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...

The problem with China
07/10/2015  China’s stock market crash will spur an internal debate in the country about the need for more market-based reforms, says author and former banker Satyajit Das.
Best ideas in credit
06/10/2015  Morningstar’s John Likos discusses what types of securities are included in the Moat-Focused Credit Best Ideas list.
Pitfalls of investing for retirement
30/09/2015  Bad behaviour before and in retirement can take a major hit to your savings. We outline the pitfalls to avoid if you want to maximise your pension pot.
Outlook for rates and the dollar
28/09/2015  Nikko Asset Management currency strategist Roger Bridges gives his view on China's recent move with the yuan, as well as the outlook for interest rates and the Australian dollar.
The new mediocre and growth
25/09/2015  Housing affordability challenges and shorter government terms will be the norm under the "new mediocre" of growth, says author Satyajit Das.
A look at global valuations
22/09/2015  Magellan’s Hamish Douglass talks about where he is finding value across the globe and why his fund has reduced its exposure to emerging markets
Global economic worries stall Fed
18/09/2015  Although overseas concerns halted Fed action this month, a hike is still in the cards this year--but it shouldn't derail the economy, say Morningstar's Bob Johnson.
M&A outlook for energy and resources
16/09/2015  Further acquisitions are expected following Woodside’s bid for Oil Search as the sectors face weak commodity prices, says Morningstar’s Mark Taylor.
Seeking value in turbulent markets
09/09/2015  Quality stocks will continue to focus on their growth strategies despite the market swings.
4 retiree to-dos in a turbulent market
02/09/2015  Despite the market swings, retirees can control stuff like checking cash reserves and spending levels.
Where to shop for quality stocks
31/08/2015  Morningstar's Peter Warnes gives his take on the recently concluded earnings season and gives investors some advice for coping with the recent volatility.
What now for China-exposed ETFs?
27/08/2015  Morningstar’s Alex Prineas discusses the growth of the ETF market and what the China market turmoil means for the A-Share ETFs.
Market overreacting to China news
26/08/2015  The depth of the market sell-off isn’t justified by the data out of China, says Morningstar’s Francisco Torralba
What to make of the market mayhem
25/08/2015  As the market focuses on China and the Fed, investors should keep an eye on the long term.
QBE emerges from rough patch
19/08/2015  As the fiscal 2015 earnings season rolls on, Morningstar's Peter Warnes gives investors his view on results from QBE, ANZ and Newcrest, while also sharing his thoughts on the Asciano takeover.
Telstra makes a statement
14/08/2015  Morningstar's Peter Warnes gives investors his take on the full-year results from the likes of Cochlear, CSL, the Commonwealth Bank and Telstra.
Introducing Morningstar's new fund screener
13/08/2015  Quality fund managers across a range of asset classes can now be easily selected using Morningstar's new fund screener.
What are the priorities for retail shareholders?
11/08/2015  The Australian Shareholders’ Association will be keeping a close watch on the current reporting season to ensure companies are balancing growth with regular dividend payments.
Introducing Morningstar's new stock screener
04/08/2015  Morningstar's new stock screener allows exclusive access to our analyst ratings, including recommendation, economic moat, stewardship and fair value uncertainty ratings.
An insight into the Chinese market fall
31/07/2015  The Chinese market has been on a rollercoaster ride over the past year, particularly in recent weeks.