CEO reflects on Christmas Eve market drop and how philosophy allowed him to capitalise on buying opportunities
Christmas Eve dropped an unwelcome gift down the chimney for investors and represented the pinnacle of uncertainty and volatility in 2018.
The S&P 500 index fell by 2.7%, which was the first session before Christmas the broad-market benchmark has endured a loss greater than 1%. According to Dow Jones Market Data, it was the largest decline on the pre-Christmas trading day since 1933.
The drop prompted some portfolio maneuvering. IBV Capital, for example, identified opportunities and attractive pricing among US bank stocks – Bank of America and Citigroup - and its basket of rate reset preferred shares. Once the markets reopened on Boxing Day, it increased its stakes in these securities.
Capturing these opportunities is central to the firm’s strategy, which is built on creating an investment environment that allows this to happen in times of market turmoil.
Talbot Babineau, president and CEO, believes his firm has an advantage given its evolution from a family office to an independent investment firm, while maintaining “tangible structural advantages” from the former.
It’s part of what he calls IBV’s edge; its "unique" combination of structure, core investment tenets and its overall temperament. The first element stems from having an investible asset base he calls “permanent flexible capital”, which manifests into three core IBV attributes.
1, Long investment horizon, which is “much longer than usual and allows us to think like owner-operators;
2, An intense focus on protecting against IBV’s definition of risk, which is the probability of a permanent loss in capital – and not a superficial risk proxy, such as volatility;
3, Valuable optionality generated by always having cash. Babineau said: “Consistently, we’ve found that this approach has allowed us to be opportunistic buyers and avoid the wealth destruction that’s inevitable when you become a forced seller.”
He added: “As investors, we gained valuable experience watching the family office patriarchs growing their operating business. This imparted on us a wisdom that’s translated directly into core tenets of our investment strategy.”
The second part of IBV’s “edge”, therefore, focuses on four aspects that are designed to not only weather volatility but create and capitalise on opportunities. The first speaks to focusing on a few great investment ideas that fall firmly within its competency wheelhouse and, as a result, a comfortably concentrated portfolio, while the second drills down on the research it takes to develop this core competency.
“Developing this takes time, but it instills confidence in the investment decision-making process,” Babineau said. “Fortunately, research, which is the foundation for building a core competency, is the part of investing we’re most passionate about.”
The third aspect to the firm’s strategy is having a broad investment mandate to allow for versatility and, finally, IBV believes in assets that have value that can be firmly tethered to conventional value indicators rather than speculative forms of investing.
As for the temperament, he explained this is a crucial value-add to the firm: “Cultivating our firm’s structural attributes and creating an investment environment that promotes continuously sound investment decisions, even during volatile markets, isn’t enough.
“We believe an investor’s emotional temperament must align perfectly with their investment approach – otherwise the risk they’ll fail to execute the strategy is too high. The importance of this connection is often under-appreciated. For us, our firm’s disposition allows us to be comfortable as independent thinkers.
“This has translated directly into an ability to pursue making investments that fit our strategy, despite it being very uncomfortable – sometimes gut-wrenching – to do so.”