(Image Courtesy, institutionalinvestor.com)
Charles Brandes is the chairman of Brandes Investment Partners. He started the firm in 1974, and manages multiple portfolios including US equity and Global Equity.
Brandes Investment Partners has $26.6 Billion in Assets Under Management, as of June 2016.
He has described his value investing strategy as:
“Guided by the principles of Benjamin Graham widely considered the father of value investing, we seek to take advantage of market irrationality and short-term security mispricing by buying stocks and bonds that we believe are undervalued based on our estimates of their true worth. We believe this is the best way we can pursue the desired results for client portfolios over the long term.”
This week, Brandes did an interview with the Financial Post where he said, “The Opportunity For Value Investing Right Now Is One of The Best I’ve Ever Seen”.
This is an excerpt from the Financial Post article, you can read the original article here.
Let’s take a look…
What’s your investing philosophy and where did it come from?
I registered as a stockbroker in 1968, and started the firm in 1974, after meeting the dean of Wall Street securities analysts and the father of value investing, Benjamin Graham. He was also the teacher of the best investor of all time, Warren Buffett.
I got to talk about investing with him in the early part of my career. There were some very bad stock markets during that time — 1970 was a very bad one — and I decided his philosophy of value was exactly the way to invest. The long-term record, even in the early 1970s, was superior.
It was basic, fundamental, long-term, conservative investing, rather than all the stuff that Wall Street and Bay Street comes up with — that short-term thinking. With a Graham-Dodd value philosophy, down markets are an opportunity for good long-term investing. You don’t look at down markets as something where you have to get scared and get out.
What are some of the key takeaways from your approach?
Famous value investor John Templeton said the time to invest is when there is blood in the streets. In 1974, there was blood in the streets. We’ve been doing the same thing ever since — buying companies at a discount when you look at the company’s long-term intrinsic value, the value of their assets, their cash flow, the potential stability, and the potential growth.
You don’t buy companies as growth investors do, expecting the future to be fantastic and paying up for it, based on a forecast of exactly what’s going to happen with technology or something else. Value investors don’t believe in that. We believe we can’t forecast all that well, but we do think that if we can have a margin of safety when it comes to the price we pay for the business, it’s going to work out pretty well, and it has.
Value has underperformed growth for a longer stretch than is normal. Are things going to change?
Value is out of favour and had been underperforming for the longest period in my 47-year career. I do see some signs of that shifting, but I don’t know when it will. It is overdue to happen.
There are very few, true Graham and Dodd value investors. We don’t have that much competition anymore because everyone is switching. So the opportunity for value investing right now is one of the best I’ve ever seen, except at the bottom of bear markets, where the opportunities are just fantastic.
Value stocks — however you want to define them — have been underperforming, but the companies aren’t always underperforming. Value stocks are trading at about 15 per cent of the level of where the growth stocks are trading in the U.S., so we are very enthusiastic about our portfolios right now.
Where do you see good opportunities these days?
We’re finding a lot of good values when we look outside of North America. One area that is still very attractive is emerging markets. It had been unbelievably attractive at the beginning of this year, and our emerging market portfolio is up 27.5 per cent in 2016.
It is still attractive because emerging markets got so cheap that they are still the cheapest markets in the world from the standpoint of book value. Our emerging markets portfolio trades at 80 per cent of its book value, and it trades at about 9x earnings, 4x cash flow, and pays a dividend of 3.1 per cent. So there is still a lot of value in emerging markets.
What emerging markets do you prefer?
We had been over allocated to Brazil, which is up 70 per cent this year. Everyone hated Brazil, it was blood in the streets, so we decided it was the time, and there are some really great companies there.
South Korea and some of the companies there are excellent and very cheap, and on a limited basis, there are some very good companies that are extremely cheap in Russia. Everyone is really concerned about Russia now, and say you can’t be investing there. But we are investing in some very high-quality companies in Russia, that are some of the cheapest in the world.
When we do things like this, we make sure our portfolio is adequately diversified, and we don’t have a lot of risk based on one country or industry.
What type of attributes do you look for?
Basic fundamental attributes change quite a bit depending on the industry. However, we’re looking for low price to earnings ratios, low price to book values, low price to cash flow, and balance sheets that will be OK if something difficult happens in the future — not too much debt. The more stable the industry, the more we will pay for it. We will also go into unstable cyclical areas when we can get them cheap enough.
Are there areas in North America you do like?
We’re finding very limited opportunity in Canada and the U.S. as value investors. The U.S. markets are quite high, and Canada is pretty much the same, except for some special areas in North America. In the U.S., we’re in the banks, and oil and gas.
U.S. banks are quite cheap because of all their regulatory problems and the need to really increase capital. There is also a fear among politicians and regulators about what happened in 2008-2009.
The banking industry has changed, especially in the U.S. The Canadian banks obviously did a lot better. It’s not nearly as good an industry as it used to be, because they have to have more capital and they can’t be as leveraged, so regulatory wise they are more like a utility.
I think what we have to realize with U.S. bank stocks, is they are never going to be trading at 2-3x tangible book value like they used to be when they are doing well. But they are still now trading below tangible book value.
Citigroup Inc. (C/NYSE) is trading at 75 per cent of its tangible book value. It’s a powerful bank, has a presence all over the world, and is trading as cheap as it ever has. It’s not going to be as good as it was in the past, but at this price, it’s a good investment.
Are there still opportunities in oil and gas?
We don’t really attempt to forecast the price of oil, because anyone who tries is wrong more than 50 per cent of the time, and they should be right at least half the time. We find that a very hazardous thing to do.
In our analysis of oil and gas, we have to make a few basic assumptions about where the normalized price of oil might end up. That depends on the supply and demand figures, the level of the U.S. dollar, and production. Our assumption is around US$55 per barrel.
We don’t think fossil fuels are going away within the next 10 or 20 years. Eventually they probably will, but we think we have a long-term for oil.
We want to buy energy stocks when they are very cheap, so we own the big Italian integrated oil company, Eni SpA (ENI/BIT). It is trading at about 6x earnings and about 80 per cent of its book value.
What are some of the misperceptions in the market today?
A lot of recommendations are based on the fear of equity volatility. That fear has made people, especially in the big institutional field, prioritize reduced volatility because they consider it the number one risk.
But the number one risk is not volatility, especially for a basic long-term investor, although it is for a speculator or short-term thinker. Volatility is opportunity, and you should welcome it because it provides the chance to buy good companies at cheap prices.
Equities are actually a lot less risky than anything else you can invest in. That’s actually where the new wealth is created over long periods of time. If you look at charts versus gold, commodities, real estate, and anything else like alternatives, equities have always outperformed. So if they always outperform, they are the least risky of anything. Equities have always recovered from down drafts.
What is something you hear a lot from investors?
I get asked when to sell if prices are going down. My answer is: never. In 2008 and 2009, so many people sold, and they hurt themselves tremendously. If they had just sat back and didn’t worry about it or do anything, they would have come out just fine.
What do you think about the reversal in roles, with fixed income having become a source for capital gains and equities becoming a source for income?
That is happening, but it’s not going to continue because it doesn’t make any sense. You’ve got bonds priced higher than they’ve ever been, so we’ve never seen anything like this before.
Where interest rates are now from the standpoint of how economies work and rates are priced in the free market, also makes no sense. Interest rates will go back up.
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