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Richard Pzena Is Drilling For Deep Value

August 31, 2014

Richard Pzena (Trades, Portfolio) isn't afraid of taking risks. Since Its founding in 1996, his Pzena Investment Management has pursued a deep-value, concentrated portfolio strategy that has sometimes led to volatile returns. The John Hancock Classic Value fund (ticker: PZFVX), which is managed by the firm, had a great 2013, rising 40.5%, eight percentage points ahead of the Standard & Poor's 500 index. But the fund was crunched in 2008, dropping 46.6%, nine percentage points worse than the index. Through the middle of last week, the fund was up 7.8% in 2014, two points behind the S&P 500.

The firm managed $26.4 billion for institutions and retail investors at the end of July. Shares of the company (PZN) have had a wild ride after its 2007 initial public offering at $18. The stock dropped below $2 in 2009 and has since rallied to $10. In addition to the Hancock fund, Pzena manages 30% of the $18 billion Vanguard Windsor fund (VWNDX), and this year started three funds, Pzena Mid-Cap Focused Value (PZVMX), Pzena Long/Short Value (PZVLX), and Pzena Emerging Markets Focused Value (PZVEX).

Pzena talked with Barron's recently at his Manhattan office. He views big banks, such asCitigroup (C) and Bank of America (BAC), as among the best values in the stock market. He's also bullish on international oil outfits, including BP (BP) and Royal Dutch Shell(RDS.A).

Barron's: How would you describe your approach?

Pzena: We are deep-value. We're trying to buy stocks that are generally extremely depressed because something has gone wrong in the business. These companies are under-earning versus their historic norms. We believe that they can fix their problems, and that's why we get to buy at a low price. It is a strategy that requires a lot of patience, has a great long-term track record, but it is less predictable in the short term. So it has to be part of a managed portfolio, but as part of that, it's a really valuable addition to a portfolio.

How many stocks do you own?

We are relatively concentrated. Our large-cap value strategy in the U.S. includes only 30 to 40 stocks. Our emerging-markets and global portfolios are 50 or 60 stocks.

So you are willing to tolerate some volatility?

Owning the cheapest stuff in the long run does pay off. And short-term volatility should be mostly irrelevant to people investing in the stock market, because it is not a short-term investment medium. If you have a one-year time horizon, you're probably making a mistake. It is more like gambling. If you have a 10-year time horizon or a 20-year time horizon, monthly volatility should be completely irrelevant, and people focus too much on it.

Two sectors you like are financials and energy.

Let's start with the big banks. Their valuations are reasonably extreme. It's hard to say that you can find real extremes in this world because finding value opportunities in general isn't as easy as it has been over the past five years. With the large banks, people are worried about all the regulatory change and pressure, and the potential disruption to profitability. But most of the reason that banks are underearning relative to their historical norms, based on return on equity and other measures, is economic and not regulatory. There are three big things going on.

Continue reading: http://online.barrons.com/news/articles/SB50001424127887324616904580107543590420672?mod=BOL_hp_popview

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