How Andrew Brenton outperformed the S&P 500 by earning 20% annual returns over 25 years
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How Andrew Brenton outperformed the S&P 500 by earning 20% annual returns over 25 years
Since Turtle Creek Asset Management was founded in late 1998 by now CEO Andrew Brenton, the fund has earned an annual average return of 20.3% compared to 8.3% for the S&P 500. That would have turned a $1,000 investment into more than $102,000 in just over 25 years.?
Brenton describes himself as a value investor, but as we will see, Turtle Creek’s investment philosophy differs from investors who typically only focus on valuation. However, Brenton emphasizes that “there is nothing original here,” meaning that Turtle Creek does what good value investing is supposed to do.
That includes having a clear view of a company’s intrinsic value, operating with the right temperament, and considering risk in a different way than academics. That is easier said than done, though. Let’s explore some of the most important lessons from Brenton and Turtle Creek:
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1. Use “Short-termism” To Your Advantage
Brenton believes that markets are becoming more inefficient. That is in stark contrast to consensus, as most people think the speed and availability of information allow stock prices to react ever faster to news.??
Brenton argues that “short-termism” is more prevalent in today’s market than before, whether the reason is social media, impatience, or shorter investment horizons. Regardless, short-term thinking tends to lead to more volatility because most investors are only willing to look one or two quarters into the future in search of quick gains.?
According to Brenton, there are fewer and fewer fundamental investors out there, at least as a proportion of the market.
Turtle Creek uses this to their advantage. An example from Turtle Creek’s portfolio is Service Corp, a company that has averaged an 11% annual return if you had bought and held over the same years that Turtle Creek has owned it.??
However, as Brenton highlights, Turtle Creek added 500 basis points to the average return (meaning the stock earned 16% annual returns for the fund) because the stock price has moved around and Turtle Creek has bought or sold as the discount to intrinsic value also moved; "We like low intrinsic value volatility and high share price volatility."
An important side note Brenton emphasizes is that his fund does not try to guess which stocks are volatile. Rather, it is a feature of the market that the share price will move up and down, often with little correlation to the business’s fundamentals. By thoroughly understanding the businesses in the portfolio, investors should view volatility as an opportunity to take advantage of the market’s irrational short-termism.
2. Don’t “Buy and Hold,” “Buy and Optimize.”
Along the same lines, many investors buy a stock and forget to keep up with it. As value investors, Brenton and his analysts continuously update their DCF models to track the intrinsic value of their portfolio holdings. Classic value investors will have a price target and sell the stock as it approaches the pre-determined fair value.?
Turtle Creeek, on the other hand, continues to assess the intrinsic value of the business as it changes with time. On a recent podcast, Brenton gave an example of a Canadian transportation company Turtle Creek has owned since the stock was trading at around $3 per share.?
The company continued to improve and had grown into Turtle Creek’s largest position at around $200. Recently, the company made a big acquisition that Brenton and his team forecasted to be highly accretive to the company’s earnings. Despite the company being the largest position in the portfolio, Turtle Creek scooped up more shares after the acquisition as the story had improved and the stock remained reasonably priced.
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3. Don’t Own More Companies Than You Can Follow
The questions of portfolio construction and diversification are ones with no single, correct answer. As Brenton says, Turtle Creek aims to have approximately 25 names in the portfolio. The reasoning is twofold:?
For retail investors, the right answer depends on risk appetite and how much time one has at hand to keep track of the portfolio holdings. If a concentrated portfolio keeps you awake at night, diversification is the answer. On the other hand, owning more companies than you can follow likely means you are over-diversified and better off owning an index fund.?
4. Risk Is More Than Volatility
In the value investor camp, the classic view of risk correlates to volatility; how much stock prices move up and down. While Turtle Creek subscribes to the value investing style, Brenton points out that risk is not that easily defined. Correlating risk with volatility assumes that the market is efficient, which, as we discussed, Brenton does not believe.?
Instead, Turtle Creek views risk as the chance of being wrong. For a fund that spends a lot of time on building models and forecasting the intrinsic value of the portfolio, risk is rather - to Brenton - the odds of the forecasts being wrong.?
To account for that risk, Turtle Creek incorporates a factor called dispersion, or range of outcomes. It is easier to model the possible outcomes for a company like Service Corp, which runs funeral services across the country, compared to insurance or home builders. Investors can account for that by demanding a lower price for more unpredictable businesses.
Furthermore, as Turtle Creek has experienced, risk is also the chance of negative company specific events. In late 2023, the board of Gildan Activewear (GIL), a long-term holding in Turtle Creek’s portfolio, fired the founder and CEO of the company.?
Because Turtle Creek and others highly disproved of the move, some shareholders became involved in re-instating the CEO and bringing in a new board. As Brenton explains, the value of the business would have been permanently impaired had the CEO not returned, which obviously was not in their forecasts.
This emphasizes the importance of owning a diversified portfolio to account for events that are impossible to predict.?
Conclusion
Regardless of investing philosophy, investors should pay attention to a fund that has outperformed the S&P 500 by such margin as Turtle Creek has over the past 25 years.. While classic value investing has not been a winning strategy for some time, Brenton and Turtle Creek show that a consistent approach that focuses on both business quality and valuation, and that avoids the short-term thinking of most fund managers, can be wildly value creating.?
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This Newsletter's Author
This newsletter was written by J?rgen Pettersen. You can find him on?Twitter/X.
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