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David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: Dr. Paul Price (IP Logged)
Date: April 11, 2009 10:33AM

NYTimes.com

By FLOYD NORRIS
Published: April 9, 2009

David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.

Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.

In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.

“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”

Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.

As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.

On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.

Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant. “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”

You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.

Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.

There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.

Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.

The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.

What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.

With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.

Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”

He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”

My suspicion is that Mr. Dreman could have saved his job if he had been more willing to bend with the times and go along with the current investment consensus. After all, this is a market where Citigroup and Bank of America could see their shares collapse after the government made it clear they would not be allowed to fail. How could any rational investor want to own a bank stock in that environment?

Of course, what is obvious is sometimes wrong. In February 2000, George Vanderheiden retired at the age of 54 from Fidelity Investments, where his sparkling long-term record at the Destiny Fund had been tarnished by underperformance caused by his refusal to jump on the technology stock bandwagon.

His successors knew a trend when they saw one. They managed to get in on the tech stock boom just before it ended. The fund lost big, when it would have done well had his successors stayed with Mr. Vanderheiden’s stocks.

The people who run mutual fund companies, it turns out, are very much like other investors, something Mr. Dreman well understood.

“The major thesis of this book,” he wrote in 1998, “is that investors overreact to events.”



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: sabonis (IP Logged)
Date: April 11, 2009 11:05AM

I completely agree with this article. I have always liked Dremen. If he was 20 years younger I am 100% sure he would make them regret his firing. Having said that, he did screw up messing with the financials. If an amateur investor like me knew to stay away from the financials he should have known it as well.



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: cm1750 (IP Logged)
Date: April 11, 2009 11:55AM

I always liked Dreman as he has been right over the years on owning tobacco stocks, but he really messed up on financials.

For some reason, value investors seem to like financial stocks given their low P/E. As smart investors know, you pay a high P/E for certainty, which is why PG, KO etc. have high multiples. Financial stocks deserve low P/Es in good times as the "E" represents earnings power when everything is going right. Given the 10x-plus leverage of banks, "E" can evaporate when including defaults/chargeoffs and real estate writedowns.

Not to play Monday-morning quarterback, but like Sabonis, I was smart enough to realize this basic idea and that the downside risk was not worth buying these stocks after a huge credit/real estate bubble in credit where a monkey could get a 95% loan/value mortgage with no income verification.

I did like how WEB spoke about WFC recently and looked at normalized earnings power and said it was cheap - so far he has been proven right. It seems to me that Dreman and others assumed the bubble earnings and book values were normalized.



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: jmn3813 (IP Logged)
Date: April 12, 2009 08:23PM


I agree that David Dreman is one of the greatest investors of his generation. It is a shame that a board at Deutsche Bank has the ability to fire someone who has been investing longer than most of them have been alive. I disagree on the points stated in reference to the financials. I believe Dreman, like many other investors, jumped on the financials before they hit bottom. Little did most of them know that the stock was almost bottomless and most would lose over 90% of their investments on paper. Going forward though, the so called "big banks" that are "too big to fail" are able to borrow at interest rates that are almost 0%, giving them huge spreads. The real losers here were the banks that were conservative in their lending practices and did not get into trouble therefore not spurring the government to bail them out.

Disclosure: Long C, BAC, ETFC



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: Sivaram (IP Logged)
Date: April 12, 2009 09:16PM

I highly respect David Dreman---hey, a contrarian wannabe can't have it any other way ;)--but I don't understand how he got killed last year. Dreman is a diversified investor, often holding hundreads of stocks. One of the reasons I don't follow him closely is precisely because he is diversified and holds a lot of stocks. It's unfortunate that he was overweight the wrong areas. He was also bullish on oil&gas and that was another disaster last year, depending on the price you bought at...

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: Sivaram (IP Logged)
Date: April 12, 2009 09:23PM

jmn3813 Wrote:
-------------------------------------------------------
> on paper. Going forward though, the so called "big
> banks" that are "too big to fail" are able to
> borrow at interest rates that are almost 0%,
> giving them huge spreads. The real losers here
> were the banks that were conservative in their
> lending practices and did not get into trouble
> therefore not spurring the government to bail them
> out.


The outcome is not clear-cut. Just because the banks are propped up by the government doesn't mean that shareholders won't get killed.

Furthermore, it is possible that operating profits may not be enough to bring some banks back to solvency. I have no idea which, if any, banks are insolvent but if some are insolvent, the profits may not be enough. The infamous zombie banks of Japan were insolvent but alive for a decade but shareholders didn't really benefit from it.

Based on what John Hampton at Bronte Capital blog has suggested, American banks as a whole, unlike in Britain, Iceland, Ireland, etc, can earn their way back to solvency. But, assuming even if he is correct, it's not clear if some banks will go down.



---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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Re: David Dreman, Contrarian Fund Manager, Exits Unbowed
Posted by: jmn3813 (IP Logged)
Date: May 10, 2009 08:17PM

It has been a month now since this article was published and I bet DB is already eating their words. The stocks of the banks have jumped many folds since their March lows when pundits such as Nouriel Roubini and Elizabeth Warren predicted the end of the world. Please refer to Dreman's performance in Q1 to show how he has done the same thing for at least the last 30 years and will continue to use people as the aforementioned Warren and Roubini to capitalize on irrational investing.

Only time will tell if the "Financials" will rebound as they always have (cite 1940s and 1990s) or if academia will prove to be correct for the first time ever in applying theory to practice.

Disclosure: Long C, ETFC, BAC, XLF



Guru Discussed: David Dreman: Current Portfolio, Stock Picks
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