I recently had the opportunity to interview Bernard Horn (Trades, Portfolio), portfolio manager of the Polaris Global Value Fund, who added four new positions to his portfolio during the fourth quarter of 2014. He currently owns 89 stocks, valued at $275 million and a quarter over quarter turnover rate of 4%.
The Beginning of Horn’s Career
“As an undergrad, I gained strong finance and accounting skills, with a good dose of legal courses. My knowledge was expanded with the capital market theory training at MIT's Sloan School. I think this combination, along with experience at a real company to learn about cash flow creation, was the foundation for my career. I watched people manage their money, including my parents. My dad always smartly bought the few houses to which we moved. I worked with a very smart client, George Jaffin, a New York-based attorney who invested in distressed debt with Ben Graham and Max Heine of Mutual Shares. He taught me a lot about value investing that differed from the capital market theories of finance.”
Horn was inspired by one of his professors to launch his first global value portfolio in 1980.
“I was a student at the Sloan School of Management at MIT at the end of the 1970s. It was a terrible decade for U.S. stocks, but many foreign markets were performing well. One of my professors, Fischer Black (co-author of the Black-Scholes equation), praised the efficient market theory, but also talked about its exceptions -- the most prominent of which was value investing. This value investing loophole to EMT, along with emerging research in the benefits of international diversification, inspired me to launch my first global value portfolio in the early 1980s.”
Horn continues, “If I look back further to the origins of my interest, I recall a job working nights on a cleaning crew at Boston Logan Airport during the summer after high school. I used to read the Barron's magazine left at the airport; the contrarian articles always struck a chord with my thrifty New England roots, and the articles seemed to make a lot of sense to me.
Polaris Global Value Fund and His Portfolio
Horn founded Polaris in 1995, with a global value philosophy that combines technology with fundamental research. The firm's global philosophy is based on two beliefs: country and industry factors play an important role in determining security prices and fluctuations in the global market result in mispriced stocks.
21.5% of Horn's portfolio consists of stocks in the financial services sector. Consumer cyclicals is 13.7% and basic materials consists of 13.4% of his overall portfolio.
When asked why the majority of his portfolio consists of stocks in the financial services sector, Horn replied, “Approximately 20% of the Polaris Global Value Fund is in financials, which is about the same as the benchmark MSCI World Index weighting. Many financials in the U.S. and overseas had been beaten down during the 2008-2009 credit crisis, and have yet to return to pre-recession stock price levels. There are many good undervalued financials around the world; in fact, this is by far the largest sector in our screens. This includes not just banks but REITs, insurance companies, asset management companies and so on. Bank earnings are either still depressed (i.e. Europe) or still have a lot of room for improvement as loan growth starts to recover and credit costs subside.”
Horn’s latest additions include: Michelin (XPAR:ML), Linde AG (OTCPK:LNEGY, Financial), Northern Star Resources Ltd (ASX:NST, Financial) and Hermes International (XPAR:RMS, Financial).
Michelin (XPAR:ML)
Horn purchased 38,400 shares of ML.France, which had a 1.3% impact on his portfolio. The shares were purchased at an average price of €71.80 a share.
Michelin sells and manufactures tires for different types of vehicles. The company was created in 1889.
“With lower gas prices, increased driving mileage may boost the demand for replacement tires. Therefore, we added French tire maker Michelin to the Polaris Global Value Fund (PGVFX) portfolio,” Horn said.
Linde AG (OTCPK:LNEGY, Financial)
Horn purchased 19,100 shares of LIN.Germany at an average price of €150.02 a share, which had a 1.3% impact on his overall portfolio.
“Linde is a German multi-national industrial gases and engineering company. The company appears attractive, as it is a dominant player in a consolidated industry, with low downside risk, many long-term contracts and strong visible cash flows,” Horn said.
Northern Star Resources Ltd (ASX:NST, Financial)
Horn purchased 707,800 shares of NST.Australia at an average price of $1.20 a share.
“Northern Star is a gold producer in Australia. We expect this small-cap stock to be a Polaris Global Value Fund diversifier,” Horn said.
HermAs International (XPAR:RMS, Financial)
Horn purchased 1,090 shares of RMS.France at an average price of €261.05 a share.
The company produces, designs and distributes personal luxury accessories and apparel.
“Hermes was a spin-off of Christian Dior, which we own,” Horn said.
Future additions to the portfolio
I then asked Horn if there are any stocks he is currently keeping his eye on, waiting for the price to lower.
“Some stocks may capitalize on the recent commodity price declines (case in point, Michelin). Lower commodity prices, as well as disruptive technologies, may add to deflationary pressures in developed countries. We believe that “deflation-beater” stocks may be among our best picks in 2015. “Deflation beaters” can be defined as companies that offer a fixed-price product that saves a consumer money. That consumer will continue to buy more of that product until it stops saving money.
We have numerous companies on our watch list after spending perhaps more time that we ever have scouring company research. However, we find ourselves wanting to watch companies a bit longer as they work through some of the risk factors we see. With investment potential stemming from every corner of the planet, it is hard to generalize but the deflation theme continues to be of the highest interest to us.”
Horn closed with advice to both current and future investors:
“Don’t let emotion influence your investment decisions; instead, look at the math behind finance — specifically the probability distribution of asset prices across all asset classes. Unfortunately, this advice is rarely heeded, as most investor mistakes are due to emotion. Stocks go down because other investors have become afraid of what they don't know. They become uncertain of their belief in what they invested in, then they get fearful someone else knows something they don't and the fight-or-flight response kicks in and they flee, or in security terms, they sell.”
He also touched on how uncertainty can mean opportunity:
“When I see stock market declines, I see an opportunity to profit from the uncertainty. Uncertainty in statistical terms is expressed as the standard deviation of stock returns, which is about 20% around a 6% real mean return. My best advice is to keep some cash on the sidelines to capitalize on this “uncertainty”. When it happens, either rebalance your portfolio and/or put some cash to work buying what is down. Eventually, many of those deep value stocks may yield good returns.”
