds. We have very
oriented asset managers. Many of these
flexible mandates but often prefer some
companies are also founder-led and less
of the smaller companies due to growth
liquid. Therefore you will face liquidity issues
opportunities in the small-to-mid cap space.
earlier than a Nordic mandate.
Naturally, we make sure to balance our
exposure with larger companies. With our
As a consequence, we plan to close our
investment style, where we tend to invest
funds before we face any difficulties in
in founder-led companies and other types
deploying capital. We want to generate the
of family owned companies, liquidity is
best returns possible. That is the right choice
less than in large institutionally-owned
for our clients.
companies. We like to keep concentration
23.
Risk management When managing risk we separate what we can control from what is out of our control. Our experience tells us that managing risk is more important than trying to manage returns. We control our investment process and risk taking. The end result of good risk management practices is solid returns. There are two types of risks we assess in all our investments: operational risk and financial risk.
Operational risk
We are careful with companies which are
Operational risk impacts the bottom line of
solely dependent on one factor outside of
our companies directly.
management control. Gold producers depend on the gold price, banks are generally
A risk management principle to reduce
dependent on the interest rate environment
operational risk is to avoid companies which
and airlines depend on the price of jet fuel.
sell a single product to a single customer
All these factors are outside of control.
in a single market. These business models are vulnerable. If the product, customer or
Operational risk also includes the assessment
market fails the results of the company will
of regulatory risk. We are careful with
be hit hard. Our risk management process
companies which base their existence solely
tends to carry us into business models which
on licenses from governments which make
are diversified and where single events have
the companies prone for regulatory pressure.
less negative impact.
24.
Financial risk
Portfolio risk management
We study financial risk through the
We manage overall portfolio risk in different
assessment of financial liabilities. The
ways. We avoid too much exposure in one
dramatic meltdowns in investments happen
single country in order to reduce political,-
when operational risk is high while the
and currency risk. We balance the liquidity
balance sheet is vulnerable. An example
risk on a portfolio level. We primarily invest
could be capital intensive industries where
in very liquid stocks but are able and willing
the end market collapses and where the
to invest in less liquid stocks when the right
company has significant financial liabilities
opportunity presents itself.
and investment needs. These situations lead to permanent capital losses. We put a lot of
Taking on market risk is part of being
effort into avoiding these situations.
invested in the stock market. We are not trying to reduce market risk through hedging.
Beyond operational and financial risk we
Our funds are subject to fund regulations
reduce risk through several measures. All
which make sure diversification across
potential investments are discussed in
number of holdings is taken care of.
the portfolio management team before investment. The pricing of the stocks is
We put a lot of effort into keeping the risk
measured against the predictability of
in the portfolios at a decent level. But the
growth in cash flow. We challenge each
future will always be unknown. An important
other with different insights. We run
part of our philosophy is therefore to invest
concentrated portfolios which make us think
with management teams who themselves
risk management in every single investment
are significant owners of the business. These
we make. We also manage risk through the
managers will put risk management on top of
sizing of positions. The largest positions
their agenda since they have to live with the
are characterized by the lowest levels of
consequences of their decisions.
operational and financial risk.
25.
Thank you for your support
We have set up our company with the aim of managing capital with a generational perspective. We are both owners, clients and capital providers to the funds that we manage. Clients in our funds understand how we invest which is our biggest competitive advantage. We will work hard to build some of the best portfolios we can using our investment principles. We do not look at relative performance on a quarterly or yearly basis. As a client you should not applaud us on a yearly basis if our relative performance to any benchmark is positive. On the contrary we will have years where our fund performance is behind any benchmarks on short term horizons. Measuring performance on a yearly basis makes no sense. A year is the time it takes the earth to go around the sun and a year is of more use in studying astronomy than investment results. As a client – be sure that we will work hard and dedicate ourselves to generate strong results.
On behalf of all of us at REQ Capital, thank you very much for your trust.
Nina Hammerstad CEO, REQ Capital
26.
Øvre Vollgate 9 • N-0158 Oslo www.reqcapital.com