The Three Partners

For over 18 years, Andrew Brenton, Jeffrey Cole and Jeffrey Hebel have managed their personal wealth and that of a select group of clients.  They have worked together continuously for over 20 years – prior to Turtle Creek they managed a $300 million private equity fund for a Canadian bank.  Prior to their public and private equity investment experience, they had, collectively, 23 years of experience in mergers and acquisitions and corporate finance.  The Partners have filled 15 positions as directors on the boards of 13 different public and private companies.  Their approach to investing is unique, partly because of their backgrounds – they have the perspective that comes from having been, for many years, deeply involved with companies, as controlling shareholders, board members or as trusted advisors.

What we believe

We believe that it is possible to outperform the market in the long term through a well considered, consistent and flexible investment approach.

We believe that it is possible to both protect your capital and earn superior investment returns - at the same time.  It is not an either/or proposition.

We believe that properly selected equities should be the overwhelming portion of one's investments, regardless of age.

We believe that investors over value (and confuse) current 'yield' at the expense of capital growth (and at the expense of their own wealth).

We believe that short term price fluctuations are irrelevant to the assessment of risk; that investors, in their pursuit of low volatility, are constantly sub optimizing.  Risk is the prospect of a decline in the intrinsic value of an investment.

We believe that it is pointless to worry about what everyone else is doing in the market (trying to guess where traded prices are going); in the long run, intrinsic value is all that matters.

How we have done

 

Since Turtle Creek began on November 1, 1998, an investment of $1,000 has grown to over $51,9301, which equals a compound annual increase of 23.3%. This is in stark contrast to the broader market where the S&P/TSX Composite has increased from $1,000 to $3,970, which equals a compound annual increase of 7.6%.

 

A different way to look at Turtle Creek's1 results is to measure investment performance over a reasonable period of time at various entry points.  We do this by calculating returns over three year rolling periods (i.e., Oct 31/98 to Oct 31/01, Nov 30/98 to Nov 30/01, . . .).  We chose three years because that is the point at which the market starts to cross over from being a "voting machine" to that of a "weighing machine" (i.e. it is the minimum period by which to properly measure investment performance).  Turtle Creek has outperformed the market (as measured by the S&P/TSX Composite) 80% of the time – often by a significant amount – and has had negative three year returns only 7% of the time. In comparison, the market has had negative three year returns 22% of the time.

Distribution of Annualized 3 Year Returns
(from founding in 1998 to present)

1.  Turtle Creek's performance is of Turtle Creek Investment Fund Class A Series 1 Units ("TCIF") to November 1, 2008 and Turtle Creek Equity Fund Class I Series 1.0 Units thereafter and is net of all fees, carried interest, and expenses.  Since Turtle Creek Equity Fund maintains an almost identical portfolio with that of TCIF (with the exception of TCIF’s private company investments), historical performance for TCIF has been combined with that of Turtle Creek Equity Fund.  There were no private investments in TCIF before 2003 and, in aggregate, the private investments had a negligible impact on TCIF's returns to November 1, 2008.  TCIF’s carried interest structure is not the same as the structure used for Turtle Creek Equity Fund (details available upon request). 

All data is in a common currency (Canadian dollars).  S&P/TSX Composite is a total return index.  Comparisons to certain indices are provided for illustrative purposes only, and are intended to indicate broad market performance.  Comparisons to indices are limited because indices are not managed and do not charge fees or expenses.  The Fund may underperform or outperform the indices for many reasons.  

Past performance must never be construed as investment advice or a prediction of future performance.

Source: Turtle Creek Asset Management, Bloomberg.  As at September 30, 2017

Alignment

Turtle Creek is where we are investing all of our wealth, and it is where a number of investors who know us well have had all of their wealth for many years.  Turtle Creek is not run by 'salaried' money managers who will simply move on to a new job if their returns are poor.  Turtle Creek is run by us – its founders and largest investors.  We are investing all of our own wealth here, to the best of our ability, and it happens that the type of investments we make and the approach we follow allows us to manage much more than our own capital without impacting our investment returns.  This strong alignment eliminates concerns as to conflicts of interest and lack of focus and attention from one's wealth manager.  In essence, it eliminates a number of the risks of choosing a manager and allows you to focus on a more limited set of criteria, such as:  is the manager capable, experienced and hard working.  Rest assured, we are.

Six founding principles

Many years ago, the partners struggled with the same issues that confront all investors:  how to best protect and grow one's wealth.  From many conversations, we identified some fundamental investment truths that became our six founding principles:

  1. 1.  All of our money . . . .

    • We believe that an investment manager with a broad, unconstrained mandate such as ourselves, should place substantially all of their personal financial assets in the same investments as their clients.  That is exactly what we have committed to do and, as you know, this is relatively rare.

  2. 2.  . . . . for a long time.

    • In making investment decisions for Turtle Creek, we take a long term view.   An extended time horizon is important because we have no control, in the short term, over the price that others will pay for our assets.  As long as we are comfortable with our investments, we really do not care what happens to the price in the shorter term.  Many times, after we have made an initial investment, the price of that investment has declined.  So we have done what any rational investor should do:  purchased more of the investment at ever lower prices, confident in our belief that given enough time, the traded price of the investment would ultimately recover to reflect intrinsic value and, time and again, this has proven to be the case.  A long term view and the absence of short-term pressure to maintain a certain unit value are very liberating.  As odd as this sounds, we actually welcome a decline in the price of an investment (so long as it is not caused by a negative change in the underlying business) because such a price decline affords us the opportunity to buy more.

  3. 3.  Abhor lazy money

    • This principle was one of the drivers toward the creation of Turtle Creek.  It might be more accurately stated as “abhorring money that is periodically active but then neglected for long periods”.  At various times, before the creation of Turtle Creek, the founding investors would find themselves with excess cash and would ‘look to invest it’.  It struck us as a frighteningly inefficient way to invest:  looking for a good investment only at that point in time simply because you have some cash.  We determined that a far better vehicle for investing would be a continuously optimal portfolio to which each investor could periodically contribute or withdraw capital as their needs dictated.

      Perhaps the term lazy money is a little misleading.  Our goal is to ensure that Turtle Creek is always smart money inasmuch as it is striving to achieve a constantly optimal portfolio.  Even though an investor may make an excellent investment, they often do not appreciate that the investment process is dynamic and never-ending.  Over time, the price and fundamentals of their investment will undoubtedly change as well as that of their other investments.  Unless rigorous and persistent analysis is brought to bear on these changing factors, over time it becomes lazy money.

  4. 4.  Abhor over-diversification

    • One of the consequences of modern portfolio theory has been an obsessive pursuit of greater and greater diversification to the point where most investors attempt to have their financial assets spread over an exceptionally large base.  Simply put, it is impossible to outperform the market when you are diversified to such an extent that you become the market.

      Obviously some degree of diversification is appropriate.  But what's often missed in this discussion is that once you own 25 companies in industries unrelated to each other, with each company facing its own unique opportunities and challenges, you are substantially as diversified as portfolios containing hundreds of companies.  And if you know these companies very well, you can construct a higher quality portfolio with a larger discount to intrinsic value than the overall market.  This is exactly what we do and it is this approach which lowers the overall level of risk for our portfolio.

  5. 5.  The only value is the present value of future cash flows

    • During the depression in the early 1930’s, a legendary investor, Bernard Baruch, became so disillusioned with the ever lower levels of the stock market that he ‘threw in the towel’ and argued that the only value of a stock is the price that someone else will pay for it.  Most investors believe this and spend their time and efforts attempting to divine the direction of the stock markets or individual stocks; to ‘read the mind of the market’.  John Maynard Keynes likened this phenomenon to being a judge at a beauty contest where you weren’t trying to pick the prettiest contestant, but were trying to guess which contestant would win by guessing how every other judge would vote, recognizing that every other judge was doing the same thing, and with many of the judges taking this to a third, fourth or fifth iteration.

      It is the rare investor who approaches the market by recognizing that a common share is a direct ownership right to a specific proportion of all future cash flows of a corporation.  Approached in this way, however, the market can be seen for what it is:  simply a place where you can buy or sell portions of companies.

  6. 6.  Prices will fluctuate around value

    • We acknowledge that this is not so much a principle as it is an observation; but it is such an important observation that it forms one of the major tenets of our investment approach.  If there is one thing that we can confidently predict, it is that share prices of publicly traded companies will fluctuate.  Often these fluctuations are severe and abrupt.

      We follow a simple approach:  unless the price decline has been caused by a fundamentally negative event for the company which causes us to lower our view of its value, we are happy to purchase more of the company at ever lower prices.  A share price decline is one of the great tests for an investor.  If you do not wish to buy more of the company, are disappointed in the price decline and wonder if you should sell, then you never should have owned it at the higher price level.  We regularly ask ourselves:  if the price of one of our investments was to drop, would we be happy to buy more?  If the answer is no, then we should be reducing the position now.  And just as we buy more when a stock declines, we sell some when a stock increases in price.  Taking advantage of fluctuating share prices is a bonus above and beyond our core approach of owning good businesses for the long term.