09 Aug 2016

A note to our investors

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A Note to Our Investors
by Bill Nolin, CFA , CIO, Portfolio Manager

Have you ever observed the owner of a successful local restaurant in your town? Did you notice the energy they bring into the restaurant, the passion they have to make sure everything is done a certain way? The care they put into the quality. The relationships they have with their customers. The way they inspire their employees, and the resulting loyalty that produces. It is something to watch, and I have had an up-front view my entire life.  

My parents are not restauranteurs, but they did start a manufacturing business in northwest Iowa. I’ve experienced firsthand how owners pour themselves into a business. It is more than a job. There is nothing nine-to-five about it. The business becomes engrained in your life. You care about its long-term health. You watch out for waste. You avoid unnecessary risks and the temptations of immediate payoffs. It is hard work, but the satisfaction of seeing your effort and ingenuity gradually rewarded over many years is worth it. There is tremendous pride in the business.

To put it mildly, the relationship owners often have with their business is quite different than the relationship many executives have with the public companies they manage. The incentives are entirely different. No cleverly designed compensation structure can replace the powerful effect of simple ownership.

From a young age I knew that I wanted to be an investor. While I learned and developed my investment philosophy, that belief in the power of ownership never left. As an investor who owns shares in businesses for many years, one realization has become increasingly clear: the management of a company matters. Their decisions about how to operate, where to spend money, and what to do with profits have an enormous effect on the return of an investment. When choosing a manager to make those decisions, I strongly prefer another owner. Someone with interests that are aligned with mine as an outside shareholder.

Another investor who cares a great deal about management resides a short two hour drive to my west – Warren Buffett in Omaha, Nebraska. I have admired Buffett’s thinking about investing for many years and have attended every Berkshire Hathaway shareholder meeting since 1999. By design, you’ll find that there are many similarities between Buffett’s way of investing and the way we do things at Aligned Investors. We are long-term owners of what we believe to be great businesses, with a constant focus on valuation and reducing risk. In my view, it is the only investment philosophy that has consistently outpaced the broader market over every full market cycle.

That investment philosophy – one with heavy Buffett influences, but an even greater emphasis on owner-operators – is what I brought to the Principal MidCap portfolios when I took over management of the strategy in 1999. The world has changed a lot since then, and I’ve certainly learned my fair share, but the fundamental principles of that philosophy have never wavered. Tom Rozycki, currently co-portfolio manager and head of research for Aligned Investors, joined me in 2001. Together we’ve implemented this approach day after day for the benefit of our clients.

After years of managing MidCap portfolios, we recognized a recurring trend: some of the great businesses we owned eventually grew past the boundaries of MidCap. Basically, they were too successful. To stay true to MidCap, we eventually had to let some of these companies go, even though we had deep knowledge of their business and still felt they had many years of success ahead of them. In 2012, we were able to effectively take the lid off our MidCap strategy with the launch of our Blue Chip strategy. Same team, same philosophy, but now applied to an expanded opportunity set that includes larger companies. We’re confident Blue Chip will provide our clients with the same great results as we move through future market cycles.

With the growth of our MidCap strategy and the launch of our Blue Chip strategy, Principal made an organizational decision to better highlight our team and its distinctive investment approach. While we have always operated autonomously, in 2015 the structure was formalized and our team became an independent boutique within Principal’s multi-boutique structure. This has been exciting as we now have more dedicated resources, with a distinct identity that enables us to better explain who we are and how we invest.

In choosing a name for our group, naturally I went back to my belief in ownership. We want management teams with ownership stakes that align them with outside shareholders. In the same vein, we have long committed to investing alongside our clients in order to align our own incentives with the people we work and invest for. For these reasons, we decided to name our boutique Aligned Investors. 

My passion for investing remains as strong today as it has ever been. Finding great businesses led by owner-operators and providing them with capital they can use wisely for the next several years is something I truly enjoy. Thank you for your continued support.

Bill Nolin, CFA
Chief Investment Officer, Aligned Investors


About Aligned Investors

Aligned Investors is an investment boutique within Principal Global Investors* that utilizes a completely fundamental, bottom-up approach. The name Aligned Investors highlights the group’s conviction in the power of aligned incentives. This is emphasized in the investment process through a distinctive preference for owner-operators. Led by Bill Nolin since 1999, the team manages MidCap Equity and Blue Chip Equity strategies.


* Principal Global Investors is the asset management arm of the Principal Financial Group®.

Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of July 2016.

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Principal Global Investors is the asset management arm of the Principal Financial Group.
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