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Value investors traditionally have little heeded macroeconomic trends, preferring instead to focus on the intrinsic value of companies. Their ultimate goal is buying assets “on the cheap” — for less than they are truly worth — but tradition has been tested by the current crisis.
Whitman began the discussion by admitting that he wished he had paid more attention to macro events, even though, he added, he was “not qualified” to do so.
Whitman’s flagship fund, the Third Avenue Value Fund, struggled in 2008, – losing 45.6%. Over the last 10 years, though, it has returned 4.43%, 6.67 percentage points better than its benchmark, the MSCI World Index.
Since World War II, central bankers have focused on aiding GDP growth and controlling inflation, Whitman said, but they have ignored “the third leg of the stool” -creditworthiness. “Cheap is no longer a sufficient condition” for value investors, he said. “The companies we buy had better be creditworthy.”
Eveillard agreed that credit and leverage are playing a central role in the crisis, noting that leverage amplifies mistakes in down markets.
Eveillard’s First Eagle U.S. Value Fund had a better year in 2008 than most, losing 23.1%. Over the last one, three, and five year periods the fund has ranked in the top percentile of its peer group.
Although studies have shown that value investing has consistently delivered superior performance, other studies have also found that value investors are strikingly few in number. Whitman and Eveillard both addressed this paradox.
Eveillard attributed the dearth of value investors to two factors. Value investing is inherently hard work, given that most public sources of information – including sell-side research – are insufficient to provide a competitive advantage, he said. More importantly, value investing requires a long-term horizon, and most investors are too impatient to wait for market values to rise to intrinsic values. “Human nature is to shrink from pain,” he said. “It’s not that value investors are masochists,” he added, it’s just that they are more patient.
Whitman believes value investors are more numerous than most people think. “Many value investors are controlling investors,” he said, expanding the traditional realm of value investors to include those who take ownership positions in a single company or a small number of companies.
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Robert Huebscher
www.advisorperspectives.com
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