Get that price right

KARL Leinberger, chief investment officer at Coronation Fund Managers, says the spectrum between growth and value investing is best delineated by the degree to which investors are disciplined on price.

“For some, value means buying distressed, broken businesses. But the biggest holdings of [Warren] Buffett, considered by many to be one of the world’s greatest value investors, are not classic value stocks. We’re deeply disciplined on price, always looking for through-the-cycle earnings,” he said.

This hybrid approach has worked well for Coronation. Not only has the firm topped most of the rankings for investment managers in recent years, but it has benefited from an influx of new clients, who want a slice of that performance.

As a result, Coronation’s share price shot up 123% in the past year.

“In our portfolio we have had low-growth businesses in the past like Telkom, but also higher-growth shares like Naspers and Aspen, which we think are still undervalued. We didn’t own commodities and construction shares at the top of their cycle, but we own them now,” he said.

Leinberger said the selling point hinged on valuation. “We wait if we have confidence in the underlying valuation, even if it takes a number of years. However, you can’t be stubborn, and shouldn’t compound a mistake if the margins of safety disappear.

“Over the years, we have found you should sell with a bigger margin than you’d think for poor-quality businesses, and a smaller margin than you’d think for good-quality businesses. In other words, sell good quality at fair value or before, and bad businesses way before fair value. Don’t sell good quality too early or bad quality too late,” he said.

Leinberger’s point is that investors should be “less greedy” when it comes to poor quality companies, even if the news coming out of that company seems wonderful.