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...

to Morningstar Premium Membership

1 stock that's close to perfection
29/08/2014  Morningstar head of equities research Peter Warnes discusses results from the likes of Ramsay Health Care and Woolworths as the curtains close over the fiscal 2014 earnings season.
Why moats matter
26/08/2014  Morningstar Australasia's co-chief executive Heather Brilliant talks about finding great companies in a new book she co-authored titled Why Moats Matter.
BHP, Wesfarmers and investor returns
22/08/2014  Morningstar's Peter Warnes takes a look at the latest results from BHP Billiton, QBE Insurance, as well as a "shareholder's dream," Wesfarmers.
CBA stands out, Telstra gives back cash
15/08/2014  Morningstar's Peter Warnes takes a look at the latest earnings results from the likes of Commonwealth Bank, CSL, Telstra and ANZ, and gives investors an idea of what to expect from these companies going forward.
2 energy stocks with strong returns
08/08/2014  These two Australian energy companies should see strong returns over the next decade.
This wide-moat stock has been a star performer
05/08/2014  With its record of high profitability and very strong shareholder returns, this banking firm stands out.
How diversified is your portfolio?
31/07/2014  Morningstar’s Tim Murphy talks about an effective investment tool that helps investors achieve a diversified portfolio.
Seeking small-cap opportunities
30/07/2014  Morningstar's Tom Whitelaw shares some insights gained from recent talks with small-cap fund managers and provides some tips for those looking to increase their exposure to the smaller end of the market.
Key insights into quality stock-pickers
31/07/2014  Morningstar’s Julian Robertson talks about recent research into Australian large-cap managers and how some quality managers are approaching the market.
7 reasons why SMSFs outperform
22/07/2014  The key advantages to running a self-managed superannuation funds have also translated into strong performance.
Top investment prospects in 2014
16/07/2014  Morningstar's Peter Warnes explores the key issues, trends, risks and opportunities that lay ahead for investors over the next year.
What the advice reforms mean for SMSFs
09/07/2014  SPAA’s Graeme Colley outlines what SMSF trustees need to do to ensure the advice they are getting complies with the government’s proposed reforms.
Woodside, Santos in solid position
02/07/2014  Morningstar's Mark Taylor shares his views on future global energy demand and explains why Australia's major gas companies are well-positioned to benefit from favourable market dynamics.
Stockland poised for growth
30/06/2014  Stockland’s managing director Mark Steinert outlines the company’s growth strategy and gives his outlook for the housing sector.
Quality emerging-markets investments
25/06/2014  Morningstar fund research analyst Alex Prineas equips investors with what they need to know when it comes to getting quality exposure to emerging markets.
Quality emerging-markets investments
25/06/2014  Morningstar fund research analyst Alex Prineas equips investors with what they need to know when it comes to getting quality exposure to emerging markets.
Giving investors access to the world
19/06/2014  By investing in companies outside the banking and resources sector, investors can get a diversified portfolio that will perform across a variety of market cycles.
Emerging investment opportunities
16/06/2014  Ibbotson’s Daniel Needham talks about the need to confront existing investment thinking in order to improve investment outcomes for investors.
Maximise quality, minimise risk
11/06/2014  Morningstar's Mathew Hodge shares some insights into the portfolio construction process, as well as the role of stewardship in stock selection.
Reliable growth from property
04/06/2014  AMP Capital's Wholesale Australian Property Fund aims to provide SMSF trustees with both reliable income and some steady capital growth.