Once the technology bubble burst, the markets began to reward traditional value investing once again. We began to go back to “old economy stocks” that could be once again be evaluated based on traditional valuation metrics.
I talked to one of these traditional value players to try to understand the workings of a true value management style. I talked to Tim McElvaine, co-manager of the Mackenzie Cundil Value Fund. Tim works with Peter Cundill and David Briggs to employ a team approach of money management.
What does a Value Manager do?
I asked Tim how does a value manager run a mutual fund? His response was that every company they looked at had to measure up on three levels:
- Step one is to try to determine what the company is worth? What is the Net Asset Value (NAV) for that company? For the Cundill team, they have a meeting of the minds as to how a stock is valued. The key of course is to buy a company at a discount as to what it is worth.
- Next, they look at how volatile is the estimate of the value of that company? What variables will impact on this valuation? For example, they want to try to understand what variables might cause their valuation theories in the first step to be incorrect. They might look at things like debt, the type of business that it is in, the sector environment, and even the competition.
- Finally, they want to know if the management of the company is working for or against you? Are these managers concerned about shareholder interest? The key to these undervalued stocks increasing in value is to ensure that management has the shareholder price as a priority.
As you can see, determining the worth of a company is the forefront of managing money with a traditional value methodology.
Is the Mackenzie Cundill Value Fund a good example of a Value Fund?
The Cundill Value Fund is rated as one of the top Global Equity Funds by Morningstar, GlobeFund, Funddata and the FundFilter. Fundlibrary.com gives it a composite rating of 94 out of 100. I think it’s a pretty good example of disciplined Value investing.
According to McElvaine, “some might consider us bull headed contrarians. I prefer to call us extreme value managers. Basically, we are patient investors who buy cheap stocks and wait for these stocks to reach the valuations we think they should be at. We must be patient. Sometimes we have to wait 2 to 3 years for the values to get there”.
Getting the sell decision right is sometimes harder than getting the buy decision right.
Often managers can tell me what they look for when they are buying stocks. However, few people take the time to understand when to sell a stock. Tim shares with us the situations when they sell a stock; “Basically we sell under one of three circumstances. Firstly, we will sell the stock when the price reaches the valuation. Alternatively, we might sell a stock when we find a better stock or idea. Finally and hopefully this doesn’t happen often, but we will sell a stock if we were just wrong. Mistakes will happen from time to time.”
Value managers are very conscious of risk.
This statement is not always true but Value funds tend to have lower volatility. I asked Tim how they managed risk in the Cundill Value Fund. “While many managers try to manage risk through diversification, we try to manage the portfolio with 20 to 30 holdings. We feel that if you’ve done the homework and you like a stock, then why not buy more of it. Rather risk is managed through good bottom up research and making sure that you have bought the stock undervalued. We spend time making sure our valuation work is correct. Risk management is in the price we pay.
You can diversify by making sure your holdings are different by nature. There is rarely a shortage of ideas. The key is to find the best ideas.
The information contained in this article was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. The views expressed are those of the author and not necessarily those of Manulife Securities International Ltd.
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