In July 2008, North Media received an unpleasant letter. That letter is one of the main reasons the listed media company owns a large equity portfolio. Its value made up 48% of the market cap by the end of Q2 2020. Another reason the portfolio is so large is the significant outperformance created by Richard Bunck.
Bunck is the founder and majority owner of North Media, a company he started in 1965. He has more than 55 years of experience both in equity investments and in running a business. His investment philosophy has been shaped by the successes and mistakes he has made in both areas. As Warren Buffett puts it: “I am a better investor because I am a businessman, and a better businessman because I am an investor”.
The investment strategy is simple, concentrated, and long-term focused. He trusts his common sense and tries to shield himself from all outside influence and advice. He focusses on industries that will see increasing demand in the next 5–10 years and tries to find the companies within these industries that will see increasing demand for their products as well.
Bunck and his company were among the early movers in the IT space in the 1990s. This has helped him identify some of the long-term winners in the industry.
I talked to Bunck about how he invests for North Media and why they own such a large equity portfolio.
Disclosure: I own shares in North Media, acquired on 9 May 2019. I will not make trades in the stock for at least 6 weeks after publication of the article.
The reason why a listed small-cap company owns a large equity portfolio
The global financial crisis was very tough on North Media. They had just expanded into Sweden and Norway and had utilized DKK 175 million of their 200 million overdraft facility. In July 2008 they received a letter from their bank, Nordea. The overdraft facility had to be brought down to 25 million within a month.
“We needed to get 150 million within a month in the middle of the financial crisis. It was extremely difficult. We only barely made it. In October or November, we got a new letter terminating the credit line completely. So, we needed another 25 million. This experience put a fear into me. At such short notice, we were nearly forced out of business,” Bunck explains.
North Media survived. And Bunck made a promise to himself that he would never again put himself or his company in that situation. So, they decided to build a capital buffer and become financially independent. The 2010 and 2011 earnings were used to build up their capital resources. Now the only debt in the company is backed by property with a low loan to value and it cannot be called unless they default on their payments.
The strong financial position turned out to be a competitive advantage when their main business came under attack from the government-owned postal service, Post Danmark. An intense price war resulted in large losses for both companies. Bunck believes the capital resources were a determining factor in Post Danmark’s decision to withdraw from the market: “They saw neither of us could make money and that they were not able to squeeze us out of the market due to our strong financial position”. This left North Media as the only player within the distribution of unaddressed retail leaflets to Danish households.
North Media also has a focus on investing in its businesses and returning money to shareholders. Since January 2018, the company has returned more than DKK 200 million in buybacks and dividends, equivalent to around 30% of the 2018 market cap or 16% of the current market cap.
The investment philosophy
Bunck sees his approach as very straightforward. He believes many people make it too complicated. “The hard part is to avoid being influenced by other people or by your own emotions. And that can be extremely difficult,” he says.
He recommends never to invest with borrowed money. “It increases the risk a lot and you can be forced to sell at the wrong time,” Bunck explains. He had a bad experience with leveraged investments in his private portfolio during the financial crisis.
Other ways Bunck reduces the risk include buying stocks with a long-term focus with the intent to hold them for years. He buys large ultra-liquid shares in the main indexes and does not speculate on commodity prices or currencies.
He thinks owning 8–20 stocks in 3–5 different industries and 2–3 different countries gives you a good diversification.
To find the stocks that will grow over the long term, he starts by identifying markets or products that will see growing demand both now and in 5 and 10 years time. Then he tries to find the company or companies in each industry that have the products he thinks will be more and more in demand in the coming years.
Valuation does not play a large role in the investment strategy. Every sale or purchase is solely based on the thorough assessment of the company’s long-term relevance and the future demand for its products.
His long-term view contradicts with many investors’ shorter-term focus. “Many investors are speculators that try to predict short-term price movements,” Bunck says. That is one of the reasons he avoids listening to friends, advisors, or others who have an opinion on the stock market. “It can cloud my judgement and make me insecure. It’s my experience that I make the best decisions when I’m not influenced by others, but come to my own conclusions”.
He sees his personality as one of the things that helps him as an investor: “I’m a loner by nature and like to do things by myself. I’m not that social and I don’t meet people to talk about equities. I cannot completely avoid being influenced, but I try. I did not sell a single stock during the Corona crisis even though many people were saying ‘Sell, it will get much worse’. I was not popular in the board at the time, but the board of directors accepted my strategy.”
“When the market drops more than 30% it can make you insecure. But you need to remember that the only prices that matter, are the prices you buy and sell at. Everything in between is irrelevant and will not impact how much money you make.”
2016 is the first full year with disclosure of the equity returns. But Bunck says they had a pretty good return on the equity portfolio throughout the whole period. Since 2016 the annual return has been 15.3% compared to 8% for the market, a 49% outperformance during the whole period.
Performance North Media equity portfolio
In 2015 the portfolio changed from mainly bonds and some equities to all equities. At the time North Media only disclosed 4 of their 11 holdings – Novo Nordisk, Genmab, Amazon, and Facebook. All four are still in the portfolio today. Currently, they own 13 stocks and 2 mutual funds.
North Media investment portfolio July 2020
A look through the holdings shows they are characterized by market-leading positions and good underlying growth. Most have strong balance sheets and high returns on invested capital. The two latest additions to the portfolio, Sea and MercadoLibre, stand out by not being profitable yet. But Bunck does not think it’s an issue as long as the companies are investing heavily in dominating attractive markets in the future.
Bunck does not rebalance the portfolio. “As long as I’m convinced in the long-term growth potential and the company’s quality, I will not sell. I will not take profit because of the share-price increases. I will only sell if we need the money elsewhere or if I no longer believe the company will be attractive in 5–10 years. For example, if the competitive situation changes or something like that. If things are going well, I don’t see a reason to sell. I know it’s common to say: ‘the price has gone up a lot and the PE is higher, let’s sell’. I think it’s a bad habit that limits your long-term returns. Why should I sell a company that performs really well and I still think it will be among the winners in 5–10 years?”
You would not expect an 80-year-old investor to have a large part of the portfolio in IT stocks. But Bunck has more experience in the area than most:
“I have been interested in IT as long as it has been around. Both for my own use and in our company. We had a Nixdorf machine with cassettes early on, but the first real IT machine was a Multibus back in the ’70s. It had no memory, but it was great at calculations.”
“In 1978 I started a newspaper called Søndagsavisen. Whenever possible we automated and digitalized the paper and the way we worked. We were the first of the Danish publishers to go from lead to digital typesetting of the paper. We were way ahead of the large Danish papers in using modern technology. Since we had the whole paper digitally anyway, we thought ‘Hey, we can actually upload the whole thing on the web and make it available across the country’. It was the first online paper in Denmark.”
“Søndagsavisen was strong in classifieds. Twenty percent of all Danish jobs were listed in the newspaper at the time. We moved it all online. Classifieds for jobs, used cars, property, travel, and so on. We later realized we could not scale all these as separate marketplaces all at once. So, we focused on a few verticals. Jobs was one of them and that was the birth of OFIR in 1996.”
To put this into context, in 1996 only 5% of Danish families had internet in their home. Today North Media owns digital platforms within rental housing, jobs, and consumer loans.
Bunck is convinced the trend will continue: “IT is here to stay. It’s becoming more and more widespread and more integrated into companies’ daily operations, production, and so on. Many of these companies have invested an extreme amount of money and had hair-raising losses to dominate their industry. Now they are profiting from their strong positions and long-term growth. I’m in no doubt at all that a company like Amazon will continue to grow. Perhaps they can be stopped by government interference if they become too dominant in the future, but not otherwise.”
Another IT holding is SimCorp, the world’s leading provider of integrated front-to-back investment management systems to the investment management industry. “I think it is an extraordinarily interesting business model. They have developed a single product they can sell to a lot of customers with few extra incremental costs. In return, they put all their effort into developing the best software in their niche. I’m also certain SimCorp will continue to grow year after year. They don’t have many competitors. It’s a niche market, but it’s still large, as they are a global player.”
The shift from cash to card and online payments is another long-term trend Bunck likes to invest in. The big potential first caught his attention when he traveled with his wife on vacations to the US: “In the beginning, we could not pay with cards a lot of places. And I realized card payments were much more common in Denmark at the time. It would just be a matter of time before the adoption would increase in other countries. It’s just so much smarter and easier to pay by card or online. That’s why we own equities in Mastercard and Visa and used to own PayPal.”
When you look at both historic and current levels of cash transactions, it is not hard to see the potential Bunck saw years ago and still sees. In 2016 the percent of the total transactions conducted in cash was around 17% in Norway and 22% in Denmark. Around 39% in the US and 61% in Germany. In India and Indonesia, it was above 95%. You can see the level per country here.
North Media has three business segments:
- FK Distribution distributes unaddressed printed advertisements and newspapers to Danish consumers physically and online via minetilbud.dk.
- North Media Online operates digital platforms within rental housing, jobs, and loans.
- BEKEY sells electronic access systems based on digital keys, primarily for home care services and distributors of goods.
Learn more about North Media on www.northmedia.dk
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