Hunting for Hidden Treasure

Most investors seek some form of margin of safety in the investments that they make and this can come in many forms. For some it will be paying a very low price for a low quality asset, whereas for others it will be paying a reasonable price for an asset of high quality. We use both of these approaches when constructing portfolios and are guided by the prevailing opportunity set. From time to time we find investments that are a combination of the two, something that features strongly in our managed share portfolios at the moment.

Businesses are often made up of different divisions or assets with very different economics. When you are able to find a business that in total is of poor or average quality, but has an asset or division that is of high quality that is not being correctly valued, there is often a mispricing that creates opportunity for patient investors. While we own a number of companies that are laden with such hidden treasure, one of them is about to come out of hiding and we are watching it with great interest.

Fiat Chrysler Automobiles is a global automaker with a strong portfolio of motor vehicle brands. These include Jeep, Chrysler, Maserati, Alfa Romeo, Dodge, Fiat and Ferrari. A key part of our investment thesis in Fiat Chrysler Automobiles is their 90% ownership of Ferrari. A Ferrari is more of a luxury good than a car, as is demonstrated by its recession proof nature. It was the only global automaker to grow revenues in the financial crisis. It has a two year waiting list and the cars are appreciating assets, especially the limited edition vehicles.

Ferrari is due to list this month, appropriately under the share code RACE, and the initial valuation range has just been set. Looking ahead, a careful increase in production should maintain the scarcity factor of the vehicles, but could lead to a large improvement in margins and profitability. Just like its

vehicles, the shares will have limited availability with only 10% being sold by Fiat to new shareholders. They plan to distribute their remaining 80% during early 2016.

Ferrari provides a solid underpin to our investment thesis, but we do think the rest of the business is worth considerably more than the stake in Ferrari. The Jeep brand continues to grow and has shown 24% annualised volume growth since 2009. Aided by the planned rejuvenation of Alfa Romeo and an expanded Maserati range, group margins and profitability are on an upward curve.

Fiat Chrysler Automobiles operates in an industry with poor economics. It is because of these poor economics that we are able to own one of the world’s most iconic brands at a very reasonable price. While Ferrari may be the treasure, we think that Fiat Chrysler management is in the process of bringing a shine to the other brands as well. This combination creates a very compelling long-term investment opportunity and is a core holding in appropriate local and global portfolios.