John A. Heffern is Principal and Founder of KCA/Princeton Advisors, LLC. His career includes nearly 30 years of senior level portfolio management and equity research mandates. He leverages a deep background in financial services for investment selection across a wide expanse of companies, themes, and factors. The fund follows a qualitatively oriented process in portfolio construction that is unique in the industry.
In his 3,169 word interview, exclusively in the Wall Street Transcript, John Heffern discusses the start and current performance of his asset management firm.
“…We’re approaching five years of operation and that followed almost three years of incubation. The fund is a limited partnership. We are fortunate to be able to say we haven’t had a down year for performance over all those years.
I think our confidence in our strategy comes from 30 years of investment management and sector experience that spans sell-side research, buy-side portfolio management, growth and value investing, as well as corporate governance as an independent director.
So we know our companies, our managements, and business models across the full range of opportunity including banks, specialty financial services, insurance brokerages, asset management REITs and even fintech…
When we say do research, we’re old-school tire-kickers, visiting the companies, meeting the managements, assessing non-quantitative factors like corporate governance as we arrive at a conclusion about where a company may be headed, and how it may be valued or misvalued in the market.
So, we spend a lot of time talking to our sources and thinking about business models, competitive moats, margin opportunities, innovation — all sorts of concepts and ideas that can’t be captured, necessarily, in a quantitative model that looks backward. Our qualitative approach tends to look forward, and focuses as well on execution, reliability and durability.
So the key to that research approach is experience, where we have seen many, many business models, met many, many company managers, and learned the signage of success and failure. That’s what we put to work. We think a qualitative approach has gone from the majority of the investment management research business to the minority. But we like where we sit, and that’s how we approach it.”
John Heffern does not mince words when it comes to ETF investing:
“I think that’s why you’ve seen the industry provide, and the individual retail investor gravitate toward, more passive-oriented approaches to investing, like ETFs and indexes. They have capitulated, ultimately, to the challenge of doing this qualitative research into understanding individual companies.
And really just moved their investment allocations toward broad pieces of the market, whether it’s themes or company sizes — small cap, large cap, value, growth. Any flavor you want is there in terms of baskets for investment opportunity.
And for most people, that’s probably appropriate.
Having said that, we think this environment creates opportunity for investors like us, who still do the work company by company, who have the experience and the capacity and the contacts to sort through the baskets to find the best.
We also believe, for the long run, we can avoid owning a lot of companies that, if you could do the work yourself, you just never would want to own as part of your portfolio.
So ironically, as the world has gravitated toward passive indexing and basket allocations, we think the opportunity for stock pickers like us is enhanced. As we go forward, we have no shortage of ideas, no shortage of opportunities, and are really encouraged about what we see, particularly in the areas where we specialize.”
Due to the increase in liquidity from government management of the COVID 19 crisis, John Heffern and his colleagues see the financial sector as the most lucrative for investors:
“We’re thinking in terms of well-researched baskets of opportunity — it is the theme we’re following within the portfolio. And we’re doing it in two places: first, in the banking space, as we’ve discussed, and second, in the insurance space.
In the banks sector — and you can take all of these or none of these, that’s totally up to you — the basket that we’re using has a handful of companies that come to mind. One is Bank of Marin Bancorp (NASDAQ:BMRC) in Novato, California; Bank of Princeton (NASDAQ:BPRN) in Princeton, New Jersey; Civista Bancshares (NASDAQ:CIVB) in Sandusky, Ohio; and then one more, Preferred Bank/LA (NASDAQ:PFBC), which is an Asian-American bank.
All of these are well capitalized, well managed, strong franchises in good markets, where we see growth opportunity. But ultimately, we see them as consolidation candidates which could gain as they are sold to larger organizations consistent with the consolidation theme we are seeing across the industry.
Turning to the insurance sector, we find different circumstances. As we talked about, banks are chasing loan demand and pricing is very competitive. The insurance business, particularly property/casualty insurance, is benefiting after a decade of intense price competition from very favorable conditions where demand is strong and pricing is actually going up meaningfully.
And so our basket of opportunity there too is focused on well managed, well capitalized players who benefit from this development.
Two property/casualty insurers in particular come to mind: Chubb LTD (NYSE:CB), The Hartford Financial Services Group (NYSE:HIG), and then our favorite insurance turnaround remains American International Group (NYSE:AIG), which after 10 years of restructuring itself seems to have finally turned the corner and still looks very inexpensive to us.
So that’s our basket of opportunity approach, as we look across banks and insurance companies.
And if we finished with a look at financial technology, which we spent a lot of time talking about, the ideas in our portfolio that match the theme are MasterCard Inc. (NYSE:MA), PayPal Holdings (NASDAQ:PYPL) and Square (NYSE:SQ), all very firmly in payment services networks around the globe and places where business and opportunity seem to be gravitating as it all moves away from the legacy financial services companies.”
To get all the detail on these and other top picks from John Heffern, Principal and Founder of KCA/Princeton Advisors, read the entire 3,169 word interview, exclusively in the Wall Street Transcript.
John A. Heffern,Founder & Principal, KCA/Princeton Advisors, LLC.
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