Unconstrained investing pays off

Originally published in the April/May 2014 issue

Jan Petter Sissener is a household name in Norway and he is also renowned throughout Scandinavia’s financial community for having built up a series of successful brokerage houses. Maverick Sissener is not afraid to publicly criticise his former employers – and in fact he had no qualms about speaking out against some of them even while he was working for them! One of Sissener’s finest moments and memories was advising clients of Kaupthing to withdraw their money from the Icelandic bank in February 2008 as “too many questions were unanswered.” Clearly this turned out to be sound advice, and although it cost him the job Sissener has not looked back because “loyalty to the client always comes above loyalty to the bank.”

He does, however, regret the takeover of Alfred Berg by ABN Amro, lamenting that “no bank exists that cannot destroy the world’s best equity house.” Indisputably the preeminent investment bank in the Nordic region, ABN was in fact at one stage ranked as number five globally. But according to Sissener the Dutch bank reneged on its remuneration promises and fired top management – even though the staff delivered on targets. In a business where human capital is the main asset, ABN’s actions were fatal for ABN as well as their subsidiary, Alfred Berg.

As head of equities at several brokers between 1989 and 2008, Sissener managed huge teams in several divisions, as his purview covered trading, research and sales. He admits he is happy not to be an “Indian chief” now as managing people is “very demanding, particularly when individuals regard themselves very highly.” Now Sissener is focused purely on research, but in other respects his remit is much wider. The Sissener Canopus fund is completely unconstrained by geography, asset class or exposure. So Sissener can and does reach well beyond the Nordic region in his search for the most compelling investments – with impressive results. Canopus made over 34% in 2013, which, combined with low volatility, earned it The Hedge Fund Journal’s UCITS Hedge award for “best global equity long/short fund” in 2013. Sissener’s Sirius vehicle has more than doubled investors’ money since June 2009. His rule of thumb is that “the expected return of investments needs to rise roughly proportionately with their distance from Oslo city.”

Absolute return UCITS
All investments, however, are expected to deliver absolute returns – not least because Sissener has much of his own personal fortune invested in his funds. “We do not mind if we are up 35% when the index is up 50%,” he says, but “we will not be pleased to be down 10% if the index is down 50%.” Sissener’s funds are intended to be “a safe place for savings,” and so far the investor base is mainly private individuals in the Nordic area, who often invest via the internet and find that the UCITS fund structure has tax advantages. While there are a few professional investors the track record is not yet long enough for most institutions to allocate, Sissener admits. Additionally, Sissener thinks some institutions may have difficulty categorising his eclectic style into any strategy box.

As well as selective shorting, portfolio hedges have included index and single-stock put options, as Sissener found levels of implied volatility good value until quite recently. Options need to be good value as Sissener will seldom spend more than 0.5% of the fund on option premium. “When markets are irrational we buy cheap out of the money options,” he says. Equally, Sissener is open-minded about selling options when he is paid well enough to do so – and could also do straddles. Currency is not hedged at present as they find it is expensive to do so. In response to client demand, Sissener might set up another vehicle that could use CFDs to avoid currency exposure. Sissener initially partnered with SEB Prime Solutions, with SEB Fund Services acting as management company as they “offered an easy package,” he recalls. Sissener is looking closely at the recently firmed up UCITS V proposals now as the UCITS IV will transition to the next stage.

Free-thinking investments
Sissener’s macro view is pretty upbeat – he sees economic growth accelerating in the US and Europe and eventually leading to higher interest rates. Fears over China are overblown, he thinks, while Russia and Ukraine together are only 3% of global GDP. Consequently, asset allocation has lately been 55-60% equities, 30% corporate bonds and 10% cash. No leverage has been used because “We are waiting for a new entry point to increase equity exposure – and Putin is serving this up on a plate,” he says.

Profits over the past year have been drawn mainly from the equity markets. In terms of industries, US oil services has been a chunky weighting and is a sector where Sissener think they have analytical advantages, as they have a good handle on what is happening in the Norwegian industry. Plane maker Airbus made a strong contribution too. “It is geared to growing air transport, more economical planes, and we felt that Airbus’s valuation discount to Boeing was unwarranted,” says Sissener.

Having been a broker all his life, Sissener naturally still talks to sell-side brokers. Yet he openly questions if lower post-crisis pay in the financial industry will reduce the quality of research, and admits that he is not always greatly inspired by sell-side research. Each of Sissener’s three analysts (soon to be four) covers their own sectors, with Kjell Magne Rystad focused on energy and Adil Shah on industrials. As such they have a big impact – although Sissener takes the final decisions. “I do not believe in consensus-driven management,” he says, and emphasises that “one guy has to take final responsibility.” One of the analysts, Peder Steen, does in-house risk analytics. Although there are a handful of brokers providing useful insights, many of Sissener’s best ideas have been generated in-house – and have gone against the prevailing market mood.

Nokia was a contrarian trade where Sissener has trebled their money from the lows. When Sissener first bought into Nokia the stock was “the most popular short in the world amongst hedge funds,” he says. This was a very overcrowded short position where some hedge funds were short 5-7% of the company. Another investment that took advantage of other investors’ excessive pessimism was Greek retailer and luxury goods maker Folli Follie. Sissener saw value in the tax-free airport shopping outlets that are more oriented towards foreign tourist spending than to the ailing Greek economy. Additionally Folli Follie makes ladies’ fashion accessories such as handbags, and also wrist watches, bracelets and wallets, that have a niche market. This firm was “dragged down to ridiculously low levels,” Sissener recalls – and the fund has doubled its money, albeit on a small position.

As well as identifying such bargains, Sissener has also sidestepped some of the more fashionable investments on the long side. Offshore seismic exploration was a sector du jour that everyone seemed to be in love with last year – but Sissener begged to differ. While the sell-side community seemed to be unanimously recommending that investors buy the entire sector, Sissener had concerns. Barriers to entry were not that high and nor was the pricing particularly competitive versus new ships. Sissener could not see much earnings visibility beyond six to nine months and yet the sector traded at high multiples. Sissener avoided long positions and put on a few shorts. The sector has dropped by about 40% since.

Statoil is another consensus buy that Sissener has stood aside from. He feels the oil producer may have garnered something of a safe haven premium, being well regulated in a safe place. Statoil has been a beneficiary of Russia’s invasion of Crimea which raised fears about the security of Europe’s gas supplies. Additionally, management has stated that they will migrate from production to profitability targets. The future divestment of part of the government’s 75% stake has also excited some investors. But Sissener’s concerns are based on big-picture fundamental analysis. “New barrels cost $75 to extract, including the capital spend, and the old ones only cost five,” he says, hence Statoil’s cashflows – one of the cornerstones of Sissener’s analytical process – are going down while the stock goes up. That said, Statoil is still “too cheap to short” valued at $10-$12 per barrel of proven reserves, and with a yield of 5%.

Neglected Norwegian value
Statoil is not the only cheap Oslo-listed stock. Norway may be the world’s most expensive country, but Sissener seems to find the local market is a treasure trove of overlooked opportunities for value investors.

He gives us a whistle-stop tour of some top holdings. Oil services firm, Aker Solutions ASA, and mobile operator, Telenor Group, are both value stories with high dividend yields of around 5%. Telenor has the added attraction of trading at a 40% discount to the value of its stakes in other quoted companies, which themselves have “tremendous upside”. Telenor has exposure to Asian markets including Pakistan, India, Bangladesh, Thailand and Malaysia with the first mobile call in Myanmar (formerly known as Burma) recently made on Telenor’s network. Telenor has, Sissener thinks, been dragged down by its emerging markets exposure including to Russian mobile operator Vimpelcom. This stock has dropped after announcing plans to cut its dividend and repay debt, but Sissener welcomes its more conservative approach. Elsewhere, Sissener’s Russian exposure has included taking a small position in Lukoil, which he reckons is on a PE ratio of three and valued at $3 per barrel of oil reserves. Sissener seems bullish on oil prices, thinking that the Arabian spring could extend beyond the Saudi border.

Other telecoms plays include Oslo-headquartered Opera, that has an internet browser with 350 million customers worldwide. Whereas some other Sissener holdings are deep value, Opera sounds more like “growth at a reasonable price”: it is growing earnings rapidly but trades on a PE ratio of around 15. Also in telecoms, Ericsson is a play on improving mobile network connectivity, something of which Sissener has frustrating personal experience. Even though Scandinavia is supposedly one of the most heavily wired regions of the world, he still finds that telephone calls frequently get cut off, and fears that the explosion of internet transmission could place further stresses on the system and prompt a huge demand for investments in networks.

Another value play is insurer Storebrand, which has been hampered by concerns over setting aside reserves to cover the costs of increased longevity forecasts. Norway’s government has asked Storebrand to provision an extra NOK 12.5 billion ($2.1 billion) but Sissener thinks this is already factored into the price. Like many insurance companies, Storebrand has been a victim of “financial repression” because lower interest rates increase the discounted value of their liabilities; in neighbouring Sweden the regulator has been innovative in setting a temporary floor under discount rates to try to alleviate this burden.

So, unlike many stocks, Storebrand could benefit from higher interest rates, which would reduce the value of its liabilities. Sissener argues, “Storebrand is a levered play on rate rises.” In the meantime, investors enjoy a secular growth story where the top line is growing at 12% and the bottom line could grow much faster thanks to the effects of operational leverage. And a new managing director has also begun to cut costs. Yet despite 70% of the stock being owned by foreigners, it still languishes on a PE ratio of six or seven times – which Sissener thinks is too cheap, even if Storebrand does need to raise additional capital. Sissener thinks Storebrand could easily get away a rights issue as Gjensidige placed its 20% shareholding in 20 minutes.

Another non-consensus position is bank DNB, which has become a proxy for the Norwegian housing market, where Sissener does not accept the consensus view that a property bubble has been inflated. Sissener admits that he knows some people in Norway’s financial sector who have over-extended themselves in buying very expensive properties in the hope that pre-crisis bonuses would reappear, when today “your bonus is your job.” But the broad market dynamics are still constructive. Given that Norway’s population continues to grow by 70,000 people a year (about 1.5%), and only 20,000 new houses are being built each year, Sissener thinks the market imbalance will persist. He therefore thinks that a valuation of 1x book value and 10x PE ratio will prove to be too low for DNB. Additionally, Sissener thinks that DNB’s conservatively high levels of reserves will turn out to be a valuable engine for earnings generation over the long run.

If Sissener thinks that some of his holdings are merely undervalued, Norsk Hydro is “completely misunderstood.” Having bought some mines in Brazil from Vale it is perceived as a miner. But if you strip out the value of the hydro plants as well as the Vale assets, Sissener argues that the rest of the business is for free – including the world’s lowest cost aluminium producer, where demand is estimated to grow 7% this year, according to Alcoa. Norway is unbeatable on aluminium because it uses reservoirs of water to generate extremely cheap electricity, which is the largest input cost for aluminium. Sissener even thinks that a spin-off could pave the way for substantial returns of capital to shareholders.

Double-digit debt yields
In the debt space, Sissener also looks for value – and has recently been finding it. Although credit spreads in most countries have collapsed to post-crisis lows, it is still possible to find yields as high as 12-15% in Norway. Sissener seeks out double-digit yields on stories on which they have an edge in understanding. These can include quasi-distressed companies, issuing high-yield debt or convertibles. The quality of management and ownership is critical for Sissener to get comfortable with all investments, including corporate debt. He has strict criteria for corporate governance, including that one share means one vote so that minority shareholders are fairly treated. He is also wary of inter-company dealings and dislikes nepotism. Hence, he has thus far avoided investing in any Wallenberg empire companies (but does not rule them out). Sissener wants clear cut lines between shareholders, management and boards, and complains that in many US companies management effectively appoints the board that supervises them, and in turn appoints the compensation committee that sets their pay. Sissener’s own board seems to include some of the “great and good” of Norway – Harald Arnkvaern is a lawyer to the supreme court, while Inge K. Hansen is a former CEO and CFO of Statoil. After a lifetime in broking, Sissener’s own appetite for the financial markets remains unabated as he pursues his very independent style of investing.