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Charles de Vaulx, CIO of International Value Advisers (IVA), subscribes to the classic value investing principles practiced by Benjamin Graham and his disciples, including Walter Schloss and Warren Buffett. But he is hardly a clone. While Buffett’s approach has long been “Buy American,” de Vaulx, having worked for renowned global investor Jean-Marie Eveillard, brings a truly global perspective to his craft.
At the 68th CFA Institute Annual Conference, de Vaulx declared that while value investing is an “American invention,” increasing globalization demands that investors look outside their borders for bargains. And de Vaulx does just that, taking advantage of a broad investment mandate that allows him to invest across geographies and asset classes.
When casting a wide net, de Vaulx cautioned that investors need to be mindful of where credit excesses exist. Having been trained as a credit analyst, he contrasted today’s leveraged environment with that of half a century ago, when governments and households held comparatively little debt.
According to de Vaulx, it’s more important than ever to “pay attention to the macro,” and reading the annual report of the Bank for International Settlements (BIS) is a good place to start. The BIS, considered “the central banks’ bank,” has warned about the unintended consequences of aggressive monetary easing around the world, including a building credit bubble in China. Likewise, de Vaulx noted that China’s falling financial stocks, flat high-yield bond prices, and sharply rising stock market are “strange divergences” that should give investors pause. And he reminded those tempted to abandon the principles of value investing that they “should be skeptical that central bankers will get it right. Historically, they have not.”
Safe and Cheap
De Vaulx invoked the mantra of noted value investor Martin J. Whitman, CFA, to buy “safe and cheap” stocks, but acknowledged the challenge this presented in an environment where valuations are stretched and “companies themselves are no longer safe.” Too often, he said, value investors don’t practice value investing, and the fact that so many posted sharply negative returns that closely tracked the major indexes in 2008 was “shameful.”
When the stock market offers no true bargains, de Vaulx thinks it’s the duty of value investors to “go one notch higher on the capital structure” and buy bonds. There are times, he said, when “bonds can be equities in disguise.” Unfortunately, investing across asset classes, or even geographies, isn’t an option for many investment portfolio managers.
Economic Growth and Stock Market Performance
While stock market performance is a component of the leading economic indicators published by The Conference Board, de Vaulx pointed out that economic growth does not always translate into good stock market performance. He cited a 2004 paper from University of Florida professor Jay Ritter, “Economic Growth and Equity Returns,” which concluded that “cross-correlation of real stock returns and per capita GDP growth over 1900–2002 is negative.” Moreover, “countries with high growth potential do not offer good equity investment opportunities unless valuations are low.”
Stock Picking Matters
De Vaulx made a spirited defense of active investing, dismissing the notion that globalization and the rise of indexing has increased correlations among stocks. No matter the market, he believes there are always opportunities to outperform. As an example, he pointed to companies with high insider ownership, including those that are family-controlled. According to de Vaulx, family-controlled firms “have the right incentives, they have a longer-term vision, [and] they’re more prudent financially.”
De Vaulx likened the popularity of passive investing today to the late 1990s craze for telecommunication, media, and technology stocks, and marveled at how quickly investors forget that the S&P 500 lost more than half its value between 2007 and 2009. Regarding market-weighted indices, he asked, “Why would you want to buy the stuff that has gone up the most? Idiotic!”
Cash Is a Valid Asset Class
Another forgotten lesson of the past decade, in de Vaulx’s opinion, is the true value of cash. He views cash as a “valid asset class” and “the dry powder that’s necessary to pounce when genuine bargains appear.” Rather than a negative real return, he sees tremendous optionality and “delayed alpha” in cash. And his IVA Worldwide Fund’s 37.3% cash position at the end of the first quarter of 2015 suggests that de Vaulx sees little value in stocks today.
In a world of zero interest rates, increasing leverage, and extended valuations, has the notion of value investing become passé? Charles de Vaulx would argue that it’s now more important than ever.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: W. Scott Mitchell