Value Column von Hans Peter Schupp

08 JULY 2024

How to deal with value traps

Hans Peter Schupp, managing partner of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) about bad investments and why they can happen over again.

As a portfolio manager, it’s always comfortable to report on successful investments. And it is even more comforting when you also receive prizes and awards for this. It is good for marketing and usually leaves a big impression on investors. From our point of view, however, it is also important for an investor to find out how their asset manager deals with bad investments. And to be honest: We too have had a few situations in the last 15 years where our investment ideas did not work out. In particular, we had to pull the ripcord on IVG, Vallourec and Atos. These were weighing on the performance of our Contrarian Value Euroland fund. It is pointless and would be self-opinionated to explain why we were invested. It was simply not the right thing to do.

Dealing with wrong decisions – transparency is a must

Professional fund analysts often pose the question – and rightly so – which lessons we have learned from this. Our honest answer is: there are only a few! So-called value traps are unpleasant and also have an impact on the performance of our fund, but they have to be seen in the context of a portfolio.

Of course, a low price/book value or a low price/earnings ratio does not automatically point to a good value investment. That’s why we always visit the companies we invest in to find out whether they have a cyclical or a structural problem. And then we form our own opinion, which sometimes contradicts the prevailing market view. This certainly helps to reduce so-called value traps, but they cannot be ruled out completely. But the probability calculus of a mistake occurring can be of help. For well over half of all share price losses, there is not a sustainable reason but only a short-term burden. Those are exactly the companies we invest in.

Good decisions are over compensating for losses – multiple awards

A simple rule helps best: the maximum possible loss is limited to the investment amount, but you can gain many times over. That sounds bad at first and implies a speculative approach. But that’s not the case. If we are wrong with our decision, we will suffer painful losses. Yes. But these are more than compensated for by other investments. And they are in the majority, otherwise we wouldn’t keep winning prizes and awards for our fund. For example, we were recently named best Euroland equity fund by Finanzenverlag and Börse Online in 2023 and 2024. And as Fidecum, we were named fund boutique of the year in the equities category.

A few examples of good decisions such as Sogefi. The shares of the Italian automotive supplier have more than tripled in value in the last three years. And that is just one of many examples.

Deutsche Bank is a good example

Take our investment in Deutsche Bank. In 2020, investors avoided us because we were – and still are – invested in such a speculative stock. Even though we had explained the logic of our investment to them. But that is now a thing of the past. Now that the share price has risen from 6 to over 15 euros, there is no longer any need for justification.

Even if some decisions occasionally turn out to be bad investments, we are sticking to our investment philosophy: with our investment approach, which has been tried and tested for more than 25 years, we look for undervalued companies with comprehensible business potential. We invest like an entrepreneur looking for opportunities, even if this means going against the prevailing market trend. And we remain true to this approach. After all, it has proven to be very successful in the end – despite very occasionally picking the wrong stock.

Translation for convenience only!

About the author: Hans Peter Schupp is a managing partner of Fidecum AG und the portfolio manager of the Contrarian Value Euroland Fund.