Brian Frank is the Founder and CIO of Frank Capital Partners, LLC and designs custom separately managed accounts investing directly in stocks, bonds, and options. Brian has been the CIO for FCP since 2003 and the Portfolio Manager of the Frank Value Fund and Frank Value Fund SP since inception in July 2004, and January 2014, respectively. After working at Lightyear Capital, a private equity fund organized by Donald Marron of Paine Webber, Brian co-founded FCP. FCP started as a single-family office working with high-net-worth individuals, and Brian managed the assets with the goal of maximizing wealth for the long term.
Russ Alan Prince: Tell me about Frank Capital and what value-add do you offer high-net-worth clients?
Brian Frank: In a world dominated by indexed and benchmarked investing, we have two major value-adds. First, we focus on individual companies with little to no analyst coverage yet have catalysts for value recognition. Second, as indexation has increased volatility, we aim to take advantage by opportunistically purchasing positions in high-quality companies that compound earnings over long time periods. We call the first advantage “catalyst value” and the second “quality compounders.”
Using an algorithm to purchase a basket of stocks with low valuations is less effective in modern markets. With fewer professionals investing in companies based on fundamentals, cheap stocks tend to stay cheap. Instead, with our “catalyst value” process, we research qualitative factors that force securities to unlock value for their owners.
For example, we find businesses with catalysts like a major asset sale, meaningful stock repurchase, initiating or raising dividends, or productive M&A. Recently, we have found companies producing enough net income to cover their entire market caps in one year, businesses with a single asset worth more than the entire company, and stock repurchases taking out over 25% of the shares outstanding in the next twelve months. Rational business owners would never sell us companies at these prices, but with competition lacking and few investors focusing on our space, we can find these deals. Opportunities like this add tremendous value to high-net-worth portfolios, and Frank Capital is one of the few firms with the experience, in-house research, and ability to generate these ideas.
Additionally, in recent years, volatility and correlations have increased. We believe the large market share of passive investors is to blame. When so many investors are using the same strategy, we can again use Frank Capital’s fundamental research to our clients’ advantage.
In 2022 when all technology stocks are being sold, our process identified profitable technology companies with sustainable competitive advantages poised to outgrow their target markets for years to come. These are the “quality compounders” that make up the core of a tax-efficient long-term portfolio. When stock prices decline below a reasonable valuation, our fundamental research gives us the confidence to take positions for the long-term while many other investors are paralyzed or forced to sell.
Finally, we are “benchmark agnostic,” meaning we are untethered by sector weights in the S&P 500 when designing client portfolios. For managers who benchmark, if the index they are benchmarking to is 25% technology, their client portfolios will have a similar amount, regardless of value. Instead, by letting our process lead, we have had positioning like large, outsized holdings in healthcare companies in 2009 when they were trading below liquidation value, and we have also had zero weightings to energy companies in 2015. Today, we have a smaller position in technology companies and a larger position in energy than our inflexible, benchmarked competition.
Prince: What are the advantages of customized, direct investing in securities instead of allocating to outside money managers?
Frank: By investing directly, we avoid double-fees other firms incur when they charge advisory fees to invest your money in mutual funds, managed money, and ETFs, which also all have embedded fees. To invest directly in stocks, our research is conducted in-house, avoiding groupthink and conflicts of interest often seen in Wall Street firms.
Why not invest directly with an advisor doing the securities research? Frank Capital follows a rigorous, proprietary investment process, providing clients with expert advice on individual securities. Most other investment advisors gather assets and outsource their investment portfolios to third parties. FCP does the hard work without the double fees.
Prince: Where do you see opportunities in the current environment and how are you positioning portfolios for the next 12 months in this rising rate, inflationary period?
Frank: Our investment process helped our clients sidestep the dramatic drawdowns in unprofitable growth companies. Amidst the wreckage, we are finding some opportunities in high-quality, profitable technology companies, and we are carefully scaling into these positions. Our aim is to position client portfolios in businesses able to compound their earnings at double-digit rates over the long-term, and bear markets are the time to go hunting.
Additionally, we are maintaining our large allocation to various small and mid-cap energy companies, as we believe the fundamental case for an undersupplied global energy market is both unchanged and still not priced into valuations. Energy has been a spectacular performer, but developed counties clearly need to move towards independence from countries like Russia. This is a long-term story that we have been invested in since the middle of 2020.
Should the Fed continue to raise rates into a slowing US economy, there could also be a recession in the next twelve months. Our client portfolios retain a sizable allocation to cash, as most equity valuations are above our acceptable return levels. We are avoiding cyclical companies, and we are watching our consumer staples positions as they are appreciating towards fair value. With volatility and macro-weakness, this is an excellent time to be benchmark agnostic stock pickers.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.