I recently caught up with Pasi Havia a friend and quantitative fund manager at Helsinki Capital Partners. His HCP Quant fund had a great year in 2021 it was up 47.5%!
I immediately asked him if you would be willing to share his investment insights and answer a few questions. Luckily, he agreed to the following interview.
This is the second interview I've done with Pasi, you can read the first interview here: Insightful interview with a quantitative fund manager - Pasi Havia I am sure you will find this interview as insightful as the first one.
Describe your investment philosophy as well as that of the fund you manage?
Pasi Havia:
Since the last interview my responsibilities at Helsinki Capital Partners have grown and these days, I manage two equity funds:
- HCP Focus and
- HCP Quant.
And, oh man, they are completely different animals.
HCP Quant follows a quantitative value investment strategy in small and midcap equities. This is fully quantitative driven to catch companies that are undervalued by many different measures.
For example, at the turn of the year fund’s P/E sat at 6, dividend yield 6.4%, ROE 32% and EV/EBITDA 4. Cheap, cheap, cheap!
HCP Focus on the other hand invests in companies that have a long-lasting competitive edge, benefit from positive network effects and megatrends and are typically market leaders in their industry.
We do a deep qualitative analysis of the companies and only invest into 12 which we keep our eyes on very carefully. That is where the fund’s name Focus also comes from. “Winner takes it all” describes these companies as they create their own natural monopoly.
As a fund manager the Finnish Financial Authorities regulate my personal investments. This puts certain boundaries around me and has caused me to invest differently than I would do if I was a private investor.
One of my biggest investments is the ownership of HCP Group which 100% owns our asset management and advisory companies. Our HCP Group company has invested into our HCP Black fund that has invested into HCP Quant and HCP Focus funds.
Through this I actually have an indirect ownership on all of our funds. But mostly I have a lot of entrepreneurial risk which I cannot recommend to most of investors. I also own Estonian pension fund shares that come through the local pension system as I currently live in Estonia.
Describe how your investment approach has developed since our previous interview?
Pasi Havia:
For the HCP Quant fund the investment process have stayed the same. This is actually very important for the shareholders in the fund. Otherwise, the fund would experience so called style drift. Style drift is a divergence of a fund from its investment style or objective.
By having the very same investment process our clients can be sure that the style what they invest in stays the same. Otherwise, a client who thought of getting into a value stock fund might end up owning growth stocks. Not a nice surprise!
For the HCP Focus fund which I took over with our new fund management team a few years back works the same way as before. As we have our investment processes clearly defined in our company’s intranet it is easy to continue the legacy.
Year 2020 we had a best performance with this fund ever with our new fresh team as we delivered a whopping 58.3% return after all expenses and fees.
For me, the last few years have been a great learning experience because HCP Focus is so qualitatively driven. Although I aced equity valuation class at the university with highest score in year 2010 it has been refreshing to start truly sharpening these skills again.
What investment strategies worked particularly well last year?
Pasi Havia:
Last year was clearly the comeback year of value stocks. I saw a switch already happening in 2020 when value stocks began performing after a decade long underperformance compared to growth stocks.
If the last ten years has been in the favour of growth stocks, I see the next ten years will most likely be for value stocks. Low interest rates, central banks’ quantitative easing and low inflation was a good environment for growth stocks.
Now all these have changed. We have an inflation raising its head, interest rates are shooting up and central banks are tightening their monetary policy. Add to this delivery chain problems caused by covid-19, and we have a perfect situation that has now began to work causing the resurgence of value stocks.
Have you done any improvements to the system you use to add investments to your portfolio?
Pasi Havia:
For HCP Quant, no. It is run the same way as it has always been.
For the HCP Focus we have done more changes during the years. We have added checks for ESG screening, exclude certain industries that we see are harmful like gambling, tobacco, and weapons.
We also changed the main valuation method to EVA (Economic Value Added) which works better with companies that have lots of intangible assets. Most of the overperformance of this fund began after changing the valuation method back in 2015.
How do you put your portfolio together? For example, do you use risk parity?
Pasi Havia:
Last time we talked a lot about concentration risk. This is still true. Both funds, HCP Quant and HCP Focus are concentrated. In HCP Focus we have only 12 positions, in HCP Quant 20-30.
As I run active fund strategies the best way to deliver results is to have a high concentration. With wide diversification you are guaranteed to get a return that is close to whatever the market returns.
There is no point of having an active strategy if you limit your performance to close what the market does. Unless if you are a regular “chicken” fund manager exposed to career risk. Then if you take conviction and are right not much good happens to you but man, if you are wrong you get fired. This is also one of the main reasons that it is so hard to find truly active strategies.
Both of the funds also use equal weighting, and we do not try to time the market in any way.
In HCP Quant all new positions are bought for the equal weight value of the fund. Within the fund I then let the stocks move as they do without rebalancing back as long as the weight stays within the borders set by Finnish AIF rules.
In HCP Focus we do an equal weight rebalancing at the turn of the year and let other time of the year let the market decide which picks are the best (or worst) for the year. Again, as long as the limits set by Finnish AIF rules are not exceeded.
How often do you rebalance positions in the fund?
Pasi Havia:
In HCP Focus we do the rebalancing once a year at the beginning of the year. Funds by-laws state that two positions can be at the max of 20% weight in the portfolio and others can have a max weight of 10%. We do need to monitor these levels in the funds and especially in the HCP Focus when there has been a super performer in the portfolio, we need to sell the stock to drop its weight in the fund. These limits are set by the AIF legal structure in Finland, and we cannot bypass them.
As a private investor I will let the profits run and not rebalancing back to under 20%.
In HCP Quant fund rebalancing happens throughout the year. The fund has a high turnover and every time a position is sold a new position replacing the sold one is bought for an equal weight value of the fund.
I try to keep the number of positions that are sold and bought each month the same to have a smooth rebalancing throughout the year. This kind of rebalancing also takes care of the dissolving the market timing effect.
How do you manage concentration risk in your portfolio?
With this I mean how do you stop the portfolio from being overweight a certain industry that may screen attractive in a specific month. For example, oil and gas stocks.
Pasi Havia:
We actually have an opposing view of concentration risk with our equity funds. Especially in HCP Focus having only 12 positions it is clear that it is a high conviction strategy and carries lots of risk from concentration. This naturally is one of the main reasons why we can deliver better performance than the market. And of course, if the view has not been working for us then also the downside risk is bigger.
For HCP Quant diversification is wider in individual stocks but also in the industries. For me it is more important that what kind of qualities the portfolio carries as a whole than any separate picks. The screening process that HCP Quant uses has been suggesting companies from a wide array of industries through all the years it has been in use.
Any new insights you have had to improve your investment process recently?
Pasi Havia:
This is not an insight on how to improve the investment process but something that I have learned through the years running and observing the strategy that I think is interesting.
As HCP Quant invests into a small sized companies that are priced cheap usually every year there is few positions that get bought out. Because the companies are cheap and small it makes a perfect sense that bigger competitor sees the opportunity and makes an offer.
The premiums of these transactions vary widely.
This is definitely one source of alpha in small and midcap value strategies.
Do you follow any key risk-management guidelines in managing your portfolio?
Pasi Havia:
Absolutely. Just a simple fact that I run AIF funds force to put certain risk-management processes in place. Some of these are separate from me and run by our Head of Risk Management. Then there are risk-management policies that come from financial authorities, like with position sizing.
But of course, we do have also internal risk-management guidelines in use in the funds.
Like I mentioned earlier with HCP Focus we exclude certain industries, do ESG check-ups during the year etc.
In HCP Quant the most important one is the use of a -20% stop-loss level for any of the positions.
Anything else you would like to mention?
Pasi Havia:
All of the HCP’s funds are open for foreign investors. We have clients from Germany, Sweden, Austria, Switzerland, Turkey, Estonia etc. Please have a look on our offering and see if any of those would be a good fit for yourself.
We offer virtual meetings for those who want to talk about our funds or need any help with making their investment. Our homepage is Helsinki Capital Partners
Thank you, Tim, for this interview and I hope I have been able to provide new thoughts for all you readers. Make good investments!
Best Regards, Pasi Havia
