Value Investing Congress speaker Charles de Vaulx of International Value Advisers gave a presentation today, entitled A Cautious and Opportunistic Approach to Global Investing: Where Are We Finding Value Opportunities in the World Today. The following are our notes from his presentation.
Investment Idea: LONG SECOM (OTCPK:SOMLF)
- Japanese, steady, stable cash flows
- Has diversified over the past few years so there has been some value destruction.
- Has a strong balance sheet, with net cash.
- At 7x EBIT, company is cheap.
Investment Idea: LONG Nestle (OTCPK:NSRGY)
- If you strip out stake in L’Oreal and other stakes, you pay 9x EBIT for food business.
- Good balance sheet.
- Accused of overpaying for acquisitions.
- The company appears cheap and safe.
View of Markets and Economic Outlook
- Too many financial stocks do not offer “safety.” Charles uses gold as an insurance policy (gold bullion—insurance against inflation/deflation; go bankrupt during deflation and bank “IOUs” become worthless). Cash is viewed as a residual.
- Would like to have twice as much capital employed in Japan but would like to see cash-rich companies be able to maintain dividends and buy back shares—needs more evidence of caring for shareholders than strictly clients, before investing more. He’s seeing many “net nets” in Japan—not as much in the US and Europe.
- His idea of a good business is natural monopolies. Many companies in China are very capital intensive. Favorite way to play emerging markets is through commodities, either directly or through bonds.
- Outlook: May remain bleak, yet some pockets of value have emerged.
Recent Lessons Learned
- Too many people focused on the upside, not enough focus on the downside.
- Monitoring credit cycles – following these cycles can be helpful and help determine when a bubble is forming (said he reads Grant’s Interest Rate Observer, Shilling, Marc Faber).
About International Value Advisers
- IVA takes a cautious and opportunistic approach to global investing.
- It is owner operated (22-23 people)—not outside seed capital, they “eat their own cooking” ($30 mil+ of principals own money in fund) and long only.
- Willing to make large negative bets/build portfolios that have nothing to do with a benchmark.
- Gold is an 8% position. Uses gold bullion, money shares, or other proxies to invest in gold. About 1% of funds are in UltraShort 20+ Year Treasury ProShares (TBT). Japan is 12%.
- Main objective is not to lose money.
- Believes in some form of diversification. Uses calls and puts to create cheap entry prices (recently sold puts on GE, 3M (MMM) and Comcast (CMCSA) to create an entry price that makes sense to them). Since markets are higher, will most likely collect the premiums on those positions. $2.3 billion AUM.
- Diversification argument [for international investing] is getting weaker—especially in a more global world.
- The real attraction is that foreign markets remain less efficient than US markets.
- At the margin, he believes accounting is more reliable outside the US (the real issue is poor disclosure (no 10-k’s, divisional breakdowns, etc).
- Corporate governance outside the US needs to improve—there have been some improvements in the field of takeovers (French have improved quite a bit).
- Small foreign stocks are not as risky as they appear—many are family controlled businesses. Family controlled businesses can be better run (less leverage, more willing to bring in outside managers) than non-family owned businesses.
- Another argument people make against international investing is that you are exposed to fluctuations in currencies. Even though domestic investors have exposure to currency risk, his firm mitigates currency risk through hedging policies, pays attention to the types of companies he owns (i.e. export company in Japan might not need to be hedged—already has its own natural hedge).
- Currently has cash level of 23%, 7% US, 34% high yield bonds, 8% gold, Europe 12%, Asia 15%, >1% Energy.
- Believes on average that European stocks are 15% cheaper than U.S. stocks.
About Charles de Vaulx
Charles de Vaulx joined IVA (International Value Advisers, LLC) in May 2008 as Partner and Portfolio Manager. He is responsible for all investment decisions jointly with Charles de Lardemelle. Until March 2007, he was Portfolio Manager of the First Eagle Global, Overseas, U.S. Value and Variable Funds, together with a number of separately managed institutional accounts. He was also solely responsible for the management of the Sofire Fund Ltd. during the time in which the fund won the Absolute Return Award back to back in 2005 and 2006 for “Fund of the Year” in the Global Equity category. Altogether, assets under Charles de Vaulx’s management totaled approximately USD $40 billion. In addition to sharing Morningstar’s “International Stock Manager of the Year” award in 2001 with his co-manager, Charles was runner-up for the same Morningstar award in 2006.
Disclosure: No positions.