If the fund industry's value managers agree on anything, it's that "value" has ceased to be a useful term, in and of itself.
"I think we're growth investors," said Marty Whitman, chairman of Third Avenue Funds and manager of the
Third Avenue Value fund, at the Morningstar Investment Conference in Chicago last week.
Whitman pointed to the well-capitalized bank stocks he's favored in the past as an example. His fund paid 80% of book value when these stock prices were depressed. But because of overall good financials, the companies recovered, and so did the stocks. "We sold them for 10 times their book value. Most bank stocks sell for no more than two or three times their book value."
Still, better to be thought of as a value investor, since stocks with a growth following can get expensive. "Growth is a dirty word," Whitman said. "You have to pay up for that. And 'paying up' is the very antithesis of value investing."
Value managers strive to achieve their return by refusing to overpay for stocks now, frequently betting on turnarounds. Whitman, for instance, never pays more than 10 times peak earnings for earnings-driven companies, and he buys asset plays at a 20% discount to their net asset value.
"Value and growth are mind-sets," said Christopher Browne, manager of the
Tweedy, Browne American fund. "We'd all rather buy 'growth' companies than what my brother calls 'the hospice patients of corporate America.' But companies and sectors cycle in and out of the growth and value categories."
Mason Hawkins, chair of Southeastern Asset Management, an investment management firm that oversees the
Longleaf Partners mutual fund, employs an equally strict discipline. The fund buys companies trading at discounts of 40% or more to the managers' estimates of the companies' intrinsic value. Hawkins and his team arrive at a company's intrinsic value using Benjamin Graham's tried-and-true discounted cash-flow analysis, as well as asset values and sales of comparable firms. Such criteria can be hard to meet, and the concentrated fund -- which usually holds just 20 to 25 names -- rarely has any positions in technology or other "growth" sectors. Even so, Hawkins balks at the term.
"Investments can't be divided into value and growth," Hawkins said. "It's insane to think that way. People think of growth and value in terms of stock prices. We think of them as companies. The stock price will tell you nothing about the company outcome."
Aside from assessing a company's intrinsic value, these buyers also assess the management.
"There's no question bad management will cause us to avoid a stock," Whitman said, adding that because his firm places such emphasis on solid financials, the management of those companies tends to be quite good. "There are trade-offs, though. Because we insist on such strong financials, we usually end up dealing with very conservative managements. So in the good times we sacrifice a little."
"We look for a management team that thinks like shareholders," Browne said. "But given the choice between good management and good financials, we'll take the good financials."
But beyond just finding the bargains, the managers noted, is the patience required to watch them turn around. "For the companies we invest in," Whitman said, "almost always the near-term outlook