Global Deep Value Fund
“It was never my thinking that made the big money. It was always my sitting. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.” – Jesse Livermore
- Founded in 2002
- Distinct Value Philosophy: Deep Value
- Investments at 50% discount to intrinsic value
- Consistent and Disciplined Methodology
- Fundamental Research
- Balance between Diversification and Focus
- Long Term Investments
Founded in 2002, this highly disciplined Global Deep Value Fund invests in equities world-wide using a distinct ‘value’ investment philosophy and bottom-up stock-picking. This sets it apart from almost all other European investment funds. While the value philosophy of investing has long been practiced successfully in North America, true value investors are still rare in Europe.
As value investors the Fund’s Managers (here after called the PMs, for Portfolio Managers of this Global Deep Value Fund…) look to identify and invest in companies whose shares are deeply undervalued, typically by 50% hence the addition of “Deep” to “Value”. The focus is on finding select companies with strong, and hopefully growing, cash flows, that have solid assets, with little or no financial risk, and decent management. Above all, the shares of a company should sell at demonstrably ‘discount’ prices to protect against the unforeseeable, as well as to leave plenty of potential for share price appreciation.
This Fund aims to build wealth for its shareholders in a steady, consistent way by generating good, long-term, absolute returns, while minimizing the risk of permanent capital loss.
This Fund’s value philosophy is based on the premise that all stocks have a certain inherent value which is derived from the value of the companies they represent. With careful analysis the value of individual stocks can be estimated with a reasonable degree of certainty. This is in value investors’ terms known as a stock’s ‘intrinsic value’ (note; however, that this is not, as it is sometimes called, a company’s book value). In a perfect world stock prices would always accurately reflect intrinsic value. However, in reality they often do not, or at least not always. The Fund focuses on finding and investing in those shares that our analysis shows are selling for far less than their estimated intrinsic value.
In implementing its value philosophy the Fund is committed to maintaining a clear, consistent, and disciplined methodology. This means not wavering in strategy, or watering-down the investment criteria to suit the wisdom of the day. A basic principle is not to speculate on how and when stock markets will perform, which sectors will out- or underperform, or which themes will drive stock prices. Few if any investors have ever succeeded in the long-term by practising those approaches. The PMs are firm believers that stock prices are always, (although sometimes it takes a while), driven by the values of the underlying businesses. Solid businesses acquired at very low prices are the best recipe for achieving superior long-term returns, and preserving investors’ capital.
Fundamental company research to find undervalued stocks. For the key to identifying undervalued stocks is to thoroughly research and analyse companies, and carefully estimate their intrinsic value. The PMs continuously search for stocks which appear to be very undervalued based on quantitative measures such as Enterprise Value to Sales, EBITDA, or Free Cash Flow, Price-to-Book, etc., and then research them in-depth. Researching a company is highly time consuming, and involves analysing the financial statements, researching markets and competitors, interviewing management, etc., but it is crucial to reducing potential risks. Companies with very weak balance sheets, a poor track record of spending shareholders’ money, or where it is simply impossible to draw a reasoned conclusion are filtered out. The next important element of work involves putting a price tag on a company. This is done by constructing detailed company and discounted cash flow models. The PMs also use a variety of valuation yardsticks (often sector specific), and pay keen attention to the prices paid by the most knowledgeable buyers of companies – other companies in comparable businesses. They attempt to err on the side of cautiousness in this process. The end result is our estimate of a company’s intrinsic value, and therefore our target price.
Purchase shares at a big discount to their estimated intrinsic value. While research often throws up undervalued stocks, the vast majority are not sufficiently undervalued enough to invest in. A select few do make the grade though. Buying at a large discount – as a rule the PMs look for a price of 50% or less of estimated intrinsic value – offers two advantages. It provides a “margin of safety” to protect against unforeseeable risks, while simultaneously offering the potential for substantial share price appreciation.
Seek a balance between diversification and focus. Generally, this Fund will hold positions in between 20 and 40 individual stocks. This provides it with a sensible level of diversification to protect against potential disappointments in individual holdings. However, it also allows the Fund to build meaningful positions when the PMs’ analysis turns up an undervalued gem. Furthermore, were the number of holdings to be much higher, it would be virtually impossible to carry-out the painstaking research which is crucial to the Fund’s investment process.
Invest for the long-term. The PMs cannot predict when undervalued shares will rise to their intrinsic value, nor do they believe that others can, at least consistently and with any degree of reliability. Consequently, we invest with a view to holding stocks for the long-term – generally 2 ½ years or longer. Short-term investment success is usually more a question of good luck than good judgement. However, in a portfolio of deeply undervalued stocks, held for the long-term, there is a reasonable probability that several will rise to their estimated intrinsic value on a regular basis thereby generating attractive returns.
Sell holdings when they reach our estimate of intrinsic value. Just as the PMs look to buy based on a careful appraisal of a stock’s value, the sell based on the same hard analysis, and replace it with another undervalued stock. Speculating that a stock will move above our estimate of instrinsic value is not part of this strategy.
The approach that this Global Deep Value Fund employs is two-fold; make concentrated investments in the quality businesses available at steep discount prices, and diversify in the ‘classic’ value businesses. The overwhelming preference is for investing in the quality business, but at a low price. These will most often be companies whose current problems the PMs judge to be temporary, not structural. The average stake in such companies will tend to be relatively large. This reflects the fact that the intrinsic values of these firms grow over time making them increasingly valuable. However, when market prices make it more difficult to find these companies at value prices, the portfolio will shift somewhat towards more ‘classic’ value stocks.
With ‘classic’ value stocks diversification is more important, and the positions will be much smaller. This is to protect both against the risk that a low-priced stock remains so, as well as against firm-specific risks. Generally the ‘classic’ value stock is more controversial than its quality brethren, otherwise its valuation wouldn’t be what it was. Results are sometimes weak, the business is often dull, and balance sheets can be stretched. Beyond spreading risk through diversification, the PMs are prudent in avoiding weak balance sheets. This is to avoid the risk that a company is tipped into serious problems (i.e. liquidity problems or worse) if results deteriorate. The PMs are also careful to select only those companies where cash flows are positive or close to it, and which their analysis indicates will improve. When prices get too far out of line, split-ups and acquisitions at far higher prices can occur. However, while nice if it happens, they don’t build this into the investment case. Still, their thinking is that in a portfolio of deeply undervalued ‘classic’ value stocks – even if held for several years – the Fund will earn a good return if only a couple of these holdings adjust to our estimate of intrinsic value or close to it.
Value can appear in numerous guises. What is important is to recognise what form it is, and to invest accordingly. This Global Deep Value Fund is all about stock-picking – irrespective of index or sector composition. However, while preferring the very undervalued quality business to the ‘classic’ value stock, both sorts can be excellent ‘value’ picks. The portfolio at any point in time is therefore apt to be a balance between both sorts of value. This should allow the Fund to perform well through most market cycles, while remaining true to its goal of preserving investors capital and earning attractive long-term returns.
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