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Value Judgement

Date: 07 July 2023

6 minute read

Whilst the annual pilgrimage to Omaha to hear from Warren Buffett and Charlie Munger gained many recent headlines, a lesser-known pilgrimage for some of us took place in London last week, namely ‘The London Value Investors Conference’. This was the 10th anniversary of a conference that has attracted almost every star name in value investing, although that in itself is a dwindling group. Yet this year there was a sense of renewed optimism backed by better returns, and hope that the momentum might prove longer lived than other recent false dawns.

The event saw nearly 500 attendees packed into the main Queen Elizabeth II Conference Centre in London, with a list of speakers including headline acts such as Howard Marks from Oaktree Capital, David Einhorn from Greenlight Capital and Henry Engelhardt, founder and former CEO of Admiral PLC. The format itself differs from most conferences I attend. Aside from the very large audience, this is not a fund pitch, but an exploration of the multiple ways to invest as a value manager. It also famously requires each presenting manager to pitch a stock, very much a US concept, but one which I know the audience always enjoy. How much personal account trading there is on the back of it I do not know, but the coffee break chat inevitably includes debates on which came across best or were most compelling. We will get to that, so keep listening!

With 18 presentations and over 10 hours of content, there were some fascinating themes and takeaways, and today I’m going to cover those that I found most interesting and insightful.

The conference was bookended by Ben Inker from GMO and David Einhorn from Greenlight Capital, who both happened to alight on the same topic.

GMO have done a lot of quantitative work on where the value lies within the cheapest segments of the market, and it turns out that “deep value”, defined as the cheapest 20% of the market by various financial metrics, was the answer. In the US, that segment has only been cheaper on 3% of observations, or effectively a 1 in 20-year event. Interestingly GMO did not see the same attraction in ‘shallow value’, the next two cheapest quintiles, in the US at least.

This was backed up by Einhorn, who described a ‘wasteland’ of undervalued stocks at incredibly low valuations, many of these located further down the market-cap spectrum. There was audible ripple round the audience when Inker noted that most value managers had either been fired in the last few years or sought self-preservation by finding reason to own a few of those ‘cheap’ tech names, such as Alphabet or Microsoft. In other words, the bottom fishers had almost entirely been taken out of the market.

Einhorn went further, describing the changing landscape whereby the largest mutual funds in the US were no longer the natural buyer from the deep value manager, as they themselves have been seeing steady outflows. Rather, as investors exited active value investors,  they have often moved to passive, adding to the weight of assets going into those stocks that have performed best.

Of course, there is no such thing as the average value manager, and as with every year we saw a real mix of process and outcome. From banking stocks on 0.2x book value to healthcare stocks on 23x price to earnings, which many may see as expensive given my previous comments, the stock picks themselves framed a very wide range of outcomes.

Another presentation that resonated was from the team at Guinness managing the Global Income fund. In particular, a reminder that dividends make up a large part of total returns over the long-term run. For example, just under 50% of US market returns over the last 80 years have come from dividends. In low-growth environments, that has been even more significant, nearer three quarters.

Whilst the virtues of value investing and opportunities today were clearly the focus, it was interesting to hear macro views that in the shorter-term markets are likely to go sideways and that stock selection is likely to be the key to performance. This is something I am hearing increasingly and, with the market so difficult to read, stepping outside of this conference we have seen those investors who are happy to shift between styles generally moving to a more neutral stance. Perhaps this was simply my own confirmation bias, but I really feel that we might finally be back to a time where stock selection matters most. The last ten or so years have been much more dominated by extremes of style outperformance, and perhaps we are in for a calmer period in that regard.

So, after all that, what about the stock pitches? Well, there were 18 mentioned, and a real mix. Based on nothing more than the enthusiasm of the presenters and the style in which they presented their ideas, the UK’s Metro Bank on 0.2x price to book along with US natural gas producer CNX was the coffee break fans’ favourites from those I spoke to. Under no circumstances invest on that basis though - but if you ever wanted a bottom quintile value stock, Metro bank, down over 97% at one stage and coming out of an FCA investigation, seemed to fit that mould. Another peculiarity of the conference has been that historic stock picks are noted, tallied, and tracked year after year. It will be fascinating as ever to see how the 18 picks have fared twelve months from now.

Finally, what were the other nuggets I picked up?

Chartwell provided an interesting overview of the Greater Bay area in China, a region China expects significant growth from in the next decade. Henry Engelhardt’s insights into management and culture were also fascinating, especially for anyone that manages a team. Finally, Korean Investor Petra Capital Management shared a few facts we did not know about the country, including that it is currently atop the Bloomberg innovation index, as well as treating us to a video of K-Pop girl band Blackpink, the most streamed girl band in the world, which I’m sure the audience have all gone off to download!

One surprise was that the three letters ESG did not get mentioned once during the conference. As much as ESG can be less clearly represented by value managers, I do wonder whether this is another example of why value managers are less in favour. Lastly, with only one of the twenty presenters and speakers female, girl band aside, I think diversity also needs to be closely considered if this part of the industry is to help itself going forward.

All in all, it was a fantastically thought-provoking conference. Let’s see if the enthusiasm for the value style is matched by returns to the space in the coming years.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.

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