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.

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