For Hassan Elmasry, It's All In The Name
August 16, 2010
Hassan Elmasry, founder and managing partner at Independent Franchise Partners, LLP, is one of the successful money managers bravely leaving Wall Street to venture out on their own. After nearly 15 years as a managing director at Morgan Stanley, where he ran the Global Franchise and American Franchise equity strategies, since June of 2009, he has been running his portfolio at Franchise Partners LLP in London.
Money Management Executive caught up with Elmasry in his native Chicago to ask him about stocks and strategies he likes in the slippery slopes of today's market.
MME: How difficult is it to be long-only in this unpredictable environment?
Elmasry: I don't think it's any more difficult than usual. Every market cycle or investing environment feels uniquely challenging when you are in the thick of things. Fortunately, we have practiced our investment discipline and tested our decision-making tools over a few market cycles and have been able to generate attractive returns with below average volatility over a full market cycle.
Right now, our free cash flow valuation tools in particular are indicating very attractive valuations in the kind of ultra-high quality, wide-moat type companies that we focus on, so we are feeling reasonably confident about the long-term compounding potential from our strategy.
MME: Can you give a little insight into recent changes to your holdings?
Elmasry: We are genuinely "buy and hold"-oriented investors. Stocks in our portfolio have an average holding period of seven or eight years, so things don't change dramatically overnight.
Our overall approach is to focus on very high-quality companies, those that can sustain very high returns on capital due to the presence of a hard-to-replicate brand, patent or other intangible asset, and let the compounding power of that franchise work to our advantage over time. With that long-term perspective in mind, it's fair to say that the market action during the depths of the financial crisis two years ago created a once-in-a-lifetime fire sale in equities.
We took advantage of that to build positions in several phenomenally powerful franchises like eBay, Experian, Estee Lauder, Harley Davidson, McGraw Hill, Moody's and Starbucks. More recently, meaning over the past year, we have initiated positions in Campari, JNJ, Mead Johnson and Novartis.
MME: What about starting an asset management firm in this weak economic environment? Good idea? Bad idea?
Elmasry: Well, for us and our clients I think it was not a bad idea. From day one, we have been able to offer a stable team with a well-practiced investment discipline and backed up with a robust operating and compliance platform. After just a little more than a year after launch, we are managing a little more than $2 billion in assets for a range of pension, endowment, foundation and sovereign wealth plans from around the world.
The initial reception for what we have to offer has been good.
MME: What do you mean when you use the term "franchise"?
Elmasry: When we say franchise we aren't really talking about a chain of fast-food restaurants or other retail format. We are using the word more in the original Latin root, where to "frank" meant a license to mint currency or print money. We are looking for those kinds of businesses that, by virtue of a hard-to-replicate brand, or patent or trademark or other intangible asset, are able to coin profits on a sustainable basis without having to tie up a lot of capital in physical assets. If purchased at attractive valuations, these businesses should be outstanding long-term compounders of wealth.
MME: What is your interest in franchises? How did that come about?
Elmasry: It dates back to my experience working with Andy Brown and Dominic Caldecott and William Lock at Morgan Stanley. They had made the observation that that companies with unique, intangible assets can have structural advantages when it comes to fending off competitors and compounding their free cash flow. When you combine that with a strong valuation orientation, the result has been a concentrated stock portfolio with an attractive return profile with below-average volatility.
MME: What drives your investment decisions?
Elmasry: Two things really. We are looking for companies that demonstrate a very specific type of quality and also attractive valuation characteristics. We focus exclusively on companies we believe have a demonstrated potential to be excellent long-term compounders of wealth because of the presence of that dominant intangible asset. They earn very high returns on their own invested capital and can grow their free cash flow without requiring substantial investment in physical assets. In addition to that exacting quality standard, we are also value investors. We typically follow a small list of high-quality companies for a long time and wait patiently for a chance to buy one of those great business at an attractive valuation.