National Post (National Edition)
Value investing or bust for die-hards
Jean Marier and Tim McElvaine — who fill multiple roles as research analysts, portfolio managers and partners at Victoria-based McElvaine Investment Trust — call themselves one of the last of the country’s deep-value investors, that group who remain 100-per-cent true to the principles laid down six decades back by Benjamin Graham.
And it’s a decision — to try and buy companies for 50 cents on the dollar, at a discount to their book value and at low price/earnings multiples — that’s become more difficult to implement. “We are not seeing many of those opportunities, which is why we are at 30 per cent cash,” added Marier, who became a Graham devotee after reading his book, The Intelligent Investor, almost 25 years back.
“We are fully invested (with the Graham philosophy),” said Marier, noting the decision to press on comes after the returns from the growth style of investing has bested returns from value investing for the past eight years. “It’s just a matter of time, we think, before reason and rational thought come back to the market.”
And it’s an adherence from which Marier has profited, including avoiding the technology bubble of 2000 and the financial crisis of 2008. “The reality is you don’t lose a lot,” he said when noting that over the past 20 years the fund, sold to accredited investors, posted a return of about seven per cent. Over the past few years, it’s been a poor performer.
Francis Chou, founder of Chou Funds, is also in the McElvaine camp. “Value investing works in the long term,” he said when noting that at times it becomes unpopular. “You have to be accurate in your analysis, you have to buy cheap to give yourself a margin of safety, but it’s harder to find bargains.”
Over 20 years, his main fund (Chou Associates Fund) has generated a 9.29-percent annual compound rate of return, versus 3.99 per cent for the group and 6.01 per cent for the S&P/TSX composite. For the past one-, two- and three-year periods the fund produced a negative return.
Recently McElvaine made some key changes in the way its one fund — yes, it offers just one — is managed. It added two new series — C and F — both of which don’t charge a management fee but instead a performance fee.
For the C series, the 25-per-cent performance fee kicks in after zero return; for the F series, which is sold through advisers, there’s a six-per-cent hurdle and a 20-per-cent performance fee.
“We align ourselves with our unitholders. If they make money we make money,” he said, adding for its regular B series, it charges a one-per-cent management fee and a “high water” performance fee.
That McElvaine is sticking to its deep-value focus approach comes at a time when other value managers, including Irwin Michael of ABC Funds, have tweaked the way they view the world.
Last April, Michael penned a piece called The New Value where he lamented the loss of his ability to buy deeply undervalued stocks and see them rise to intrinsic value. “Increased investor competition, aggressive corporate takeovers of deeply undervalued securities and fewer initial public offerings,” plus an “increasingly efficient” market have made it more difficult to replicate the strategy that worked in the past, he said. Accordingly “value investors such as ourselves have had to face a more complicated world of new value.”