Episode Summary
Executive Summary: Kim Shannon, President and Co-CIO of Sionna Investment Managers, discusses her journey from a science background to value investing, the challenges women face in asset management, and Sionna's disciplined investment process combining quantitative screening with fundamental analysis. She explores the underperformance of value investing, attributing it to prolonged deflationary periods and falling interest rates, and argues that current conditions present a historic opportunity for value investors. The conversation also covers portfolio construction, exit strategies, and the impact of passive investing on market efficiency.
Main Topics: Kim Shannon's Personal Journey and Career (Priority: 4/5): Shannon shares her transition from studying anthropology and zoology to a career in finance, her mentorship under deep value investor John D. Tommaso, and her experiences at Royal & Sun Alliance, Merrill Lynch, and founding Sionna in 2002. Women in Asset Management (Priority: 5/5): Discussion on the decline of women in portfolio management roles (from 16% to 10%), the founding of Variant Perspectives to address unconscious bias, and Warren Buffett's support for diversity. Sionna's Investment Process (Priority: 5/5): Details of Sionna's quantitative screening model that ranks stocks by cheapness using normalized earnings, book value, and financial risk metrics, combined with fundamental analysis and a structured research template. Relative Value vs. Deep Value (Priority: 4/5): Shannon explains her shift from deep value to a relative value approach, focusing on the cheapest stocks within each sector to reduce portfolio volatility and improve client experience. Exit Strategies and Portfolio Construction (Priority: 3/5): Three main reasons to sell: mistakes, switches to better opportunities, and when stocks reach intrinsic value. Portfolio construction uses a cap-10 benchmark and sector-based diversification. Value Investing's Underperformance and Future (Priority: 5/5): Analysis of value's prolonged underperformance since the 2008 financial crisis, linked to falling interest rates and deflationary conditions. Shannon argues that current valuations relative to growth are at historic extremes, suggesting a potential reversal. Impact of Passive Investing (Priority: 3/5): Concerns about the growth of passive investing reducing market efficiency and the need for active managers to perform price discovery.
Key Arguments: Value investing has underperformed growth for an extended period due to falling interest rates and deflationary conditions, similar to the 1930s-1940s. Current value vs. growth spreads are at historic extremes, presenting a compelling opportunity for patient value investors. A relative value approach (cheapest stocks within each sector) reduces portfolio volatility compared to deep value while still generating alpha. Women in asset management face unconscious bias, with only 1.2% of assets managed by women who are firm owners. Passive investing relies on active managers for market efficiency; excessive passive growth may undermine that efficiency. Sionna's quantitative model is an efficiency tool, not a substitute for fundamental analysis, and helps identify opportunities during market dislocations.
Data Points: Women portfolio managers: 10% - Current percentage of women portfolio managers, down from 16% at the peak of mutual funds. Assets managed by women: 3% - Percentage of total assets under management managed by women. Assets managed by women firm owners: 1.2% - Percentage of assets managed by women who are real owners of firms. Value outperformance frequency: 84% - Percentage of time value outperforms growth based on Fama-French data from 1926. U.S. interest rate low (March 2020): 0.34% - All-time low in North American interest rates during the COVID-19 pandemic. U.S. interest rate low (1941): 1.95% - Previous record low before the current deflationary period. Value underperformance duration (1930s-1940s): 14 years - Length of the previous period of value underperformance during deflation.
Pivotal Quotes: "Up until now, I've been competing with half the population, and I welcome competing with the entire population." — Warren Buffett: Comment at Variant Perspectives conference in Omaha (2019) supporting diversity in asset management. "If you buy value today and you're a patient investor, and what I think is going to occur, this is one of the best times to buy value given how cheap it is relative to growth in over 80 years." — Kim Shannon: Argument for the current opportunity in value investing based on historical analysis. "The market is, in my opinion, equal parts human emotion and fundamentals. And it's so easy to forget that combination." — Kim Shannon: Explaining market behavior during crises and the role of investor psychology.
Implications: For investors, the podcast suggests that value investing may be poised for a resurgence as interest rates bottom and inflation potentially rises. Asset allocators should consider increasing exposure to value strategies, while the industry must address gender diversity to tap into the full talent pool. The growth of passive investing may eventually require a correction to maintain market efficiency.
About Value Investing with Legends
Value investing is more than an investment strategy — it's a fundamental way of thinking about finance. Value investing was developed in the 1920s at Columbia Business School by professors Benjamin Graham and David Dodd, MS '21. The authors of the classic text, Security Analysis, Graham and Dodd were the very pioneers of their field and their security analysis principles provided the first rational basis for investment decisions. Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors' success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and '60s and remains dominant even today. Our mission today is to promote the study and practice of Graham & Dodd's original investing principles and to improve investing with world-class education, research, and practitioner-academic dialogue. In this podcast you will hear from some of the world's greatest investors, their views on the investment management industry, how they developed their investment process and how they see the field changing over time.