Money managers, in contrast, actively manage portfolios of financial securities for clients in accordance with a stated investment strategy. Mutual fund managers, for example, are money managers. Money managers and financial advisers generally possess different professional skills, with money managers usually being trained as securities analysts, i.e., researching, analyzing, and valuing financial securities. Few financial advisers have training in advanced securities analysis. Financial advisers, however, will generally be much more knowledgeable than money managers on matters such as types of retirement accounts and estate planning strategies.
Generally both money managers and financial advisers are registered investment advisers (investment adviser representatives are the individuals themselves who hold the series 65 license) who have a fiduciary obligation to act in their client’s best interest.
The value approach is at odds with the “modern finance” view of capital markets, which assumes that security prices at all times appropriately reflect all available information. To value investors, the modern finance view of security prices seems to ignore the institutional constraints and behavioral perversions which often underpin modern capital markets.
We calculate intrinsic value primarily by discounting a company’s future free cash flows. We define free cash flow as the discretionary cash flow available to all capital providers after all expenditures have been made to maintain the business in its current state. This approach, referred to as the discounted cash flow approach, is based on the premise that an asset is worth the present value of the future cash benefits which it will generate over its life. We supplement the discounted cash flow approach by also analyzing a company’s net asset value and by viewing market valuations on similar companies.
Business valuation is as much art as science, requiring many subjective inputs. We try to be very conservative in our assumptions, placing particular emphasis on downside scenarios. We deal with the inherent subjective nature of business valuation by using multiple valuation methods and performing rigorous scenario analysis. We also only invest in businesses whose economics we can thoroughly understand, shunning firms whose cash flows are too unpredictable or whose assets are unanalyzable.
Inherent in the modern finance view of risk is the assumption that security prices fully and appropriately reflect all available information. In other words, modern finance adherents view a security’s price changes as perfect recalibrations of value. We at Tortuga Capital highly refute this assumption. We have observed that often a security’s short-term price volatility is far in excess of changes in a company’s underlying fundamentals.
In view of how we define risk, we seek to minimize risk by (1) always demanding a margin of safety, (2) diversifying among securities to eliminate any overexposure to a particular company or industry, (3) holding large amounts of cash in client portfolios when bargain prices are difficult to find, and (4) hedging when appropriate.
Separately managed accounts (SMAs) are not pooled investment vehicles, but rather accounts which are uniquely owned by individual clients and professionally managed by an adviser. Although numerous SMAs may be managed in accordance with a given investment strategy, each portfolio is unique to the client’s account.