With a large part of his investment career spent abroad and focused on international public equities, Desmond Kingsford has brought his expertise to Canada as founder and portfolio manager of Highwood Value Partners in Whistler, B.C.
Kingsford was raised in Alberta and studied at McGill University before earning a masters in philosophy from Cambridge University. Then he began his career in London, starting with five years at Putnam Investments, the Boston-based fund manager.
In 2007, he joined the family office of tech billionaire Michael Dell to help build its European investing capability. Over 11 years, the firm, MSD Capital, grew from three people managing $200 million to a five-person investment team managing the $1.2-billion European Opportunities Fund, an opportunistic, fundamental value investor across both equities and credit in Europe.
In 2019, Kingsford moved back to Canada and started Highwood Value Partners, a fundamental value investor with a concentrated, long-term approach serving Canadian family offices and high-net-worth individuals.
Kingsford talked with Canadian Family Offices about the benefits of his firm staying small, how Michael Dell ran his family office and why it’s wise for investors to consider European equities.
Why did you start Highwood?
I started Highwood because, first, this is my passion, and second, I felt Canadian investors with a long-term, endowment-style approach had limited options to invest in international public equities using the approach of a top-tier family office like MSD Capital.
The firm’s mission is to turn every $1 of investors’ capital into $5 over 10 years, without taking undue risk. I hope and aim to achieve this through a strategy of fundamental value investing with a concentrated and long-term approach focused on international public equities.
What are your assets under management (AUM) and your total number of investors?
With a concentrated portfolio of 10 to 15 positions at any one time, I’ve chosen to limit the fund’s capacity to $200 million in AUM.
I manage capital on behalf of six family offices across Canada and a variety of friends and family. The family offices I manage capital for have typically made their money as business owners and entrepreneurs in sectors from real estate and retail to technology.
Can you talk about the company’s size and your plans?
The firm has two employees and is growing. I expect to grow the team more in the model of Berkshire Hathaway’s ‘Warren Buffett and Charlie Munger show’ rather than the more traditional model of a portfolio manager and a team of analysts.
It will remain small enough to target the most attractive opportunities across international equity markets, but with the scale to run an in-depth fundamental research process, using top-tier partners.
Where do you see opportunities in those markets?
Historically, the most attractive risk-adjusted opportunities have been in the mid-cap space, which is below $10 billion in market cap. These are established businesses, but not mature businesses.
What did you do at MSD Capital—Michael Dell’s family office—and what was the firm’s focus?
I was a senior analyst and a partner on the MSD European Opportunities Fund, a flexible, value-oriented fund focused on European companies.
We invested across the capital structure in European companies—equity and credit, public and private—depending on where the opportunity set was. It was flexible capital, and the mandate was to achieve outstanding risk-adjusted returns for Michael, his family and, in time, other families and endowment-style investors.
What was it like working there?
It was a kind of investing nirvana—flexible, unconstrained, absolute return-focused with a wide degree of latitude.
I had a wonderful experience. It was 11 years of working in a tight-knit team of very experienced investors who took a first-principles, fundamental approach to investing.
How did Michael Dell run his family office?
Michael was good at surrounding himself with capable people. He was like a good quarterback in that sense.
He ran the firm with a private-markets perspective. We sought to understand the businesses we were interested in, from the unit economics up to the incentives of the top management. And we were only buyers of select businesses, when we felt they were for sale in the equity market at a substantial discount to their worth.
We also had long-term capital—as in capital that was earmarked for the next generation—and a charitable foundation called the Michael and Susan Dell Foundation. Every investment was underwritten with a five-to-10-year holding period.
The two together meant that we could go where the opportunity set was, where we could earn great long-term returns rather than getting caught up in volatility, tracking error and the like.
We were not investing against a benchmark in the way that many traditional investors do. We analyzed every opportunity as if we owned the whole business and the existing management were hired to run it. Call it a private-equity approach to public markets.
Yes, U.S. exceptionalism is an attractive narrative, but … if you invest in the S&P 500 at 23x earnings, as it is right now, you are almost guaranteed to lose money over a 10-year period.
Desmond Kingsford
I understand that MSD also acted as an investment firm for other wealthy families?
Over time, MSD decided to open to outside capital, so yes, we took on capital from other family offices and endowment-style investors who wanted to invest in the same way.
Next, Highwood. Why the change?
The European fund was looking to spin out from MSD, which would have been a minimum three-year commitment. I was 41 and had always wanted to run my own firm with my own values, and I felt there was an opportunity to do what I was doing for Michael for Canadian families here in Canada.
Who are your clients and how do you find them?
I don’t spend time marketing Highwood. I think my time is better spent doing what I am passionate about, which is searching for those select few businesses available at great prices. I have found that over time clients find Highwood under their own steam. It is perhaps a slower way to build, but I believe it is more sustainable and more enjoyable.
I’m managing my own capital and that of family offices that have a similar approach. I’m not trying to build some big fee-paying business here. I think this is the way investing should be done, though it’s not the way it’s traditionally done.
What are your thoughts on European equities?
Europe is the world’s second-largest economy. It’s home to some of the best businesses in the world, and there are around 4,000 businesses listed on European exchanges. Some are great, some are not so great.
That said, my interest in European equities is ultimately the result of my experience and not a dogmatic view that they are better than other geographies. I lived there and studied European businesses for 16 years, so that is my circle of competence.
Are Canadian investors looking to diversify into the European market?
It is an interesting question. The truth is that Highwood owns 10 to 15 positions at any one time. It’s a concentrated portfolio and is not therefore a broad ‘exposure’ to European equity markets.
I look for businesses with staying power and management teams that are passionate, risk-averse, long-term thinkers and well aligned with owners, often because they are significant owners of the business. And I demand an attractive starting valuation as a margin of safety in case things don’t play out as seems most likely at the time.
That last point is important. The starting valuations in Europe are a lot lower than they are in the U.S., for example. The UK equity market is on about 11x earnings, which is less than half of the 23x the U.S. market is on.
There is a big premium being paid for businesses that happen to be listed in the U.S. Highwood’s portfolio companies earn 44 per cent of their revenue in the U.S.; it is their largest market, but they are trading on European exchanges at about 8x earnings, on average.
If they were trading in the U.S., they would be at something higher than 8x—I suspect much higher, given their returns on capital, market positions and growth. They are economic productivity at a discount, and it is wise for investors to consider European equities in that regard.
But, to answer your question directly: Yes, U.S. exceptionalism is an attractive narrative, but it is a near mathematical certainty that if you invest in the S&P 500 at 23x earnings, as it is right now, you are almost guaranteed to lose money over a 10-year period.
What are the top issues that wealthy families are facing these days?
I suspect whether they earn a two per cent return or a 20 per cent return is not the biggest issue. My guess is that what wealth and expectation do to future generations is a much bigger issue than the returns generated on excess capital.
Wealth beyond a certain level is more of a curse than a blessing. It creates incredibly large shoes to fill—and, more often than not, disappointment—for the next generation.
I think most wealthy families would do their children and grandchildren a service by ensuring their security, giving them a down payment on their first home, and giving the vast majority of the rest away to well-run charities and foundations that serve those who have not had the same good fortune.
Responses have been lightly edited for clarity and length.
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.