Rupal Bhansali is the chief investment officer for international and global equities at John Rogers (Trades, Portfolio)' Ariel Investments, a Chicago-based firm with $12.7 billion in assets under management.
Heading up the Ariel Global Fund and Ariel International Fund, Bhansali joined Ariel in 2011 and now manages approximately $7 billion in portfolios for both institutional and retail clients.
Bhansali answered questions about investing that GuruFocus readers asked recently and discussed her new book, “Non-Consensus Investing: Being Right When Everyone Else Is Wrong.” This is the second part of that interview. Read the first part here.
You can also check out Ariel Investments’ current portfolio here.
Bhansali will be one of our speakers at the 2020 GuruFocus Value Conference in Omaha, Nebraska next year. For more information on the event and to purchase tickets, please go here.
GuruFocus Question: How do you value businesses? Are asset-based or earnings-based valuations more useful?
Bhansali: They are not mutually exclusive – both are essential to valuing a company. One must look at the earnings and cash generation power of the business in conjunction with the balance sheet and need for reinvestment in assets to sustain growth. So any valuation work would be incomplete if one simply looked at either the income statement or the balance sheet.
Question: How do you analyze the management of companies?
Bhansali: By the decisions they make or choose not to make with respect to managing both the risk and return profile of the business, the cards they were dealt and how they played their hand and their attention to and overall track record on shareholder value creation.
Question: Value stocks have lagged growth stocks over the last decade. Do you believe that the reversal of the mean will occur at some point, and value will start outperforming growth going forward?
Bhansali: Yes we do. As noted earlier, we saw another version of this movie in the late 1990s and we have not forgotten how it ended. Styles go in and out of favor, but markets inevitably restore balance. The pendulum swings slowly, but it also swings to wide extremes.
Question: Given the outlook moving forward as central banks continue to expand the monetary base and drive yields lower and asset prices higher, how can anyone accurately gauge risk since fundamentals seem to be focused on a two-tiered economy?
Bhansali: We are headed into unchartered territory, and uncertainty presents risks. Rampant money printing and negative interest rates in many countries around the world 10 years post the financial crisis should concern policymakers, including and especially the central bankers, because their goal is to maintain stability and contain inflation, not drive asset price distortion. As with any government action or policy, there are unintended consequences and we seem to confronting those. Indeed, if quantitative easing was a panacea, then the Japanese economy and stock market would be the best-performing ones in the world as Japan implemented monetary easing long before any other country. Yet neither monetary nor fiscal stimulus proved sufficient. Ultimately, Japanese companies and consumers had to do the hard work of structural reform: improving their cost profile, governance structure, productivity, balance sheets and value proposition, to remain relevant and thrive. The results are in. Kodak (KODK, Financial), which is a U.S. company, had the benefit of a good economy but floundered nonetheless because they were in denial about the challenges they faced (i.e., no amount of macro policy or tailwinds helped them) but its Japanese counterpart, Fuji Photo Film (TSE:4901, Financial) is thriving despite a fragile Japanese economy, because they reinvented themselves and pivoted to new applications of their old expertise by making chemical coatings for LCD panels.
Question: On that note, do you think this trend is sustainable? If so, what are the appropriate long-term investment themes you would focus on?
Bhansali: Ultimately, business worth is determined not by financial engineering (by a company or central bank), but by the enduring value propositions companies offer their customers. This is what will ultimately drive asset prices (which, in an efficient market, equals business worth). Having done research over the past three decades in about 50 countries with oscillating stages of economic headwinds and tailwinds, I have learnt to focus more on company and industry-specific factors such as the business plans, strategic transformation or competitive dynamics rather than getting lost in macro debates. Some of the best companies emerge from the worst economic backdrops because they get battle tested and develop resilience – and identifying those is time better spent.
Question: In regard to your book, what was your favorite part of the writing and publishing process, and why?
Bhansali: My favorite part was the writing because it forced me to be explicit about things I had intuitively known and applied for over 25 years. It was a very clarifying experience because I had to break down the puzzle of investing and put it back together again in a way that someone else could follow it. And the reviews have been great, which means I got my message across to my readers – that is very satisfying!
Question: What was the most important message about investing that you wanted to convey in your book?
Bhansali: The rules of the game of investing are not just different, they are asymmetric – you may not score any points (make no money) for being correct, but you incur penalty points (lose money) for being incorrect. And because one always loses money from a higher number and makes money off a lower number, avoiding losers and losses is more important than picking winners and making gains. My book is different in that it shows you how to do both – avoid the losers and pick the winners.
Question: What do you know about investing now, that you wish you knew when you started?
Bhansali: Everything I write about in the book!
Question: What advice do you have for those investors who are just starting out?
Bhansali: You learn best from osmosis in this profession, so apprentice alongside smart and wise veterans because you will learn from them on the job. If you can’t work alongside them, read anything that is published by or on them because their actual investment experiences provide a treasure trove of learning.
Read the first part of this interview here.
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