Cantillon Capital Management

William von Mueffling

William von Mueffling is the founder of Cantillon Capital Management. He was born in Munich, Germany to a German investment banker father and an American mother who met at Columbia University. His paternal family has roots in German nobility, and his maternal grandfather, Mark Millward, was a senior managing director at Shearson American Express.

Educated at Connecticut's Hotchkiss School, von Mueffling earned his B.A. in 1990 and an MBA from Columbia University in 1995. In college, he interned at Shearson Lehman Hutton but found investment banking unappealing. Instead, he focused on equity research at Deutsche Bank in Frankfurt, specializing in non-German European stocks.

Afterward, von Mueffling joined Lazard Asset Management, gaining acclaim as a successful short seller during the dot-com bubble, achieving returns averaging over 30% from 1998 to 2003.

In 2003, following a compensation dispute with Lazard's CEO Bruce Wasserstein, he departed to establish Cantillon Capital Management. Drawing nearly $3 billion in assets from Lazard, von Mueffling was joined by former colleagues Robert Cope and Tom Ellis. At its peak, Cantillon managed $10 billion.

During the 2008 financial crisis, Cantillon, while outperforming many peers, faced significant client withdrawals. By mid-2009, the firm shifted to a long-only strategy, returning $3.5 billion to investors while retaining $1 billion. Posting a 21% gain in 2010, Cantillon attracted new investments from pensions and sovereign wealth funds, boosting assets under management to $5 billion. Von Mueffling attributed the move away from shorting to challenges posed by government stimulus and computer-driven trading dynamics, which reduced the predictability of short-term stock movements crucial for successful short-selling.

Despite transitioning from a traditional 2/20 fee structure to a lower 1.25% AUM fee, von Mueffling aimed to build a stable asset management business. The Cantillon Global Equity fund, capped at around $7.5 billion, maintained a minimum investment of $10 million, retaining an exclusive hedge fund appeal.

Investment style

Cantillon is a (Warren) Buffett-style investor, focusing on high-ROIC businesses at reasonable prices. Von Mueffling stresses that these businesses can include those with robust moats supported by physical assets, contrary to the common belief that high-ROIC necessitates asset-light models. For example, Bank Rakyat, an Indonesian bank with a widespread network of small offices across the archipelago, and Royal Vopak, a global liquid storage terminal operator with long-term leases where clients value consistent execution, exemplify such investments.

The fund focuses on sustainable earners. Von Mueffling targets companies with sustainable high returns on equity (ROE), avoiding those deemed either overpriced or undervalued by the market. Cantillon emphasizes the dynamic assessment of ROE influenced by factors like technological disruption and industry consolidation.

For instance, the US aluminum can industry consolidated significantly in the early 1990s, enhancing ROE for players like Ball Corp and Rexam. Conversely, poorly executed mergers, such as Heineken's acquisition of lower-quality brewers, can erode ROE, highlighting the importance of ascertaining management’s capital allocation skills.

Cantillon maintains a long-term holding strategy, prioritizing companies that reinvest or buy back shares to grow earnings. Their selling approach involves holding positions until reaching predetermined price targets based on future earnings growth expectations. Positions nearing these targets are sold, and proceeds are reinvested in undervalued opportunities, reflecting their nearly 6-year average holding period and low portfolio turnover.

Idea generation and investment process

Cantillon employs a structured three-step investment process. First, they screen for companies exhibiting high "financial productivity" based on metrics like ROIC, ROA, and ROE, while ensuring valuations are reasonable.

Next, analysts assess whether mispricing stems from macroeconomic factors or company-specific issues. This involves assessing management quality, competitive dynamics, revenue and margin trends, sensitivity to economic cycles, and broader market conditions.

The focus lies on organic operating income growth, driven by organic sales growth and operating leverage potential, and evaluation of free cash flow yield, which drives capacity for M&A, dividends, and share buybacks.

Cantillon's research is team-based. No analyst works on an idea alone. Once an idea is fully developed, a detailed company overview and thesis are circulated to the entire investment team. Team members pose questions in advance, which are addressed in writing before a live discussion centered on qualitative aspects and key drivers. Purchase decisions are democratic, with each team member having an equal vote, and position sizes are determined based on stock liquidity.

The analysts cover exclusively high-ROE stocks and set price targets for all covered companies, though ownership isn't mandatory. Von Mueffling avoids businesses transitioning from low to high ROE, steering clear of turnaround or emerging moat narratives that lack profitability at the time of analysis.

By emphasizing exclusively high-ROE companies with robust growth prospects (aka reinvestment runway) and rigorous qualitative scrutiny, Cantillon aims to construct a resilient portfolio capable of weathering diverse market conditions. Similar to strategies seen in Polen Focused Growth, Cantillon seeks to enhance shareholder value by holding businesses capable of consistently generating superior returns on equity.

Team composition and how to get a job there

Cantillon's employee and alum profile can be traced back to von Mueffling's academic and professional journey, predominantly centered around Columbia University. Notably, getting a Columbia Business School MBA seems to be a way to earn a shot on goal at Cantillon.

Von Mueffling's own dual Columbia background has influenced the firm's hiring practices, with Columbia Business School (CBS) graduates, including alumni from the esteemed Value Investing (VI) program, frequently joining as interns and full-time employees. Interestingly, while no current full-time investment team members are from CBS, historically, the firm has welcomed five CBS graduates and sixfrom the CBS VI program, at least based on my analysis.

Given von Mueffling holding an MBA, Cantillon also attracts talent from other top-tier business schools such as Harvard, Stanford, Wharton, and Booth. Reflecting its Lazard Asset Management roots and von Mueffling's European upbringing, Cantillon also includes alumni from prestigious European institutions like Oxford and LSE among its ranks.

The current and previous investment team members’ undergraduate backgrounds are equally impressive, spanning top U.S. schools like Harvard, Yale, Wharton, Princeton, Dartmouth, and Chicago, alongside European counterparts educated at Oxbridge and LSE.

Leveraging von Mueffling's equity research background, Cantillon does not solely target candidates with investment banking and private equity experience. Instead, the firm is open to candidates with sell-side equity research experience.

Recap

Cantillon Capital Management has successfully transitioned from a long/short strategy to a thriving long-only hedge fund. The firm's investment approach centers on high-ROIC businesses acquired at reasonable valuations. Supported by a rigorous three-step research process, Cantillon emphasizes team-based decision-making to ensure thorough scrutiny of the qualitative aspects of an investment prospect.

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