Welcome to the 35th edition of Value Investor Digest
In addition to the usual collection of articles of interest to Value Investors we are delighted to announce the launch of a new conference: Value Invest New York – December 4 2018.
The articles featured in this edition include a link to an FT article titled “Can Factor Investing Kill Off the Hedge Fund”, a Boyar Value Group report on five “orphaned” stock ideas, the latest memo from Howard Marks of Oaktree Capital, our archive of the Berkshire Hathaway Annual Meeting videos from 1994 to 2018, a WSJ article on the “existential crisis” facing Value Investors, some analysis of the performance of 100 stocks presented at the London Value Investor Conference since 2012, an FT article from John Authers on how FANG stocks are having an outsized effect on index performance, an article which details how Amazon steers customers to their own brand products, an article by Ronald Chan on the richest man in Hong Kong Li Ka-shing’s investment record, an article by conference speaker David Iben titled “Master and Servant” and finally another FT article which reveals a painful short-squeeze for some hedge funds who made bets against UK retailers.
BlackRock estimates that there are $1.9tn of assets in dedicated factor strategies, and predicts this will swell to $3.4tn by 2022. This FT article is a summary of a prominent current trend in investing and focusses on Cliff Asness of AQR, whose strategies include some funds focussing on factor investing. “By in theory replicating what a lot of professional money managers do at a fraction of the cost, factor investing puts more pressure on fees. This is why Mr Asness thinks AQR can play the same disruptive role for hedge funds that Vanguard did for mutual funds. ‘It is part of our business to be the Vanguard of hedge funds. It’s not all of our business, by any means. But to take some of the basics and say you should get this for lower fees,’ he says ‘What [hedge funds] are doing as a group is good, but simple. And they’re kicking up a whole lot of dust around it.’”
The Boyar Value Group recently gave an online presentation detailing their new “orphaned” equity strategy and discussed the investment cases for five “orphaned” stocks. Explaining what constitutes an oprhaned stock, Jonathan Boyar said “An ‘orphaned’ stock is a stock that analysts and investors have for the most part disregarded. A stock can become “orphaned” via a variety of ways. A stock may not be included in one of the major S&P indices (S&P 500, S&P 600, etc.) and therefore cannot be bought by index funds as well as “closet” indexers, which tend to focus on stocks included in the major indices to ensure that their performance doesn’t deviate greatly from their respective benchmark. Some of the reasons why companies may be ineligible for index inclusion include companies that are listed in the U.S., but maintain headquarters outside of the U.S., companies with super-voting share class structures and tracking stocks.These so-called “index orphans” are not limited to small companies.”
Since its first edition in 2011 Value Investor Digest has regularly featured Memos from Howard Marks and we are delighted that Howard will be speaking at the inaugural Value Invest New York on December 4. Famously, Warren Buffett remarked of these memos “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.” In this latest memo Howard looks at the ways in which securities markets seem to be moving toward reducing the role of people through passive, quantitative and algorithmic trading, articificial intelligence and machine learning; and the effects of these current big trends in investing on active managers: “quantitative investing’s emphasis on profiting from short-term dislocations leaves a lot more to be mined. So much of investing these days considers only the short run that I think there’s great scope for superior active investors to make value-additive decisions concerning the long run.”
Many Value Investor Digest readers will know that since 2016 the Berkshire Hathaway Annual Shareholders Meeting has been live-streamed around the world from Omaha. More recently, the previously un-released archives of video footage from the meetings back to 1994 has also been made available. We have compiled a single page with links to full videos, highlights videos and other clips from the meetings on both the CNBC and Youtube websites. For the Youtube videos prior to 2008 our links also skip the introductory and business session remarks in the morning so that the video starts at the beginning of the Q&A. Alongside these links are a photo and one of our favourite quotes from either Buffett or Munger during that years meeting. It is interesting to us as organisers of the London Value Investor Conference to see in the older videos how many conference delegates were asking questions at the BRK meeting as far back as the mid-1990s.
This WSJ article outlines problems facing some Value Managers from the temptation to “style drift” and/or engage in “portfolio window dressing” for their investors: “Hunting for cheap stocks has been out of favor for so long that some self-proclaimed “value” investors are embracing a broader mandate, a potentially costly move in the later stages of an economic cycle…Some critics say the measures used to identify value have aged poorly in a market dominated by passive investing strategies and asset-light technology companies. Those trends have pushed more investors into the shares of fast-growing companies such as Apple Inc. and Netflix Inc. that have powered the market higher in recent years. Other investors have turned to studying momentum trading, crowded positions, fund flows and event-driven trading, strategies not typically associated with value investing.” Some would argue that the investment landscape has changed permanently and that managers should change with it, although those reluctant to move on from their approach might be reminded of when Warren Buffett was asked whether the buy and hold style of investing was dead and he replied “it depends what you buy and hold”.
Analysing the Performance of the Stocks Presented at the London Value Investor Conference Since 2012
To celebrate the launch of the inaugural Value Invest New York conference on December 4 2018, we have done some analysis of the 100 stocks presented by fund managers at the London Value Investor Conference since it started in 2012 and have presented the results in a video on the conference website. In addition to identifying the top long-term compounders and strong performance of most of the stocks presented, it was also interesting to note that when seperating the stocks presented in to annual “conference portfolios” the outperformace of these portfolios versus the MSCI World was remarkable; with CAGR of the individual portfolios of between 14%-28% in each year other than the 2015 portfolio, which was the only year in which the conference portfolio underperformed the MSCI World. We look forward to many more investment ideas being presented in future at Value Invest New York.
This Financial Times article from John Authers reveals that if the FANG stocks were removed from the S&P 500 Index this year, the index would be down in 2018. The article goes on to talk about the momentum effect of the FANG stocks whilst “unloved cheap stocks grow ever cheaper”… “For the purposes of this exercise, I took the Fangs to be Facebook, Amazon, Apple, Microsoft, Netflix, Nvidia and Google. According to a few calculations I made on the back of an envelope (or more precisely, with a Bloomberg terminal and a spreadsheet), the market cap of these seven stocks has risen by $772bn so far this year. Meanwhile the market cap of the S&P 500 as a whole has risen by $673bn. Excluding just those seven Fangs takes the S&P from a 2 per cent gain for the year to a slight loss.”
It is remarkable that AmazonBasics now has a 30% share of the online battery market and outsold both Duracell and Energizer on its own site. The company also now has around 100 private label brands for sale using anodyne names in a similar manner to supermarkets own brand products. If, as a quoted analyst in the article suggests “nearly half of all online shopping in the United States will be conducted on Amazon’s platform in the next couple of years” the opportunity for Amazon to increase sales of own brand products using the strategies they have adopted detailed in this article could be substantial.
This Bloomberg article by Value Invest New York speaker Ronald Chan of Chartwell Capital, who is based in Hong Kong, provides a profile of Li Ka-shing who recently hosted his final shareholder meeting as founder and chairman of the Cheung Kong group. Since IPO in 1972, Li Ka-shing has “generated a return of 5,000 times, including reinvested dividends. That’s equivalent to an annualized compound rate of 20.3 percent over 46 years.”
This is the latest commentary written in June 2018 from Dave Iben (who will be speaking at Value Invest New York on December 4). The commentary covers a lot of ground on a range of topics from the rise of robo-advisors, ETFs and passive management; through economic theory and on to ESG investing under a unifying theme of the “fallacy of servitude to misguided ivory tower theory, behavioral heuristics, ill-conceived formulas, fiat money, and other ‘false Gods'”. Regarding the increasing role of computers in financial markets Dave writes: “Obviously, computers are far faster, much better at gathering data, and calculation is instantaneous. But, while robots and algorithms are vastly superior to humans in many ways, they still lack judgment. They can’t think nor exhibit anything akin to the ‘wisdom of Solomon’. And, in investing, a field that is famously a blend of science and art, isn’t judgment what really matters? In a weird paradox, computers have allowed mankind to formulate and embrace more theories, which in turn, have caused increased use of computers, which unfortunately, due to the inherent fallacies embedded within, have had spurious consequences. Perhaps the prime example of the problem is that computers’ need for data have led mankind to quantify and digitize items that can’t be quantified and digitized.”
A recent Bank of America Merrill Lynch fund manager survey showed the UK remains the least popular destination for global investors, with many large instiutions “uncertain about Brexit and a limp domestic economy”. Given this backdrop the recent performance of some UK retailers is surprising: J Sainsbury, Tesco, Next and UK online grocer Ocado are up 30%, 24%, 40% and 162% year to date and this FT article article from Miles Johnson suggests that “there may be further gains to come as the market slowly comes around to the idea that certain unglamorous but still profitable high street and consumer-facing businesses in the UK are not simply going to disappear overnight as a result of political uncertainty or the threat of Amazon”. This has also led to a painful short squeeze for some Hedge Funds: the John Authers detailed that according to Markit data 28% of Ocado stock was out on loan to hedge funds in the middle of 2017.