Interview with Louis de Fels- managing director, Head of Asset Management and Partner of Gay Lussac funds

Aiming for a recurring Mid and long term gain with the less risk possible

First of all many thanks Louis to have granted me some time for this interview. It is very much appreciated. Louis manages a team of portfolio managers who manage the following funds Gay Lussac Microcaps, Gay Lussac Microcaps Europe, Gay Lussac Smallcaps, Gay Lussac Green Impact, Gay Lussac Europe Flex and Gay Lussac Heritage funds.

Q: What is the origin of the fund’s name Gay Lussac?

A: Two of our four founding partners are from the Gay Lussac family. Louis Joseph Gay Lussac was a famous chemist and physicist known for his studies on the properties of gas. He also contributed to the invention of the hot air ballon. A third partner has strong family links to the Limousin region from which the Gay Lussac family comes from. Family values hold an important place for us. The four partners have been working together for the last 15 years.

Q:  What is your investment approach?

A: We aim for a mid and long term recurring performance with as little risk as possible. We aim for a 7% gain per year. It enables us to take advantage of compound interest with risks which are clearly lower.

Our investment process and philosophy has four steps, which guides our approach. The first and fourth step are quantitative:

• A quantitative filter which uses the low vol and low beta which are much more defensive. Momentum is an offensive criteria. Low vol and low Beta  ensures that we only have companies which have lots of cash and that we have no cyclical companies. This helps us to qualify our investment universe which gets down to 200 companies. It brings us performing companies which have recurring revenues. In other words quality companies.

• Our second filter is a top down approach.

• Our third filter is a bottom up approach.

• The fourth filter is a quantitative filter. It is a budget risk analysis which ranks the companies from 1 to 50. The most risky companies are excluded. We use a 6 month vol indicator too. The risk budget approach determines the weight which will be given to a company.

To illustrate this, Neurones has 0 risk (a very important net cash position) and can thus have a 5% weight in a fund. Assystem is a little more riskier so weight can be up to 2% while Aubay is more riskier  so its weight cannot be above 1%.

This is how we build our portfolio. This explains why when the cyclicals rebound we lag a little as we have a volatility that is two times lower than the market.

Q: which is your best current idea?

Our best risk adjusted ideas are:

• Neurones is not too expensive and is the less risky

• Wavestone is in our middle risk  bucket

• Fontaine Pajot is in our riskier bucket. It is qualitative but also cyclical.

Q: what has been your most important mistake?

A: Before the investment process was set up in 2015, we invested in an IPO.  We will never do one again as our process has a quantitative dimension which now prevents us from investing in IPOs which tend to be overvalued and where they are no alignment of interests.

Q: What is an automatic red flag for you?

A: The two most important ones for us are:

• a poor management team which is not trustworthy and,

• a company which does not generate cash. The latest is the biggest red flag. We need to see some cash generation. If we cannot see any recurring cash generation, it will be a no go. On a 3 to 5 year period, cash must follow the EPS growth.

Q: Do you like to see management? If yes why?

Our team did more than 850 calls with the management teams of the companies which we follow. We like to see and talk to management to understand their philosophy, their vision, to see if interests are aligned. The aim is to understand a person’s personality. When you see and get to know the Neurones and Infotel CEO you can see that you have some great owner operators.

Q: which investment book would you recommend us to read?

A: My favorite book is “Un paradoxe financier étonnant, le lièvre et la tortue” by Pim van Vliet. It focuses on the idea on how to offer performance slowly but surely and having a long term vision. One needs to give time to their investments.

Q: which question would you have for me?

A: What is the most important thing you look at when you invest? 

Management as they are the ones who will be taken the decisions and allocating capital. Even If I were to be a big minority shareholder, I still cannot influence.

Louis de Fels: it is a good one but you need to add to it a solid business model and a solid balance sheet.

Many many thanks again Louis for your time and I am sure all the readers will have learned many things!

Cheers!

Jeremy

Disclaimer: the above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a position in Neurones at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION). I have no business relationship with Gay Lussac Gestion.