Are all value managers the same?
Christine St Anne  |  09/11/2012Text size  Decrease  Increase  |  
Christine St Anne: Morningstar's Tom Whitelaw recently wrote a paper on fund managers who adopt the investment process value investing. He joins us today to give us an insight into what this process is and why all value fund managers are not necessarily the same. Tom, welcome.

Tom Whitelaw: Thank you.

St Anne: Tom, first of all, what is value investing?

Whitelaw: Value investing was popularized by Benjamin Graham, and then obviously taken forward by Warren Buffett, but really the premise has been around, since we've traded goods, essentially it's the desire to buy something for less than you believe it's worth. So, investors are talking about buying stocks for less than their intrinsic value and trying to get a good deal basically.

St Anne: So, Tom, are all value fund managers the same?

Whitelaw: No, I mean that's the thing. There is a number of different ways you can skin this cat. So, you've got the relative value guys, I suppose, and then the more sustainable value guys, if you want to put them into two broad buckets. The relative value guys; they're really looking for stocks that are cheap relative to history, so that are trading at a discount to what they've previously traded at or cheap within their own industry or sector, and maybe less bothered about fundamentals than maybe the sustainable value guys are.

The sustainable value guys are all about sum-of-the-parts. So they want strong management teams, they want strong franchise quality; those kind of attributes, but where those sum-of-the-parts aren't reflected in the overall valuation. So, somebody like Investors Mutual would be a key sustainable value manager we could say, whereas Perennial Value, for example, might be more in that relative value field.

St Anne: Tom, what are the typical value stocks and how did they perform?

Whitelaw: Well, again, typical value stocks, because there are different kinds of value managers, so the typical stocks can kind of cover a really broad spectrum, I suppose. So, you take the banks for example. I mean, most Australian investors will own some of the banks, so the relative value guys will be more interested in the likes of NAB or ANZ where there's kind of been problems with their growth. I guess the cynic would say the value stocks are growth stocks gone wrong, whereas as the sustainable value guys; they are more interested in the likes of Westpac or CBA, where again those kind of franchises are strong, they're kind of perceived to have stronger management teams, have had fewer missteps, but still they see that there's the pricing there that's kind of moving forward.

St Anne: Given that all value fund managers are not the same, Tom, what should investors look for when choosing a value manager?

Whitelaw: They really need to look for anything that they normally look for in a traditional manager. So, you talk about the people; so they want to have strong people, those managements have experience, have a strong team, and kind of really to understand the process that kind of moves on to process, making sure that the process they're using kind of fits with their strengths and that is going to be consistent. So an investor can look at a strategy, really understand how it's going to fit within their portfolio.

Then you move on to the parent company, so you want a parent company that really understands the managers that are working for them and he is able to support them, and he isn't going to have too much – too many demands on that time to go out marketing this product, for example.

Then price; I mean you want to make sure that you're paying a reasonable price for it. You don't want to overpay. And then I guess, finally, performance, kind of making sure that all of those four things we just discussed kind of bear out in the performance; so how is the performance you'd expect given the qualities that you perceive. And that's the job we do at Morningstar. We kind of pick those guys that we think are a good fit for your portfolio and then that they're going to outperform over time.

St Anne: Tom, thanks so much for your insights today.

Whitelaw: Thank you.

Video Archive...

How safe are the banks?: Part 2
24/07/2015  Mortgage risks, new capital requirements and the role of technology giants in the provision of payment systems continue to pose challenges for the big banks.
How diversified is your portfolio?
23/07/2015  Morningstar’s Tim Murphy talks about an effective investment tool that helps investors achieve a diversified portfolio.
Identifying quality fund managers
20/07/2015  Morningstar’s Kathryn Young discusses the key attributes behind a quality investment manager and why past performance is not a good indicator of future performance
Your Money Weekly Forecast 2015-16
17/07/2015  Morningstar's Peter Warnes discusses the Your Money Weekly biannual Forecast and what investors can expect as they head into the new financial year.
How safe are the banks?: Part 1
14/07/2015  A closer look at the strengths and weaknesses of bank profits around the world following Morningstar’s recent study on the sector.
What the new ETFs mean for investors
09/07/2015  Investors are urged to drill down and understand the strategy behind the plethora of new ETFs coming into the market.
Introducing new stock charts
01/07/2015  Get an in-depth analysis of a stock using Morningstar's new powerful chart tool including company and benchmark comparisons.
5 big market themes
30/06/2015  Investors should watch the velocity of rate increases, keep Greece in perspective, and mind diversification in a world with very few good values.
Where are the new global opportunities?
29/06/2015  Global fund managers discuss emerging opportunities beyond the local market.
3 key risks for retirees
24/06/2015  Accurium SMSF technical services manager Melanie Dunn discusses three factors trustees should be aware of as they move from the accumulation to the retirement phase.
What the Greek crisis means for investors
22/06/2015  With most of the debt now being held by institutions, contagion is no longer a concern, says Morningstar's Bob Johnson.
5 questions for a top bond manager
17/06/2015  PIMCO’s Rob Mead discusses interest rates, the global economy and where the best opportunities are over the next 12 months.
4 keys to fixed-income investing
16/06/2015  Morningstar's John Likos scrutinises the risks that hybrids, bonds and other forms of credit carry and suggest ways in which investors can choose quality assets.
Grading the fund investor experience
09/06/2015  Morningstar’s Anthony Serhan takes a look at the experiences of fund investors around the world.
Understanding valuation risk
09/06/2015  Morningstar Investment Management's Chris Galloway discusses the important role annuities can play within a portfolio, as well as the key risk faced by all investors.
Big banks: As good as it gets?
--  Perpetual's Paul Skamvougeras maintains his view on being underweight the banks while favouring stocks with sound balance sheets and good management.
Uncovering quality undervalued stocks
03/06/2015  Companies with sustainable earnings can still be found despite an expensive market, according to Ausbil’s Paul Xiradis.
Seeking income and growth
29/05/2015  Cash generating stocks with a focus on creating shareholder value can be found across the global universe.
Where are the best global opportunities?
29/05/2015  Platinum’s Andrew Clifford discusses where he is finding well-priced opportunities in the global markets.
Good values are harder to find
28/05/2015  A run-up in European stocks has left the region moderately overvalued, while Asia market valuations are even more stretched; according to Morningstar's fair value metrics.