Last updated: 12:03 / Monday, 23 November 2015
Interview with Nordea

"Time Is One of The Few Remaining Market Inefficiencies"

"Time Is One of The Few Remaining Market Inefficiencies"

Mark E. DeVaul, portfolio manager of North America Value Fund and a member of the Nordea's investment team (through the firm The London Company), explains in this interview with Funds Society how to be a good value investor in these high volatile markets. Recent additions to the portfolio have come from multiple sectors including Consumer Discretionary, Industrials, and Consumer Staples.

US equities have experienced a strong rally in recent years. Investing with a value perspective requires discounts to be found. Is this possible in a more expensive stock market scenario? 

US stocks have been strong since the bottom of the market back in March of 2009. Valuations have improved and the US economy is in much better condition compared to the depths of the great recession. It is more difficult to find great investing ideas today vs. 5-6 years ago, but we are still finding them. We attempt to purchase strong companies when they are trading at a roughly 30-40% discount to our estimate of intrinsic value. We calculate intrinsic value using a process we call Balance Sheet Optimization. Our goal is to build the investment thesis for each holding around the strength of the company’s balance sheet and not rely on future growth.

What return potential are you currently detecting for your portfolios, taking into account market prices? Has the safety margin tightened compared with before? 

We don’t have a specific return goal each year.  Our goal is to outperform the broader market over full market cycles (5-6 years) while maintaining more attractive risk characteristics (better downside capture, lower beta, lower standard deviation). Yes, the discount to intrinsic value is lower today vs. a few years ago. 

Value management is characterised by patience and long-term convictions… Do you believe it is possible to maintain a buy&hold management approach in view of the current high volatility? 

We believe it is an advantage to follow a buy and hold approach. Many investors have a very short time horizon. We think time is one of the few remaining market inefficiencies. We look at each company as if we were going to buy the whole firm. Our average holding period is five years. We build diversified portfolios of 30-35 holdings. Each holding is meaningful and can drive value to shareholders over a multi-year holding period.

In this regard, have you made any changes to your management approach as a consequence of the market volatility in recent years? 

No, we have not made any changes to our investment approach because of recent volatility. 

As regards sectors or companies in which you are currently detecting value, which sectors are you concentrating on?

We build our portfolios following a bottom up approach and pay little attention to sector weights. Our goal is to have a strong margin of safety in each holding. Recent additions to the portfolio have come from multiple sectors including Consumer Discretionary, Industrials, and Consumer Staples.

What impact could the Fed’s decision to raise interest rates have on your portfolios? Could the volatility that has been created be useful in any way?

The Fed’s timing of interest rate increases will not have much of an impact on our portfolio. We are aware of the risk and on the margin have stayed away from some of the sectors that investors may view more like bonds because of the high dividend yields (REITs, Telecom, Utilities). If rates begin to move higher, we take that into consideration as part of our balance sheet optimization approach in determining intrinsic value. 

To what extent do you take into account macro considerations when it comes to making your investment decisions? 

Our process is 100% bottom up so there is limited impact from macro considerations. That said, we are aware of what is going on at the macro level and try to avoid major headwinds when possible. 

I imagine that you invest bearing in mind the fundamentals of the company. Do you think the exposure of US companies to China and other EMs will impact their fundamentals?

Exposure to China and other EMs may have some impact. In our large cap portfolio, roughly 30% of sales from the companies in the portfolio are generated outside the US. So we recognize there is some impact.  However, the impact is fairly limited as we attempt to buy companies with very little growth expectations priced into the shares.