The “point of departure” for the Ivey Value Fund is the acknowledgement that there is almost always a difference between the price of an asset and its value, and that knowing the difference is the key to achieving satisfactory investment returns. This view runs contrary to the prevalent theory that markets are informationally efficient and that it is therefore a waste of time to look for discrepancies between price and value. In our view, mispriced stocks are the rule, not the exception. Value, however, is never measurable with a high degree of precision, so a margin of safety will always be applied between estimated value and the price that the Fund is willing to pay.
The Fund’s investment model, including the concept of always requiring a margin of safety, has as its foundation the principles that Benjamin Graham laid out in Security Analysis (1934) and The Intelligent Investor (1949), with many valuable building blocks laid atop that foundation by successful practitioners of the value philosophy, such as Warren Buffett, Charlie Munger, Sir John Templeton, Prem Watsa, Mason Hawkins, Bill Ruane, Seth Klarman and others.
The hedging component of the Fund is based on the belief that, if hedging is carried out strategically, it can contribute immensely to the goal of protecting against major setbacks. This belief is based on the recognition that, even though a portfolio may consist of undervalued securities, the indiscriminate selling that takes place during sharp market declines can lead to drawdowns in portfolio value that are very uncomfortable for most investors.
The Fund will aim to optimize the relationship between capital preservation and profit, or risk and reward, where risk is defined as the probability of permanent loss of capital. The Fund’s risk-management discipline has four main components:
- Stock selection based on sound value investing principles, including a large margin of safety between price and value.
- Moderate diversification of firm-specific risk.
- Mitigation of systematic risk through hedging strategies.
- A prohibition on the use of leverage to enhance returns.
While the Fund’s investment decisions will not depend on economic forecasts - either internal or external - prudent management dictates that there be an awareness of the economic landscape and, in the rare instances when economic conditions have relatively clear implications for investments, the Fund take steps accordingly to preserve capital.
The Ivey Value Fund will also strive to embody the spirit of continuous learning and improvement by paying close attention not only to results but, perhaps more importantly, to process, and in this way remain flexible and innovative.
Investment Process and Principles of Operations
The investment process involves the following steps:
- Students will search for stocks that may be undervalued.
- Students will value selected stocks according to Dr. George Athanassakos’ Value Investing course to arrive at a stock’s intrinsic value.
- Students will make a recommendation to buy, watch, or not buy a stock. In this step, an entry price will be determined, which is the intrinsic value of the stock less the minimum margin of safety and represents the maximum price the Fund is willing to pay for one share of the underlying business. The minimum margin of safety will be set at 33% of the intrinsic value. Behavioral biases and considerations will also be checked before a recommendation is made.
- The recommendations will be reviewed by the Managing Director and the Fund Managers, who together will eliminate any obviously unsuitable ideas from the list before forwarding the rest to the Advisory Board.
- Each Board Member, as well as the Managing Director and the Fund Managers, will rank in order of preference the ideas which they deem investable.
- The Fund Managers, having solicited and obtained all the rankings, will produce a combined ranking which will then be used as the basis for adding stocks to the Fund's portfolio, but not before the analysis is checked and updated a final time by the originating team and a Research Analyst.
- At this time, a handful of the top-ranked recommendations (according to need) will be placed on the Fund's "buy" list for addition to the portfolio when the price is below the entry price that was determined by the student analysts. Any remaining investable recommendations will be placed on a watch list to be monitored by the Fund Managers for possible investment at a later date.
- The need to hedge the portfolio will be considered on an ongoing basis using the principles taught in the Strategic Investing course. The Fund Managers will carry out this step and will also be responsible for the ongoing hedging requirements.
- A stock will be sold when its price reaches intrinsic value, or according to the checklist developed in the Value Investing course. The Fund Fellows, with back-up from the Fund Managers, are responsible for managing this part of the process.
- Once a stock is sold, the Fund Managers, together with the Fund Fellows, will analyze the rationale for the investment and the reasons why the results were satisfactory or not. Such analysis will be documented and made available to succeeding groups of students.
Thanks to Fairfax Financial Holdings Ltd. for their vision and generous support of the Ivey Value Fund, which benefits students and practitioners worldwide.