GLOBAL FUNDS POWER – INTERVIEW Erwin Dut, Kempen Capital Management

Concentrated portfolio of long term profitable companies and a star player in its niche markets. Kempen Capital Management investment vision leads them to a select group of strategies that place them among the top of their international league in small caps and real estate, but also high-yield stocks, fixed income and funds of hedge funds.

Erwin Dut joined Kempen Capital Management in February 2015 as Senior Portfolio Manager for Kempen Oranje Participaties. Prior to joining, Erwin was responsible for equity research at Deutsche Bank Amsterdam (1999-2005) and Kempen Securities (2005-2014). He began his career as an analyst at Banque Indosuez and ING Investment Management. Erwin holds a Master degree in Business Economics from University of Groningen (1996) and is a CFA charterholder (1999).

1.      How  much AUM does Kempen manage?

Kempen Capital Management manages circa €46bn across various asset classes and strategies. We do this from our offices in Amsterdam, Edinburgh and London.

2.      How does your investment approach compare to the other mutual funds?

In many of our equity strategies we act as a long term, engaged shareholder in companies versus many of our peers being quant-based, diversified investors in the stock market. At Kempen, we typically manage concentrated portfolios of quality companies for the long term.

3.   What assets do you have in European Equities? (%   and   bn)

Kempen Capital Management manages circa €2bn in European small caps and €2bn in European large caps, which represents the bulk of our active strategies’ assets under management.

4.    Which are the most favorite  European Countries for your Investments?

For the fund that I co-manage, Kempen Oranje Participations, we look across Western Europe for attractive small caps to invest in. We typically find Italian, Swiss and Dutch companies attractive given their international focus. Although large small cap markets, in Germany, France and the UK some companies only focus on their large home market, which builds strong franchises but also limits long term growth prospects. We look for leaders in international niche-markets.

5.    Which investment style: value, growth, GARP, and so on,  fit better to Kempen?  Which is your investment approach?

Although each investment team has its own style and process, I think at Kempen we are ‘quality at a reasonable price’. For example, my colleagues of the Global Small-cap team screen their large universe on ROCE (quality) and EV/EBIT (value) when making their selection.

6.    Which screens do you use? How do you know if a company fits with your investment style?

For Kempen Oranje Participations we look for market leaders in industries that are relatively easy to understand and have little risk of disruption of their economics due to emerging technologies. Therefore, the first screen we make is an industry screen. Within these preferred industries, we look for strong companies that are profitable, cash generative and who’s shares trade at reasonable valuations.

7.   Which are the key factors that Kempen target (management, corporate culture, governance, markets, profitability, ESG, say on pay and so on)?

The most important factors that we look for are industry quality, profitability, company culture, management integrity, ESG and shareholder structure.

8.   Do you have a target price when you buy a stock, such as 10 or 20% upside, for example?

The fund aims to generate on average 10% annual total return for its investors over the long term (after cost) and this we integrate in our valuation models when looking for sufficient returns on investments. Over the last 25 years, Kempen Oranje Participations has on average made 13.0% per annum (after cost).

9.  What is your average market cap? And what about your cut-off?

Kempen Oranje Participations invests in companies with market caps between €150m and €700m, the area of the stock market that institutional investors typically call micro-caps but when looking from a broader economic perspective often are sizeable companies. Our universe in Western Europe consists of around 500 listed companies.

10.  Typically, what size position do you take in your portfolios?

For tax reasons we buy more than 5% of a company’s oustanding capital (for Dutch taxable investors, owning more than 5% of a company ‘s capital makes the capital gains and dividends tax free under Dutch law). Kempen Oranje Participations has a concentrated portfolio of 15-20 participations and normally holds 5-10% of a company’s capital.

11.  Does a Company have to be profitable, when your Fund invests in this Company?

Yes, we only invest in profitable companies. We do not mind earnings volatility as we are long term investors and take a through-the-cycle look at companies earnings development. For us the key is that over time companies become stronger by operating efficiently and making smart strategic decisions.

12.  Do you use to meet management before buying a stock?

As we run a concentrated portfolio and hold significant stakes in less liquid stocks, we need to be convinced of an investment before we start building a position. That means that we always meet management before deciding on building a new position. Doing our homework afterwards is far too risky for us.

13.  Where do you prefer/like to meet management?

The first meeting typically happens at investor conferences where we can speed-date a lot of companies very efficiently. Then we go home, do the fundamental analysis,  which includes building a model and doing follow-up conference calls with management and other information sources. When we hold a position in a company, we make sure we visit their headquarters and see their operations.

14.  Are your Funds long-term investors, what is your average holding period.

We have the intention of being shareholders for the long term and we have held many of our positions for more than 10 years. However, sometimes the companies that we invest in are bid for by strategic or financial buyers. This triggers us to move on and search for new attractive companies to invest in.

15.  Are you an active investor? And does your investment policy consider to have a seat in the BoD of the Companies?

We are an engaged shareholder but not activists. We are in frequent dialogue with management about strategy, renumeration, dividend policy, ESG etc. and we actively vote at shareholder meetings when needed. However, we do not have board seats and work purely on the basis of public information that a company provides.

16.  Are there any sectors or themes you would not  invest in?

As said, we invest in companies that we can understand and that are going to be around in the next 10-15 years. Therefore, we would not invest in binary investments like biotech or oil exploration. Also, companies need to be profitable so early-stage, unprofitable companies that are in heavy investment mode are typically not for us to look at.

17.  Typically how many European companies do you meet in a year?

I would say we meet around 100 companies a year, where we make sure that the ones that we meet already meet our criteria of being profitable leaders in low-risk industries.

18.  Why should a Company  target funds such as Kempen?

As a long term shareholder we allow companies to focus on the long term. We like companies that think about how they can be the winner in their industry in the long run rather than focusing on next quarters’ earnings. Also, we help many of our companies when thinking about ESG, dividends, renumeration etc. and we have a history to stick around when the going gets tough.