Exceptional long-term results using a timeless value approach
DL Capital is a value-oriented investment advisor whose goal is to achieve high absolute rates of return while minimizing the risk of capital loss.
Our firm utilizes a disciplined quality-value approach with an emphasis on long-term total return. We use a bottom-up process looking for attractively priced publicly traded securities that are out of favor with other investors, but which have stable or increasing fundamental value such that the long-run risk-reward is highly favorable.
Since our May 2005 inception, our investors have enjoyed highly favorable metrics including cumulative net return compared with the S&P 500 Total Return index over the same period.
DL Capital is a value-oriented investment advisor whose goal is to achieve high absolute rates of return while minimizing the risk of capital loss
Investment Philosophy
Objective:
Maximize the rate of return since inception while prudently managing the risk of the unlikely or unknowable
Ben Graham crystalized a timeless truth about financial markets when he wrote: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
Our underlying belief is that pricing in financial markets can be inefficient in the short run often due to short-termism, liquidity shortfalls, or behavioral biases of other investors, and that we can profit from these inefficiencies by avoiding these pitfalls, buying underpriced securities, and holding them. Longer run, we expect pricing will approximate fair value. Over time, we can further profit as underlying growth in the business causes fair value to increase.
Investment Process
Seek opportunity widely, and then look to invest deeply by applying dispassionate analysis to the company and its industry
Through reflection and experience of episodes both vicarious and direct, it's generally been true that ultimately the best performing opportunities find the investor. They present themselves often in glaringly fashion, and if you have too many reservations, then it's too close to the line, and the default action should be to pass.
When a great opportunity presents itself, it's up to the investor to apply sound analytics, and have both the available capital and mental fortitude to execute in times of market stress. When all these elements are present, great results usually follow.
It's not about blind contrarianism, since most investment opportunities that come before us will be rejected. But, if one comes along that fits in our Circle of Competence, a business and industry we understand and one that we have confidence in valuing, then the analysis really begins.
Of course, perspective matters: we want to focus on those opportunities where we have very high confidence in the long-term prospects of a company and believe the stock is highly attractive against this backdrop. While specifics matter, it's been my experience that market mispricing often occurs when investors overweight and focus too much on negative minutiae or cyclical patterns unlikely to have much lasting impact.
Portfolio Construction
Our portfolio is a collection of quality businesses with attractive prospects purchased at a reasonable price – time is on our side
When a good individual opportunity is found, the consideration then turns to how it fits into the existing portfolio. It's important to note that there's a threshold where we'd want it to be attractive enough to put a meaningful amount of capital into the investment; if we're uncomfortable putting anything more than a token amount, then it's a red flag indicating a lack of analytical confidence, and the prospect will be rejected.
Ours is a focused portfolio that attempts to capture the bulk of the benefits diversification has to offer while not diluting away our ability to generate excess returns by applying superior judgment at the company level. If we have no similar holdings already in the portfolio, then it's an easy decision to add the prospect. If there's overlap, then a decision will be made as to whether to add the prospect, or replace the existing similar holding with the new one.
We don't tend to hold cash, and our favored investments are in single stocks. But sometimes, for instance in a persistently bullish environment where valuations are getting stretched, we'll be net sellers. Instead of cash, we prefer to default into broad or sector-level index products depending on their relative attractiveness at the time with the idea that should markets continue higher, we'll benefit from the extra diversification and continued market exposure. Should markets turn, we'll be relatively more sheltered given the typically lower betas of these products, which can then be sold as a source of funds to put into single stocks with much higher upside as they present themselves.
Risk Management
The future always holds some surprises, so we keep in mind the three most important words in investing: margin of safety
DL Capital managed through the Great Recession of 2008-2009, which is widely considered the worst financial crisis since the Great Depression. While our portfolio's drawdown outperformed the S&P 500 TR by a couple percentage points, what stands out is that we fully recovered and went on to new highs in just 14 months versus 53 months for the index.
This highlights not only our philosophy, process, and portfolio construction in action, but also the way we manage risk. Conventional wisdom - indeed modern portfolio theory - defines risk in terms of volatility. This is where we turn instead to a more classical definition of risk as that of permanent loss. When markets get more volatile than they've been, the conventional response by investors is to sell long securities to reduce portfolio volatility. We tend to do the opposite.
Ideally, we'll enter volatile periods with available capital to put to work. When markets are volatile and we see wild price swings for securities driven by a surge in demand for liquidity, we want to provide that liquidity and be a buyer. These tend to be the most lucrative of times: a flood of stocks of great companies available for purchase at large discounts. In fact, our most active buying days tend to be on these very days when most other investors want to reduce equity exposure. Sometimes these events manifest as market-wide fears, but other times they center on a single stock or industry.
Despite the sophisticated mathematical tools at our disposal, it remains fundamentally true that stock prices and their movements do not resemble the physical world, and investing will never attain the predictable precision of physics. Indeed, markets and the investment decisions animating them are very much human affairs and exhibit all the unpredictable outcomes one would expect by a system routinely hit by waves of fear and greed. Keeping this in mind, and remembering Graham's immortal admonition will continue to serve us well.
Trustworthiness, integrity, treating partners how we’d want to be treated – values at our core
Dennis Lau, CFA
Dennis is managing member of DL Capital, and has served continuously as the sole investment officer since its founding in May 2005. Prior to launching DL Capital, he held roles in financial advisory and corporate finance from 2003-05 at American Express and then as a consultant to MassMutual respectively. From 2001-03, he ran an investment partnership, DCL Investments, LLC.
He holds the Chartered Financial Analyst® designation, and is a member of CFA Society New York. He also holds a B.A. from Harvard University in Economics where he focused on the subfields of capital markets, monetary & fiscal policy, and industrial organization.
His hobbies include golf, guitar, fly fishing, reading, and thoughtful discussion of myriad topics. He operates the company from Suffield, Connecticut.
Service Providers
DL Capital and its investors benefit from the expertise of several well-regarded and established service providers. Our lean-strong model means we in-house the core value-add of investment management, and outboard back office to companies that focus on these important functions. Having independent firms provide these services also adds an extra layer of assurance to our investors.
Administrator, Registered Transfer Agent, Tax
- 960+ clients worldwide and $92+ billion in assets under administration
- Has direct full-time electronic read-only access to our brokerage and bank accounts
- Creates and delivers monthly statements directly to LPs
- Assists w/ investor due diligence: AML, KYC, OFAC checks
- Processes and counter-approves all cash flows in and out of fund via a dual-control bank account
Legal
- Firm with approximately 300 attorneys across 11 offices
- Their Stamford and NYC-based co-chair of Investment Management and Private Funds and his team assist us with a broad range of matters from regulatory filings to our fund's operating documents
Audit
- PCAOB approved, over 40 years in the securities industry
- Services 800+ alternative investment funds, both US and offshore, ranging in size to over $3 billion in assets
- Consistently ranks among the top ten auditors of hedge funds based on SEC filings
Prime Broker
- Large publicly-traded firm
- Use two-factor authentication for account access and wires to bank account
