By Rupert Hargreaves. Originally published at ValueWalk.
Far View Capital Management the global value orientated equity fund returned 15.6% and net of all fees and expenses for partners during the second half of 2016. For the full year, the fund produced a net return of 19.55% taking returns since inception (July 1, 2011) to 109.09%
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In the Far View fourth quarter and full year letter to partners, Brad Hathaway the partnership’s managing partner and largest investor writes that the firm’s best performers during the year were Aware Inc., Coats Group PLC, and The RMR Group. Coats alone produced a return of 100%. Gains were offset by declines in Covisint Corporation, Halogen Software, and Mediaset S.p.A.
Far View Capital Management Up 19.6% Dissects A Bad Trade
The main focal point of Far View’s full-year letter, a copy of which has been reviewed by ValueWalk, is a post-mortem on Aqualis ASA, a Norwegian consulting firm that Far View exited during the second half of the year.
Brad Hathaway dissects the Aqualis mistake and admits that the , and it thesis for buying the stock was incorrect as it “materially underestimated the extent of the company’s exposure to the energy markets.” As a result of the oil price collapse in 2014-15, demand for Aqualis’s services plummeted. Unfortunately, Far View had plenty of opportunities to realize this mistake but never put two and two together:
“In fact, in a later note during the oil price plunge, I wrote that I expected the company to “grow significantly over the next few years, regardless of the level of offshore spending.” Aqualis’s revenue declined double digits y/y in Q3 2015, and the share price was cut in half between the results announcement and the end of the year.”
Investors make mistakes, it is part of the job. Learning from the mistakes is key and Brad’s post-mortem of Aqualis in his full year letter is an attempt to help a Phoenix rise from the ashes. It appears that the managing partner put too much trust in the company’s management’s outlook, he writes that during his conversations with management, he regularly questioned the team about the impact of oil prices on their business. They assured the Far View manager sales would remain stable. To add insult to injury, these optimistic views essentially blinded Far View’s portfolio manager to evidence of increasing end-market weakness, including worsening industry layoffs, numerous project cancellations, and unexpected client payment delay. Therefore, repeated bouts of confirmation bias set in and the investment partnership did not take an opportunity to exit the stock as fast as it should have done.
To ensure this mistake never happens again, Far View has included a new section to its investment checklist to double-check that decision-making is not being “inappropriately influenced by an outside authority, including management or a well-known investor.”
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