Yesterday, we learned about the untimely death of Charles de Vaulx (Trades, Portfolio) by apparent suicide at his offices in New York City. Before anything else, this is a human tragedy. By every measure, de Vaulx was a diligent, hardworking and incredibly thoughtful value manager. He leaves behind a wife and two children. Everyone at Nintai sends our condolences to his family at this very difficult time.
De Vaulx was a value investor who represented the best of the Old Guard. By that, I mean in thinking, not in age. He was only 59 and still had much to offer the investment community. I refer to his investment thesis, portfolio management theory and investment practices. First and most important, he always insisted on a reasonable margin of safety. He was willing to go to what is considered today heretical, extraordinarily high percentages of cash, reaching 40% of total AUM sometimes. He insisted, much like his mentor Jean-Marie Eveillard, in holding actual gold in portfolios as a means to offset risk. Last, he saw his job's role as a means to retain wealth, not just create wealth. His passion for reducing risk for his clients' assets was legendary.
All of that is, of course, profoundly out of step in today's investment world. Nearly every core concept de Vaulx held dear has been tossed topsy-turvy over the last decade. Interest rates continued their downward trend that had started in the 1980s, finally turning negative (!) in many countries around the world over the past few years. His remarkably high cash position was a terrible drag over the past decade. Interestingly, even that didn't help when the market suffered its collapse in the spring of 2020 with the onset of Covid-19. Even with so much cash, IVA funds saw share price drops of over 25%.
The last year had been difficult for IVA and de Vaulx. Total assets had dropped from a peak of nearly $20 billion to less than $1 billion this year. In July last year, de Vaulx's co-investment manager Chuck de Lardemelle left the firm. In December, another founding partner, Michael Malafronte, left the firm for health reasons. The final blow was a dreadful 2020, with both funds underperforming their index by nearly 15 percentage points. The end came on March 10, 2021, when IVA filed with the SEC that it intended to liquidate its two mutual funds, IVA Worldwide and IVA Global, and shutter the firm altogether.
The Weight of Professional Asset Management
There is a vast distinction between managing your own money and doing it professionally. It's hard to describe the pressure one feels as underperformance piles up. The markets are famously unfeeling. You wake up every morning, and you compete against a faceless index. There is no emotion or subjectivity to what a professional investment manager does. You either outperform the market, or you don't. You can come up with many reasons why your picks have performed poorly, but there is simply no hiding from the numbers.
For many value managers, the past decade or more have been a grueling experience having to report – year after year – underperformance to their investors. After the first few years, it becomes increasingly difficult not to question your methodology. After a decade, it becomes hard not to question your entire investing career. Was the initial success just luck? Is it possible to add value to your clients? Is it even worth continuing?
When I listened to de Vaulx on Morningstar's "The Long View" in November 2019, it was clear IVA and the investment management team still felt their underperformance would turn around. The markets would return to some form of sanity after nearly a decade of seeming craziness. Somewhere between then and March of this year, their view fundamentally changed.
I can only speak from my perspective of having an abysmal 12 month run over the past year. I find I don't sleep as well. I spend days evaluating current holdings, re-running our investment thesis, tweaking the numbers until there isn't much else to do. I find it takes about six months of straight underperformance before I question not only the investment thesis but whether Nintai's strategy is flawed. In this business, I think three major themes can significantly (and negatively) impact a professional value manager these days.
Some Important Themes
Competition is Brutal
I'm not sure you will find an industry with such widespread competition as investment management. At the strategic level, competition takes place against other active managers and against index (or passive) funds. With fellow active investors, a manager competes on her stock-picking abilities and his management fee. Against index funds, the battles rest more on price (it's hard to compete when you give away 1.5% at the top every year) and secondarily on stock picking. At the tactical level, competition is intense as data and content have become democratized. The days of finding net/nets by reviewing individual annual reports or Value Line surveys has been replaced by utilizing a search query of GuruFocus that takes roughly 25 seconds to run. Nearly every competitive advantage a value investor brought to the table 25-30 years ago is gone in today's investment world.
Generally, Your Behavior is Your Enemy
Value investors operate in a field where nearly every genetically programmed behavior is contrary to what it takes to be successful. Everything from confirmation bias to loss aversion pushes an active manager to behave against their investors' best interests. The ability to control your emotions and focus on what works – regardless of your native impulses – is vital to success. As almost anybody who has invested for more than a decade can tell you, that sure as hell isn't easy.
Time Should Be Your Friend, But Sometimes Isn't
The past decade has added an enemy to many value investors that has always been one of their greatest allies. Warren Buffett (Trades, Portfolio) said that a key to investment success is to find wet snow and a very long hill. For nearly every decade since the 1920s, it was assumed the long hill ran downwards. The past 12 years have been a long uphill climb for value investors. Nearly every investment thesis and process has been challenged or simply not worked since 2009. That's a long uphill climb.
Conclusions
I didn't have the honor to know de Vaulx on a personal level. I met him several times, and I treasured our conversations. I first knew of him because I admired his investment record over the long term, the brilliance and clarity of his intellectual frameworks and his ability to stick to his core convictions (I highly recommend the aforementioned "The Long View" interview on Morningstar).
It's unlikely we as outsiders will ever have a clear view what happened over the last few months of his life. Still, we can be sure he looked out over the previous decade as every value investor has and saw a challenging period that posed a risk to his entire professional being. He isn't alone. But it's important to realize that at its most fundamental, value investing is about human beings making judgment calls on the long-term future of a possible investment. De Vaulx was human, and he also happened to be a good human being. I'm glad I met him, and I'm even more glad I got to understand his skills better, his thinking, and his convictions. He will be missed.
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