Interview with MW Compounders: Top-10 isn’t a success yet Interview with MW Compounders: Top-10 isn’t a success yet Interview with MW Compounders: Top-10 isn’t a success yet

Interview with MW Compounders: Top-10 isn’t a success yet

Søren Otto Simonsen

Senior Investment Editor

Last week, Peter Garnry, our head of SaxoStrats, did a special edition of the Danish podcast Børssnak. This episode featured Dan Wejse, co-founder and portfolio manager at MW Compounders.

MW Compounders is a Danish equity fund, established by Johannes Møller and Dan Wejse. In December, the three-year-old fund received a 5-star rating by Morningstar indicating that it’s among the 10 per cent best performing funds within its category (Global Large Cap Blend). According to Wejse, the fund has just exceeded DKK 1 billion (around EUR 134 million). With a return of roughly 57 per cent over the past three years, it is the best performing Danish fund and it has beaten the wider stock market by almost 20 per cent in the period, according to Wejse.

*Please note that the fund has a slightly higher return than what is shown in the graph because of a positive net asset value development prior to entering the exchange.

Sticking to the strategy

The fund's strong performance, Wejse says, is built on a strategy of focusing on so-called compounding stocks (hence the name. M and W are the first letters of the two founders' last names). According to Wejse, compounding stocks are those of companies with a long-term and steady organic growth. In a humble fashion, he underlines that a long-term view is key for this strategy to work, which is also why he is reluctant to call MW Compounders a success yet, despite the strong start.

The fund is made up of 20–30 stocks. To find the right compounding stocks at the right price, Wejse says that the two former Nordea employees use a so-called bottom-up approach. This generally means that they analyze a company from microeconomic factors before considering macroeconomic factors and is contrary to a top-down approach, where analysts paint a macroeconomic picture that is then used to judge what to invest in.

In this bottom-up analysis, Møller and Wejse have identified three things that they prioritize, which Wejse says is a split of objective numbers and subjective gut feeling: 1. "Nice organic growth", 2. "Attractive return on invested capital", and 3. "Capital allocation".

The first factor, nice organic growth, relates to the nature of compounding stocks. Wejse says that while this is a numerical measure, it has some subjectivity as the "nice" part has to be judged subjectively in relation to the broader market and industry where a given stock belongs.

The second factor, "Attractive return on invested capital" is about how much bang for the buck a company gets for the capital it invests in something. Here, Wejse notes that a biproduct of this philosophy is that they tend to favor companies with an "asset-light" strategy as the return on invested capital for such a strategy usually is higher. This e.g. means that a company leasing equipment to carry out a given service may seem more attractive than one that owns the equipment themselves. He gives a concrete example of logistics giant DSV being asset-light whereas shipping giant Maersk is capital intensive.

The third factor, capital allocation, is concerned with how a company uses the capital it generates. Are they buying back shares or leaving it all in the bank account? Or are they aggressive purchasers? And if so, are they any good at it?

While these three factors make up the overall investment philosophy for MW Compounders, Wejse is adamant to underline that there is room for other interpretations, should any interesting opportunities arise.

Picking the right stocks

Conducting a bottom-up analysis by a company consisting of just two people has a natural limit as to how many stocks it can be carried out on. When asked the question of how to decide which companies to actually look at, Wejse states that this can come about in a variety of ways.

Wejse says that some of the companies they have in their portfolio are well-known to them from their previous jobs as equity analysts. They also look at other fund managers with somewhat similar strategies to theirs and use any opportunity to talk to people who may have interesting insights that can give an idea of interesting companies to look at. They even read magazines and – sometimes – decide to dig into a specific theme, like e.g., green transformation when the timing seems right.

Once they have looked at a company, they will then make up their mind about whether the combination of fundamentals and price make it so attractive that it should go into the starting line-up of the fund or whether it should be benched on the watchlist for further examination at a later stage.

Take a tour of the engine room

Being two people and starting an investment fund on your own poses one very obvious challenge: How do you get anyone to buy what you have? According to Wejse, the solution to this problem has two answers: structure and openness.

In terms of the structure, MW Compounders was faced with the question of whether to create a so-called AIF or UCITS fund. Without going into the technicalities, they opted for the UCITS solution, which generally is the heaviest regulated version, but at the same time is the cheapest and the one with lower entry requirements for clients in terms of invested capital. As Wejse points out, they needed a structure that friends and family could buy into from the beginning.

When the structure and process were set for a fund that was – relatively – easy to invest in for clients, the pair needed to tell people about it. Here, they decided to make use of especially LinkedIn to showcase how they were working. As such, they created an open invitation into the engine room portraying how they work with identifying and choosing the stocks that they deem good enough for their fund. This type of openness is not something the couple has invented, but it is somewhat new for portfolio managers to offer a view of how they work and with a high-performing fund that has just crossed 1 billion Danish kroner under management, it seems to have worked for MW Compounders.

You can listen to the Danish podcast here.

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