An active lack of participation

Commentarya month ago
The phrase “active management” brings to mind change, movement, a sense that things are always happening.
But we believe active management done well can often look like no action at all.
And some of the most important calls Titan makes as an investment team can result in no visible outcomes. Instead, the research, analysis, and debate that go on behind the scenes might lead us to pause, re-examine, or step away from an opportunity.
In other words, a great deal of what goes into an active management process can appear, from the outside, like just sitting still.
And here we’re inclined to follow the wisdom of Vanguard founder Jack Bogle, who wrote in a 2014 column that investors are best served to follow the aphorism — “Don’t do something. Just stand there!”
If we think about Titan’s investment process as an iceberg, portfolio changes are what can be seen above the water’s surface. Below the surface is where you’ll find most of the team’s work — deep investigations, vigorous debates, and ruthless honesty about how we’re going to make money for our clients.
Let’s explore a recent example. Earlier this month, Titan investment analyst Christopher Seifel brought to our investment committee the idea of taking a position in three companies poised to help power what he characterized as a “gold rush” for the semiconductor business.
These are businesses that we believe have durable competitive advantages, secular tailwinds, and great management teams. But the hangup for our team came at the question of valuation.
For these stocks, our valuation work suggested achieving a 15% annual rate of return net of fees was a median outcome rather than a conservative estimate. And our goal at Titan is to attempt to achieve returns that average 15% per year net of fees.
Accordingly, the stocks we buy should not only represent shares in a company that has the three characteristics mentioned above, but should be valued such that we believe a 15% return net of fees is a conservative estimate. This approach may provide us with what investors often refer to as a margin of safety.
In the case of these semiconductor names, things may not need to go perfectly for us to realize 15% annual returns net of fees. But developments that might be classified as “less than ideal” could be more than enough to derail progress towards this outcome, in our view.
For now, we’ve decided to stand by, observe, and wait to see if the state of play shifts. If and when it does, we’ll be ready to act.
But until then, we’re happy to appear like we’re “just standing there.”

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