Investment Manager`s
LETTER TO SHAREHOLDERS
Nielsen FCP - Global Value
2014
2014: Safety first
Dear Investors and Partners
The net asset value per investment unit rose by
6.87 % in 2014 against a comparable return
achieved by the general stock markets,
measured by the performance of the MSCI
World Index Local (MSCI WIL) which came
out at 9.81 %. Based on a monthly average,
62.5 % of the Fund was invested during 2014.
From the establishment of the Fund in
December 2008 and till the end of 2014, the
return averaged 10.98 % per annum against an
annual return of 14.20 % achieved by the
MSCI WIL during the same period. The
relative return achieved by the Fund during
the period is not satisfactory.
However, it’s worth bearing in mind that we
achieved our return at a lower risk, as the
investment ratio of the Fund was relatively
low. My first priority remains the
maximization of the Fund’s average annual
return in the long term, but the Fund’s longterm success will depend on whether the
Fund’s full assets will also be able to generate
a return in excess of the one generated by
MSCI WIL. I thank you for your anticipation
and confidence that that will be the case.
Below I have provided a comparative
overview of the Fund’s returns and investment
ratios over the years:
Jahr
Return Nielsen FCP Global Value
Approx. Invest- Return
ment Ratio
MSCI WIL
2014
6,87%
63%
2013
19,61%
65% 28,87%
2012
19,41%
84% 15,71%
2011
-9,03%
86% -5,49%
2010
4,77%
85% 10,01%
2009
24,94%
73% 25,73%
2008
4,43%
p.a.
10,98%
60%
9,81%
4,65%
14,20%
approximate accumulated return after costs of
140 % against 124 % for MSCI WIL,
corresponding to an annual return of 15.5 %
for the Fund’s stock investments against 14.2
% for MSCI WIL. My bias towards
conservatism, which influences the price that
I am willing to pay for a company, also applies
to the Fund’s liquidity. Looking back, it’s
quite clear, though, that we would all have
been better off, if the Fund had been fully
invested for the period. I refer you to the
Management Report for 2013 for my thoughts
on holding liquidity.
Our distinct safety orientation means that we do
not join the markets in a hype.
Investments
I adhere to a concentrated portfolio and we
have 12 companies in the portfolio. The five
largest positions totaled 41.8 % of the
portfolio, and the ten largest positions made
up 61.6 %. With so few companies, the return
of the Fund may vary significantly from the
general stock markets (as measured by MSCI
WIL) from one year to the next. Perhaps even
for longer periods. Even though our aim is to
generate an absolute return, I hope and trust
that an accumulation of the discrepancies will
prove to be in our favor in the long term.
When adjusted for its liquidity ratio, the
Fund’s stock investments have generated an
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
I have listed below our ten largest positions
and the percentage of the Fund that each
individual company makes up:
Company
Sector
Percentage
of the Fund
AMERICAN INTL GROUP INC
Insurance
9,9%
FAIRFAX FINANCIAL HOLDING
Insurance
9,9%
ADMIRAL GROUP PLC
Insurance
9,6%
RINGKJÖBING LANDBOBANK A/S
Banking
7,4%
ALLEGHANY CORP.
Insurance
5,0%
THOR INDUSTRIES INC
Industry
4,7%
NORDEA BANK AB
Banking
4,5%
BANK OF GREENLAND A/S (THE)
Banking
3,9%
CALBEE INC.
Nahrungsmittel 3,4%
CONZZETA AG
Industrie
3,4%
The five largest positions are:
American International Group: leading
international insurance company represented
in over 130 countries. Since 2008, AIG has
been going through a rationalization process
selling off non-core activities. The
management is focusing on cost reduction and
restrained pricing of insurance risk with the
objective of achieving a return on equity of
between 10 % and 15 %. The company is
priced at 0.72 times shareholders’ equity.
Fairfax Financial Holdings: holding company
for a number of insurance companies in North
America. The members of the management
team are shareholders in the company
themselves, and it is a very owner-oriented
company. Focusing on the “float” from the
insurance companies and value-oriented
investment with a firm eye on producing
absolute return, management has on
average increased its book value per share by
over 20 % per year since 1985. Originally, we
invested in Fairfax at a large discount
compared to the company’s equity and at an
even greater discount vis-à-vis its intrinsic
business value. Fairfax is now priced at 1.3
times shareholders’ equity.
Admiral Group plc: Britain’s most profitable
motor insurance company. Admiral focuses
on low costs, selling directly to the consumer,
good customer service and high return on
equity. Since it was established in 1993, the
company has enjoyed very high growth with a
market share rising from 0 to 11 %. Admiral is
priced at 8.7 times cyclically low operating
income.
Ringkjøbing Landbobank: regional bank,
which is Denmark’s most profitable credit
institution. The management focuses on very
high credit quality in its loan portfolio and
stringent cost management. Despite high
solvency, the bank has produced a high return
on equity. We’ve invested at prices below
shareholders’ equity, and the bank is currently
priced at below 9 times estimated earnings.
Alleghany Corp.: holding company with
investments in insurance companies,
including
Transatlantic Holdings, which is among the
world’s ten largest reinsurance companies.
Alleghany has the same business model as
Fairfax and Berkshire Hathaway with focus on
disciplined
insurance
operations
and
investment of the “float” from the insurance
business with a view to achieving high return
on equity in the long term. Alleghany is priced
at 1.0 times shareholders’ equity.
With a weighting of 50.2 %, it’s clear that
banking and insurance still make up a
relatively large proportion of the Fund: four
insurance companies totaling 34.4 % and three
banks adding up to 15.8 %. Other industries
make up the remainder of the portfolio,
representing 16.1 % of the value, while cash
and short-term money market instruments add
up to 33.7 %.
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
As our portfolio is so concentrated, there may
be situations where increases in individual
companies’ stock prices or relevant exchange
rates make us break the “5 – 10 – 40 %” rule.
According to this rule, more than 10 % of the
Fund may not be invested in one position, and
the positions that individually make up more
than 5 % may not total more than 40 % of the
Fund’s assets. Whenever this happens, the
portfolio is adjusted.
We have sold our position in Tokio Marine
and reduced our position in Conzzeta. In
addition, in order to observe the “5 – 10 – 40
%” rule, we reduced our position in Nordea
Bank and invested the proceeds in the Admiral
Group. We bought our first shares in Admiral
in February and increased our position
significantly in the second half of 2014.
“The Security I Like Best”
This was the title of an article published in the
Commercial and Financial Chronicle on
December 6, 1951. The author was entirely
unknown at the time, but he has since become
a household name: the investor Warren
Buffett. The article was on the company
Government
Employees
Insurance
Corporation, these days better known by the
abbreviation GEICO, which at the time was a
listed and highly profitable motor insurance
company in which Warren Buffett was an
investor. Many years later and following a
complete takeover in 1995, GEICO is now a
subsidiary in Warren Buffett’s holding
company Berkshire Hathaway.
The sentence “The Security I Like Best”
includes three factors: a company, a financial
instrument (security) and a price. There are
many companies that I find interesting based
on their business models and managements,
and they are all listed and have therefore
issued shares. Some of these we have already
invested in. But most of the time, the third
factor, that is the price, proves to be the
stumbling block, as the price is higher than the
level at which we want to invest. As you all
know, our investment philosophy demands a
low price in order to ensure that our
investment has the necessary safety margin.
There are high requirements for a share to
become the “Security we like best”.
We invested in the British company Admiral
Group plc in 2014. Initially the size of our
position represented just below 5 % of our
Fund’s total value, but later in the year, we
doubled our position to just below 10 %. At the
moment, I would describe this investment as
“The Security I Like Best”. Strangely enough,
Admiral is also primarily a motor insurance
company, and even though Admiral also
focuses on selling directly to the consumer
without the use of agents, just like GEICO,
then the business model is somewhat
different.
With a history going back to 1993 and the
subsequent management buyout in 1999,
Admiral had and still has the clear objective to
focus on low prices and good service. The
company concentrates on selling directly to
the consumer without the aid of a network of
agents. The management’s view was and
remains that over time the Internet would
become an irresistible rallying point for
consumers to compare prices of standardized
motor insurance in Great Britain. Thus, the
company Confused.com was established in
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
2002 with an internet website by the same
name, where consumers could enter their
personal data and get quotations from the
motor insurance companies in the market.
With its low prices, Admiral was thereby able
to sell its products without using agents.
The success of this business model has meant
that Admiral has grown from having
originally one brand, zero customers and 57
employees to currently having 3,940,000
customers, 15 brands, 7,000 employees and an
income from premiums and other insurancerelated products generated from online sales
totaling GBP 1,563 million as well as a market
share in Britain of just above 11 %: growth
that is beyond amazing!
It’s true that such tremendous revenue growth
is wonderful. It’s an indication of the
company’s sales success, and over time, it’s
proof that customers like Admiral’s products.
However, just as important as revenue growth
is profitability. And this is where Admiral
outperforms the rest! While the majority of
Admiral’s competitors in the British motor
insurance market has an expense ratio of
around 30 %, Admiral operates with an
expense ratio of only 15 %.
Where Admiral’s competitors are only able to
achieve combined ratios (claims and
administration costs in relation to income
from premiums) of, on average, just over 100,
Admiral has demonstrated combined ratios,
over time, of just below 84. For the last 11
years, Admiral’s average profit margin after
tax has come out at just below 32 %. Admiral
reinsures 75 % of its business and the level of
tied-up capital is therefore not very high. In
this way, Admiral has been able to grow at an
amazing rate and also pay out a large
proportion of profits to shareholders. Over the
last 11 years, the return on equity has been just
above 55 % per annum without interestbearing debt on the balance sheet.
The management attaches great importance to
employee
motivation.
They
actually
implement the self-evident idea that a happy
employee is more productive which is why
they consistently prioritize employee
motivation. For several years on the trot,
Admiral has been voted among the best
companies to work for in Britain. Not just
managerial staff but all employees are
shareholders in the company.
With the existing business model, Admiral
will be able to grow further in the British
market and I fully expect that it will. But
management has invested in applying the
same business model in markets outside
Britain. In 2006, Admiral established a motor
insurance company in Spain and launched a
Spanish price comparison website similar to
Confused.com. Later similar initiatives
followed in France and Italy. And most
recently, Admiral established subsidiaries in
four states in the USA together with a website
for comparing insurance prices. If Admiral
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
will be able to replicate the success of its
business outside Britain, the company can
look forward to many years of profitable
growth. When that’s said, it’s worth bearing in
mind that it’ll take the subsidiaries some eight
to ten years to achieve break-even. Finally,
towards the end of 2012, Admiral started
selling home insurance in Britain according to
the same principles.
cash equivalents. Measured at the current
adjusted market value of 8.7 times the 2013
operating income, a bad year for the industry
and an operating income kept down
“artificially” by the company’s activities
outside Britain, the market does not seem to
pay for Admiral’s huge earning potential.
Liquidity
Insurance business, including motor insurance
business, is cyclical in nature. The prices of
motor insurance in Britain fluctuate, and the
British market has experienced falling prices
for the last two years. Admiral reacted by
easing its foot off the pedal, so to speak, in
order to reduce the growth in number of new
customers, and then when things pick up and
the market once again will begin experiencing
rising prices, Admiral will lack price increases
on its products and accelerate the increase in
new customers. This means that for these
couple of years, Admiral will achieve
cyclically lower prices, which in turn will
have a negative impact on earnings. Net
earnings for 2013 was GBP 287 million, but
the same figure will be lower for 2014 and
maybe for 2015. However, it did look as if the
falling prices stabilized towards the end of
2014. We must also bear in mind that
Admiral’s activities outside Britain reduce the
overall result somewhat, as investments
continue to be made in these activities, which
have not yet reached the break-even point.
As mentioned earlier, Admiral does not have
the level of tied-up capital as a typical
insurance company. In addition, Admiral has
a history of generating high profit margins.
Finally, Admiral has other business income on
the side. Therefore, its right to assess the
company in a slightly different way compared
to a typical insurance company and adjust
Admiral’s market value by taking into account
insurance-related allowances and accounts
receivable as well as the company’s cash and
I have never attempted to predict whether in
the short term, the stock markets will rise, fall
or remain unchanged. But I have difficulty
finding companies that currently meet our
Fund’s investment criteria: companies based
on good business models with highly
competent, shareholderoriented managements
which generate high returns on invested
capital and which have market values that
are significantly below their business
values. We have sold some of our positions,
and I haven’t been able to replace all of these
with interesting investment prospects. This is
why our Fund’s liquidity is also relatively
high at the end of 2014. If we’d not had to
reduce our position in Nordea in order to make
room for Admiral, our Fund’s liquidity would
actually have been about 4 % lower.
Objective
Our financial objective is to maximize the
average annual long-term return on
unitholders’ equity while focusing on low risk
of permanent loss of capital. I don’t measure
our financial success by the size of the Fund’s
assets. My focus on value appreciation over
time is to be met by investment in undervalued
and well-capitalized companies, domiciled in
Denmark and abroad.
I strive to achieve this objective by investing
in both high-quality and ordinary companies.
I prefer a portfolio of high-quality companies,
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
as these companies will increase their intrinsic
business values considerably in the long term.
High-quality companies are characterized by
being market leaders, generating high returns
on invested capital; they are cash generating
and have shareholder-oriented and highly
competent managements. However, no matter
the company, we must have a very high safety
margin before we invest. It is not enough that
a given high-quality company is traded at a
relatively “fair” price. This means that it will
take longer before I kick the ball, but — other
things being equal — it will also mean a lower
turnover rate for the Fund.
If we’ve invested with a high safety margin, I
don’t mind, if the market price falls further, as
I add to our investment with higher safety
margin. Ultimately, we’ll benefit when the
market price reflects the intrinsic business
value. I don’t worry about the quarterly or
annual price development: we focus on what
we can do today to maximize value in the long
term.
I thank our investors for the confidence that
they have shown in the Fund and in me. I try
to include in my reports both positive and
negative aspects of my management of the
Fund’s assets. In the final analysis, however,
it will be the results that will determine if I
deserve your confidence.
January 2015
Sincerely
Nielsen Capital Management
Fondsmæglerselskab A/S
Ole Nielsen
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Nielsen FCP – Global Value (Letter to Shareholders 2014)
Important Information
The Fund’s investment objectives, risks, charges, and expenses should be considered carefully
before investing. The prospectus contains this and other important information about the Funds,
and it may be obtained by visiting our website www.nielsencapitalmanagement.com. Read it
carefully before investing.
Mutual fund investing involves risks including loss of principal. Performance information
quoted herein is unaudited, represents past performance and is not a guarantee of future
results. The investment returns and principal values of investments in the Fund will fluctuate
so that an investor’s shares, when redeemed, may be worth more or less than their original
cost. Current performance may be higher or lower than the performance information quoted
within.
Nielsen Capital Management Fondsmaeglerselskab A/S
Eriksholmvej 40
DK-4390 Vipperoed
www.nielsencapitalmanagement.dk
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Nielsen FCP – Global Value (Letter to Shareholders 2012)