I attended the 13th Annual Columbia Investment Management Conference on Friday, February 26th, and had the opportunity to hear current views and insights from several esteemed value investors.
Martin Whitman, Founder and Portfolio Manager of Third Avenue Management, opened the conference by discussing his current portfolio, his largest holding and sharing interesting insights. Mr. Whitman’s current portfolio is 80% comprised of “Graham and Dodd Net Nets”, including Toyota Industries Corp., Brookfield Asset Management (BAM), Capital Southwest Corp. (CSWC), Investor AB, Henderson Land Development (OTCPK:HLDCY) and Hang Lung Group. Third Avenue searches for companies with “super strong” financial positions that have excellent prospects of growing net asset value over the next five to seven years and that are trading at large discounts from readily attainable net asset value. Henderson Land is Third Avenue Value Fund’s largest holding and is well positioned according to Mr. Whitman based on its massive land holdings in Hong Kong and China, its 30+% stakes in Hong Kong and China Gas Company and Miramar Hotel, and strong management team led by Dr. Lee. Mr. Whitman also mentioned that his firm has found the most value opportunities in East Asia in recent years and that he does not worry about currency for foreign holdings, but that his portfolio will benefit when the Chinese Yuan appreciates over the next several years.
The first panel discussion focused on lessons learned from the financial crisis and the panelists included Wendy Trevisani (Co-Portfolio Manager of Thornburg International Value Fund), Matthew McLennan (Portfolio Manager of First Eagle Global Fund) and Thomas Russo (Partner of Gardner Russo & Gardner). Ms. Trevisani’s three major lessons from the crisis were the importance of remaining humble as an investor, of staying disciplined by holding on to great companies that you have done homework on during periods of crisis and of exercising risk control through purchase of diversified portfolio of assets when those assets are selling at discounts to fair value. Mr. McLennan said the main lesson that was reinforced was that human technology has advanced more than human emotions. He echoed that having humility and recognizing that the future is uncertain is very important to successful investing. Mr. Russo stated that the greatest lesson he took away from the crisis was not to sell a great company he was holding that was showing a loss only to replace it with a lesser company.
Bruce Greenwald, the moderator of the first panel, questioned the panel speakers about which parts of the world presented the most opportunity at the present time. Ms. Trevisani said she was finding value opportunities in Western European companies that have exposure to growth in emerging markets, but are more attractively valued than emerging market listed companies. Mr. McLennan expressed that he was finding little opportunity in China and was concerned with balance sheet growth and complacency about long-term growth prospects in China. He made a fascinating comparison that investors’ current love affair with emerging market stocks over developed market stocks reminded him of investors’ passion for “new economy” technology stocks over “old economy” stocks in the late 1990s and he said he is finding more value in developed markets, such as Japan, right now. Mr. McLennan also highlighted the attractiveness of a position in gold as a “scarce store of value for mankind”. He mentioned that annual gold production only equaled about 1.5% of total gold in existence so it was possible to determine the amount of gold that will exist in a few years. Many paper currencies are being printed at much faster rates in developed markets right now so it makes sense that gold would appreciate relative to those currencies. Mr. McLennan said that he looks at total value of gold compared to global income per capita to get a feel for whether gold is undervalued or overvalued and feels that gold is “slightly expensive” right now. Mr. Russo stated that he was spending less time on U.S. companies and that he was concerned by record deficits and dependence on foreign countries to roll over U.S. debt. He did not recommend a favorite region in the world to invest right now, but mentioned that he favors those companies that can deploy capital flexibly around the world, such as Richemont.
David Dreman, Founder and Chief Investment Officer of Dreman Value Management, presented an interesting overview of the political and financial landscape prior to 2008 that contributed to the financial crisis and then shared his current views. Mr. Dreman expects the U.S. to inflate its way out of debt just like it has in the past. He anticipates double digit inflation in the U.S. once unemployment falls to 6%, which he felt could take a while. In the inflationary environment he foresees, Mr. Dreman thinks that stocks will be one of best inflation hedges and perform well over time.
The next panel discussion centered on distressed investing and the panelists included Jeffrey Altman (Founder and Portfolio Manager of Owl Creek Asset Management), Daniel Arbess (Portfolio Manager of PWP Xerion Funds) and Jamie Zimmerman (Managing Partner of Litespeed Management). Mr. Altman is seeing pockets of opportunities right now at lower levels of capital structure, including some equities. His favorite investments are HMO equities, including Cigna and Wellpoint and he also mentioned that the risk reward looked favorable for Fannie Mae and Freddie Mac preferred stocks. Mr. Arbess felt that there was currently a lull in the distressed credit cycle and that ultimate restructuring of corporate balance sheets would occur over the next several years as debt comes due, which should provide more opportunities. His favorite idea right now is Ivanhoe Mines, which has strong gold, copper and coal assets. Ms. Zimmerman is finding one-off opportunities in which companies are repairing their balance sheets and mentioned the challenge in determining the right EBITDA estimates to use given the volatility in profitability in the last several years. Her favorite ideas are Smurfit Stone Container unsecured bonds and Lyondell bonds.
The final panel discussion focused on mental models in investing and the panelists included David Abrams (Managing Member of Abrams Capital), William Browne (Managing Director of Tweedy, Browne Company) and David Greenspan (Managing Director of Blue Ridge Capital). Mr. Browne stressed the importance of having a value framework to invest successfully and that investing is an exercise in probabilities in which he tries to get as many factors working in his favor as possible. Mr. Abrams mentioned the importance of “getting out of the noise”, referring to information overload, and he said that there was less noise in Boston, where he currently works, than in New York, which has helped him to become a better investor. It is interesting that Warren Buffet has echoed similar sentiment in the past about the advantages of working in Omaha, including not being overloaded with noise and just independently figuring out stock. Mr. Greenspan expressed that extending his time frame and looking out at potential profitability over the next few years has helped him to invest successfully. He said that sometimes stocks look expensive on near term earnings, but have strong return on capital and look inexpensive on earnings a few years out, providing investment opportunities.
Michael Mauboussin, the moderator of the final panel, questioned the panel speakers about position sizing and evaluating management. Mr. Browne said that his firm’s maximum position size for a new position was 4% and that if a stock appreciates to 6% or 7% of the portfolio, his firm cuts back the position. Mr. Abrams stated that his firm usually holds about twenty positions with an average size around 5% or 6% and that he uses concentration to make sure his ideas are really good. At the same time, he likes to diversify so that if any one stock loses 20% or 30%, the overall portfolio would only be down 1% or 1.5%. Mr. Browne felt that the best indicator of management was to look at what management has done in the past and he was skeptical about the usefulness of management meetings. Mr. Abrams reiterated the importance of looking at management’s track record, including prior uses of capital. He also mentioned that he likes to look at employee turnover and compensation levels of senior management.
Overall, the conference was very well organized and offered the audience the opportunity to listen to current views of leading value investors. I found the discussion regarding portfolio management in the midst of the financial crisis to be very insightful. In addition, Mr. McLennan’s bullish argument for gold over the next several years was also very convincing.
Disclosure: No positions in stocks or bonds recommended