Episode Summary
Executive Summary: In this retrospective episode of The Longview, host Jeff Patak highlights memorable moments from interviews with portfolio managers and investment strategists. Topics include fostering culture in investment firms, adapting value investing approaches, the potential resurgence of value strategies, conducting fundamental research to identify risks, exploiting post-crisis market frictions, the growth of indexing, and promoting diversity in asset management. Guest experts share insights on their investment philosophies and industry trends.
Main Topics: Fostering Constructive Investment Culture (Priority: 4/5): GMO strategist James Montier discusses how GMO encourages junior team members to speak up by structuring interactions to ensure everyone's input is valued, emphasizing humility and mutual respect. Value Investing Adjustments and Opportunities (Priority: 5/5): Bill Nygren explains how Harris Associates adjusts GAAP metrics to uncover hidden value in companies, noting that mispricing persists due to reliance on traditional screens by many investors. Case for Value Investing Resurgence (Priority: 5/5): Rob Arnott argues that despite a prolonged underperformance, value is historically cheap relative to growth, with spreads wide enough to expect significant mean reversion and outperformance. Fundamental Research and Risk Identification (Priority: 4/5): Rupal Bhansali advocates for business-focused analysis over financial modeling, using examples like Apple and Kraft Heinz to illustrate how understanding business model risks can lead to effective negative screens. Exploiting Post-Crisis Frictions in Fixed Income (Priority: 4/5): Dan Ivascyn details how PIMCO Income benefits from non-agency mortgages, which remain resilient due to post-crisis regulation, improved borrower profiles, and limited new issuance. Growth and Drivers of Indexing (Priority: 4/5): Ben Johnson attributes indexing's rise to cost awareness, shift to fee-based advice, and structural trends like target-date funds, noting its counterintuitive success compared to active strategies. Diversity in Asset Management (Priority: 3/5): Dana Emery shares Dodge & Cox's approach to attracting diverse talent through culture, visibility, and programs like Girls Who Invest, emphasizing the importance of deliberate efforts.
Key Arguments: James Montier argues that fostering a culture of open debate requires formats that allow junior members to speak first, reducing fear of contradicting superiors. Bill Nygren contends that GAAP accounting can obscure true earnings power, and value investors can exploit this by capitalizing and amortizing expenses to estimate intrinsic value. Rob Arnott posits that value investing's underperformance is due to growth stocks getting more expensive rather than poor business performance, creating a buying opportunity. Rupal Bhansali asserts that traditional valuation screens are insufficient; investors should analyze business models and industry dynamics to identify risks like disruption. Dan Ivascyn explains that post-crisis regulations have limited credit extension, making legacy mortgage assets with strong collateral and borrower equity attractive. Ben Johnson argues that indexing's success stems from lower costs and the behavioral appeal of accepting market returns, aided by structural shifts in the advice industry. Charles de Vaulx claims that true active managers who deviate from benchmarks can add value, but many are closet indexers, and passive investing lacks downside protection.
Data Points: Duration of value underperformance: 12 years - Rob Arnott mentions the current value underperformance span rivals the tech bubble era. Value cheapening vs. underperformance: 2,000 basis points cheaper vs. 1,000 basis points underperformance - Arnott illustrates that value has become cheaper by more than it underperformed, indicating a potential rebound. Expected incremental performance if value re-rates: 2,500 basis points (US), 4,000 basis points (emerging markets) - Arnott calculates the potential return if growth-value spreads revert to historical norms. Percentage of women in investment roles at Dodge & Cox: 30% - Dana Emery cites a Morningstar study showing Dodge & Cox has the highest percentage in the industry, though she calls it not a victory. S&P 500 decline from Sept 2007 to March 2009: 47-48% - Charles de Vaulx uses this to argue that most investors cannot tolerate passive index volatility. Number of names in typical IVA portfolio: 100-250 - De Vaulx describes their diversified active approach with willingness to make negative benchmark bets.
Pivotal Quotes: "The real question was: can that translate, or does that translate directly to mobile? So, the confidence in our willingness to stay the course was really that the core of the thesis was around the social network and how strong it was, and whether or not you were going to monetize that desktop or via mobile was a secondary execution issue in our mind." — Dennis Lynch: Explaining how Morgan Stanley's Counterpoint Global team evaluated Facebook's transition to mobile advertising during a period of stock price volatility. "If a style underperforms by a thousand basis points while getting cheaper by 2,000 basis points, that's a buy, not a sell. And that's sort of the picture of value investing today." — Rob Arnott: Arguing that value's relative cheapness signals a buying opportunity despite recent underperformance. "The only reason why Jean-Marie Eveillard invented our way of investing, the Sojan way, which became the first Eagle way, and hopefully now the IVA way, is our awareness that most clients do not tolerate downside volatility well." — Charles de Vaulx: Explaining the philosophy behind their value-oriented, downside-protection-focused investment approach.
Implications: For investors, the key takeaway is that value investing may be poised for a rebound given extreme cheapness, but requires fundamental research to identify business model risks. The growth of passive investing may enhance opportunities for truly active managers in less efficient markets. Diversity initiatives can improve investment outcomes by attracting varied perspectives.
About The Long View
Expand your investing horizons and look to the long term. Join hosts Christine Benz, Dan Lefkovitz, and Amy C. Arnott as they talk to influential leaders in investing, advice, and personal finance about a wide-range of topics, such as asset allocation and balancing risk and return.