Tom Stubbe Olsen has delivered great returns for more than two decades by executing on a simple but well-structured value strategy

Olsen, the founder and one of the portfolio managers at Mensarius, has a strong focus on capital preservation and a long-term investment horizon. He buys companies with attractive business models in viable industries at bargain prices, often when other investors are skeptical and concerned. Learn about his three preferred types of investments, his due diligence process, and why he recently bought SAF-Holland. 

Tom Stubbe Olsen, founder and portfolio manager at Mensarius

The interview has been translated and edited for clarity and length.

 

Can you describe your investment philosophy? 

“Our value-based philosophy is built around a few essential thoughts. We see equities as parts of a business. We buy parts of cash flow generating real assets, not financial instruments. So, we obviously do a thorough analysis and need to have a very good understanding of the company and the markets it operates in.”

“Another cornerstone is our focus on capital preservation. Our analysis starts with the risk of losing money before we think about the potential upside. To limit the downside, we always start out by asking ourselves: 1) Is this a viable industry? 2) Is this an attractive business model? And we also need to get a bargain price ­– the margin of safety is essential in protecting the downside and for generating an attractive return.”

“We evaluate each company on a stand-alone basis and don’t let the benchmark composition impact our investment decisions in any way. We have a focus on total returns and aim to double the money over a business cycle. That equals a target rate of around 12% annual compounded return. It’s only possible if we avoid large impairments on our investments.”

The strategy is quite simple, but few people can keep on performing for decades. In implementing it, what are the most difficult things to achieve?

“Actually, I don’t think it’s that difficult to execute on the strategy if you have the right mindset. Then it comes naturally to you, like second nature. But you have to accept the market doesn’t always provide the opportunities you would like. If that’s the case, you have to be patient and sit on your hands for a while instead of trying to force anything through.”

“But at Mensarius we have created an environment that allows us to focus on the important things and shield us from a lot of noise from the market. Many organisations are structurally prevented from enjoying the same luxury.”

“You obviously also need to get some dirt under your nails, dig around, and do the work. It becomes more difficult when you need to build an organization and make sure everyone has the same mindset. We spend a lot of time and put a lot of effort into finding the right people. People with the right attitude, values, and way of thinking.”

You typically focus on three different types of investments. Compounders, quality cyclicals, and restructurings. Can you explain what you look for in compounders and give an example?

“Compounders are usually already good companies with strong moats, and they can reinvest at the same high returns as they generate on their existing assets. There is a big difference between growing companies and compounders. We want profitable growth at attractive prices. These can be hard to find but once you own them, you can hold on to them longer as they keep compounding and growing the value.”

“A good example is the luxury brand owner LVMH. They have a relatively stable 15% return on invested capital. They can reinvest at an investment rate equal to around 5% of their assets every year at these returns. We were able to buy LVMH around 2013 or 2014 when the market, among other things, was concerned about the development in the important Chinese market.”

“Another example is the mining equipment maker Atlas Copco. It’s more cyclical in nature but they actually make higher returns on invested capital than LVMH over the cycle. They can make 15–20% ROIC and also have an average reinvestment rate of around 5% of the assets. It’s more cyclical. In some years they won’t grow and in some, they grow more. As long-term investors the volatility doesn’t matter much, it’s the long-term development that counts. The volatility actually provides buying opportunities.”

What do you look for in the second type of investments, quality cyclicals?

“Quality cyclicals are companies with strong balance sheets and leading market positions. If you can buy them close to the bottom of the cycle you just have to be patient and wait for the market to change. We often find opportunities in areas and industries when they are out of favor and other investors are concerned or avoiding them. The companies obviously need to live up to the two key questions I mentioned earlier. Is this a viable industry? And is this an attractive business model?”

“The downturn in the oil industry a couple of years ago allowed us to buy some high-quality companies when they were out of favor. Hunting is a good example. One of their core segments is perforating guns for the oil and gas industry. Perforating systems are deployed in the wellbore to complete a well to allow oil or gas to flow back to the surface. Hunting is the clear market leader and the stock fell a lot due to the low oil price. When you took a long-term perspective and looked at the normalized earnings it was extremely cheap, and the low oil price was not sustainable. The investments made at these prices were simply not large enough to keep up the required oil production. The stock is quite volatile, and it allowed us to adjust our position along the way. We also got a chance to invest in Frank’s International. It’s the market leader in wellbore casings. To get comfortable with these investments we took a field trip to Louisiana and Texas and visited a number of companies.”

How do you look at the timing of these investments? It’s easy to be either too early or to miss the opportunity if you wait too long?

“No one can time the bottom. However, we value the companies using cyclically adjusted earning power and we only buy if we have a margin of safety of at least 40% to our fair value. If the price goes down further, it’s an opportunity to deploy more capital into the company. Because we only buy good companies with healthy balance sheets in viable industries, we are confident that they can come out on the other side.”

“In the short run, everything can happen. Right after we buy a company, actually in the first couple of years, the stock price tends to be a bit all over the place. Some go down and some go up. But if you look further out, closer to our investment horizon, they start to perform and contribute.”

Can you describe the third type of investments you look at?

“The third and final type of investments is what we call restructuring cases. We don’t speculate in restructurings. We never just buy into a company in trouble with a low share price and hope things get better. We look for situations where the management has acknowledged the issues and has presented a realistic plan. Then it merely becomes a matter of execution. And we need to be confident that the management can deliver on the plan.”

“An example of a successful restructuring case we are invested in is Ericsson, the leading telecommunications equipment manufacturer. At the time it had been a dog for ten years and the stock had not performed. They were impacted by the entrance of the Chinese into the market with lower cost products. The market share had started to stabilize, and a plan was already in place. But the former management was not able to deliver. Then one of the large Swedish industrial investors, Industrivärden, had a new CIO and they started to air their concerns in public, which is quite rare. That was enough to spark our interest and the management changes came faster than we expected. Later Ronnie Leten, the former CEO of Atlas Copco, was elected as new Chairman of the Board. We were obviously very happy with that decision.”

“The plan includes a full overhaul of the business both focused on improving the profitability and selling non-core non-performing assets. The goal is to increase the operating margins from 6% to 12%. At the same time, we have started to see traction in 5G investments. It’s a restructuring case with an element of cyclical recovery as telecom investments have been low for a long time.”

Overview slide from Ericsson’s November 2017 capital markets day

Can you take us through your seven-step due diligence process?  

“The process is based on our focus on capital preservation, and we start out with a background check. Who owns the company? What interests are involved? How do we expect these people to act and what are the risks that they will take the company in a direction that hurts the minority shareholders’ interests? A lot of turnarounds never turn around due to conflicting interests and opinions. Even in good companies, it’s important to have a healthy ownership structure.”

“The second step we call financial statements and is a thorough analysis of the company. We do accounting due diligence to see if there are any red flags. A healthy and well-run company doesn’t have to aggressively exploit accounting rules to make the numbers appear more attractive. We adjust the numbers to get a more accurate picture of the underlying earnings. We use our findings in our analysis going forward and in our models.”

“The industry structure is important to us. It’s the third step. We need an understanding of who does what and where the company fits in. We prefer market leaders that dominate the industry. A company with a number 3 or 4 position in several different industries is significantly less interesting. Scale and a dominant market position give the company a number of advantages.”

What is the next step in the process?

“The fourth step, the value chain, is related to the industry structure. We examine where the company fits in with a focus on the competitive advantage. How does the company add value to its customers and is it difficult for the competitors to replicate? Does the company have pricing power? Does the company have an actual moat in this industry? It’s not enough that it’s a large, profitable, and growing company. It must have a sustainable moat.”

“An example of a company with pricing power is Viscofan, the clear market leader in sausage casings. They have scale advantages and unmatched know-how that gives them a lower production cost than their peers. In addition, the product is critical but only makes up a tiny part of the overall cost for their customers. Viscofan is able to make a ROIC above 15% while its peers struggle to earn the cost of capital. They have true pricing power.”

“In my experience, fewer companies actually have a sustainable wide moat than most people tend to believe. It might look like they have a moat, or they might have a temporary moat. But in reality, few companies actually do. It’s extremely dangerous if you make a misjudgment about the moat. When your mistake becomes apparent and the moat fades it’s not just the earnings that will decline. The multiple will also contract and it can lead to a large and permanent loss of capital.”

“The product life-cycle is the fifth step. It’s very important to understand in some industries. It gives us an idea about the long-term development. For how long can we expect the company to generate attractive profits? And what kind of investments are necessary?”

“The next step, the operating environment, includes all the things outside the company’s reach. Like the economic cycle or changes in regulation. In the financial industry, regulation and increased capital requirements has made a large part of it into a cost-of-capital industry. We are not interested in those kind of industries.”

“Finally, we judge the management on past decisions and look at the track record. We look for changes in the management team that might have a positive or negative impact. Are we confident that they are pursuing the goals that are in place, and do we believe they can deliver?”

Mensarius’ Seven-step due diligence process

“Our due diligence process is not a black box or rocket science. Anyone with an MBA has been through the seven elements we look at. It’s common sense but it is structured, and it gives you a good framework to evaluate a company’s true earning power. And again, you need to be willing to do the work.”

“Every step in the due diligence process feeds into our valuation of the company. I never liked DCF models and today we use a variation of a FCF multiple model. We don’t discount the cash flows and we don’t use risk adjustments in the valuation model. We do the risk adjustment in the assessment of the company and need an appropriate margin of safety to be interested and to invest. We can compare the FCF yield with other stocks, bonds, cash or other assets. And we can assess the FCF yield compared to the risk we take on by investing in the specific company.”

SAF-Holland is down 50% from last year’s top. You recently bought the company, what is the investment case?

“SAF-Holland is an interesting company. The share price has suffered a lot as people are worried about the auto industry. However, SAF-Holland has nothing to do with autos, they are exposed to the trailer, truck, and bus industry. It’s still a cyclical industry but it’s a different cycle and different drivers. The concerns and the share decline gave us a great buying opportunity.”

“The company is a product of the merger between the German company SAF and the American company Holland. They focus on the most critical trailer components, where quality matters. It’s a leading player in high-end components including chassis-related systems and components. They have a strong market position and scale advantages.”

“You need maintenance, service, and repair on brakes and axles. An extensive dealer network is essential to give the customers and end users comfort and to avoid costly downtime. SAF-Holland has its own parts distribution centers and a leading international sales and service network.”

“In the trailer market, it is actually the fleet manager who decides the specs on the trailers. So even though SAF-Holland does not sell directly to the fleet managers, they have a big impact on the specs and on which supplier the manufacturers use. The most important thing for the fleet managers is to avoid downtime, so they often prefer SAF-Holland due to the quality and the service network.”

“One of its key product categories is entire axle systems. They make high-end axles and they are one of the few players that makes them with disc brakes, which is quite interesting. Not long ago a lot of trucks in Europe used drum brakes. Now 90% of new orders have disc brakes. In the US, drum brakes still make up most of the market. However, we are beginning to see a change. Walmart is one of the companies that recently announced that they are going to change the specs on their new trailers to disc brakes.”

“Regulation is also supportive in both the US and in China. In the US you have a liability risk. If you try to save money by choosing an inferior product or technology when a better product could have prevented an accident, then you are liable. In China, they approved a new road safety code that has requirements quite similar to the ones we have in Europe. The majority of the trailer fleet needs to be replaced to live up to the new standards. Ninety percent of SAF-Holland’s revenue is currently in developed markets, but sales in China and other emerging markets are growing fast. We do not factor in the regulatory developments in our valuation, but it can provide a tailwind for the company.”

“The industry is cyclical, and you don’t have a long order cycle. Last time we visited one of the factories and the management, we talked about what they learned in the last downturn and the measures taken. They have been through an extensive lean program, they have automated a lot of the production and they have made their cost base more adjustable. The workforce is more flexible and can be adjusted to market demand on an ongoing basis. 

We know that the earnings would be put under pressure in a potential downturn. However, a downturn should impact SAF-Holland less than the overall trailer market – about half the earning power is generated by the after-market in spare parts.”

“The company has a healthy balance sheet and conservative management. We have big expectations for the company and are pleased that we got the opportunity to buy it at a good price. It can be difficult to get quality companies like this at attractive prices.  We actually see SAF-Holland more as a compounder than as a quality cyclical.”

“We have a margin of safety of around 40% to our fair value based on our assessment of the company’s earning power. SAF-Holland currently has an EBIT margin of around 6% and a dividend yield of around 4.5%. The return on invested capital is under some pressure and just below 10%; it could be closer to 15% in the long run.”



Mensarius was founded in 2007 as European Value Partners. At the heart of the company is the investment approach designed by portfolio manager and founding partner Tom Stubbe Olsen.

Olsen’s investment results date back to 1998. His strategy has produced superior risk-adjusted investment returns over a period of more than 20 years. Besides Olsen, the investment team consists of partner and portfolio manager Cédric Jacque, three analysts and a risk manager.

The company offers two different strategies, the Mensarius Equity Strategy and the Mensarius Equity ex UK Strategy. Both have about 20–30 holdings and mainly invest in European equities. The AUM is around EUR 1.1 billion.

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