A recent article in The Economist titled “Value investing is struggling to remain relevant” perhaps best captures the popularity of the discipline, or lack thereof, within the current mainstream investing community. Ross Glotzbach, CEO and Head of Research at Southeastern Asset Management, recently provided students at Ivey with reasons to remain optimistic. As Ross explained, the relative underperformance of value recently, combined with the ever-present influences of human emotion, ensures that opportunities for the enterprising investor will continue to materialize.
Thinking Like an Owner
Southeastern, founded in 1975 by Mason Hawkins, continues to stick to three guiding principles, namely being long-term orientated, concentrated, and engaged. The firm encourages long-termism by being 100% employee owned, with all employee equity holdings in the fund itself, while also maintaining a loyal client base with an average tenure of 17 years. When explaining the benefits of concentration, Ross talked about why having 18-22 of the highest conviction businesses allowed them to deeply understand each company while concurrently achieving a satisfactory level of diversification. This style is relatively unique in the asset management world, as most funds own hundreds of companies so as to closely mimic index returns. A vital final piece is engagement, which means that Southeastern works closely with management teams to help their businesses succeed, whether that be through asking hard questions or providing encouragement. Ultimately, Southeastern embodies the dictum first set out by Benjamin Graham that investment is most intelligent when it is most businesslike.
Finding Value Nirvana: Business, People, and Price
“Price provides the opportunity, but business and people drive long-term outcomes.” ~ Ross Glotzbach
Ross described the consistent process Southeastern follows in identifying opportunities, beginning with a deep understanding of how companies make money and underlying industry economics. Southeastern’s deep research includes leveraging suppliers, customers, and competitors to identify companies where accounting numbers have yet to catch up with business fundamentals. Ross emphasized the insights gained from asking competitors one of Warren Buffett’s favourite questions, namely that if they could invest in one competitor, which company would they choose? Analyzing the people aspect of the business includes engaging with management, while also looking at quantitative measures including returns on capital (with a particular focus on incremental capital), growth in free cash flows, and long-term share price appreciation. At this stage, Southeastern maintains a curated list of 3000 companies across the world, as sourced by the 15 analysts on the team, that they would be interested in owning at the right price. As Ross emphasized, having the discipline to buy at a 60% discount to intrinsic value means that out of the 3000 companies, analysts may have 1-2 good ideas per year. In this sense, Southeastern puts all their eggs in one basket, and watches that basket closely.
Sonic as a Case Study
Ross tied the above principles together with the example of Sonic. The fast-food company was an understandable, high return business at a point of inflection as they transitioned towards a franchise model. The deep research conducted by Ross and his team through each of the firm’s pillars led them to believe that recent disappointing sales numbers had pushed Sonic to irrationally low levels. Working with management (in keeping with the firm value of engagement), led to strong results with an eventual sale at intrinsic value. This provided an important lesson as to the benefits of time arbitrage in a world dominated by short-termism. Unlike recent proclamations regarding the death of value investing, Ross proved to us that the fundamental principles of the discipline remain as relevant as ever.
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Keenan Conlon
Keenan is a current HBA Candidate, having previously studied accounting and history before coming to Ivey. In high-school, he first developed a passion for value investing after stumbling upon The Intelligent Investor by Ben Graham. After this eureka moment, he continued to learn from the investing greats and is honoured to be able to attend one of only two institutions in North America with a Centre dedicated to advancing the principles of value investing. When not reading 10-K’s, Keenan enjoys playing a range of sports and watching his beloved Toronto Maple Leafs.
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The views expressed in these blog posts are the opinions of their authors, and do not necessarily reflect those of the Centre. The intention of this blog is provide a platform for current, past and upcoming HBA, MBA and Executive program value investing students to discuss value investing and related topics.
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