Devotion Capital Management (DCM) prefers that new individual and institutional accounts have at least $250,000 and a time horizon of at least 5 years.
Funds invested with us should not serve as a surrogate for your bank account. Instead, clients should limit their investment to that portion of their total assets that can be committed for the longer-term, at least three years. Over such a period of time we expect the stock prices of our portfolio companies to more closely reflect their underlying intrinsic values.
Client portfolios often look very similar due to the structured nature of our portfolio and approach. After all, each of us desires the preservation and growth of our capital over the long-term. Nonetheless, each client portfolio is separate and managed individually on a fully discretionary basis. We encourage clients to articulate preferences, especially any ethical restrictions (i.e., tobacco/alcohol companies), when management services begin.
DCM is a fee-based investment manager. We get paid based on assets under management only. We have implemented a simple fee structure (an annualized fee of 1% of the assets we manage). Fees are deducted calendar-quarterly from client accounts.
Many firms and mutual funds try to hide their fees from clients. Our clients receive a quarterly statement outlining our management fee and how it is calculated. There are no sales charges involved in investing with us and there are no penalties for withdrawing your capital. We also receive none of the brokerage commissions associated with the securities transactions of our accounts.
In short, our fee structure is simple and it ties our fortunes to reasonable performance over time. This is in keeping with our desire to have our personal interests tied to those of our clients. We purposely structured Schacht Value so that everyone’s interests are aligned.
When clients entrust hard-earned dollars to an investment manager, they should be assured that the manager will invest it as if it were his/her own. Sadly, in our industry, this is not always the case.
Generally speaking, our policy is to purchase the same securities for our clients that we purchase for our own individual portfolios. It begs the question: If the investment is so wonderful, why don’t we own it ourselves? The answer is that we do. We never expose our clients to any risks that make us uncomfortable. Our personal capital is exposed to the same risks and earns the same returns as our clients’ capital.
We employ the stock selection process we’ve outlined to construct portfolios of deeply discounted securities. This patient, long-term investment approach is the best way to achieve our goal of providing above-average returns to clients while incurring below-average risk. In conjunction with this philosophy we strive to be fully invested. We are not market timers.
DCM holds relatively concentrated portfolios when compared with other investment managers, typically holding less than 25 securities. Nonetheless, we believe this is more than adequate to achieve effective diversification.
We believe concentrated portfolios of carefully selected securities produce superior long-term performance. Since excellent investment ideas tend to be limited, we concentrate heavily on our best ideas, subject to reasonable portfolio diversification. When we discover large pockets of under-valuation, we are willing to commit substantial portions of our clients’ and our personal assets to take advantage of these opportunities.
Indeed, diversification can be overdone. This phenomenon is affectionately known as “di-WORSE-ification”. It occurs when portfolio managers lack conviction and invest client money in company after company. Mutual funds owning hundreds of companies are commonplace. If one of their selections performs poorly the portfolio does not suffer much, but the converse is also true. This type of diversification leads to mediocre performance. It cures only the portfolio manager’s ignorance, not the client’s risk. We prefer to limit risk in other ways, including the application of value investing principles and a thorough knowledge of our portfolio holdings.
Client portfolios contain companies of all sizes (all-cap). We do not constrain our search for attractive investments by filtering out companies solely on the basis of size. As a result, a significant portion of portfolio assets may be invested in smaller (generally under $1 billion) and medium (up to $5 billion) capitalization companies. Put simply, we go where the value is.