International Value Advisers talks investing in a post-­Brexit and Trump market

Funds Management

by Carolyn Herbert

Finance News Network transcription of MLC interview with International Value Advisers’ Chief Investment Officer, Charles de Vaulx.

Myooran Mahalingam: Hello, I’m Myooran Mahalingam from MLC. Joining me today is Charles de Vaulx, Chief Investment Officer of International Value Advisers. Charles, welcome.

Charles de Vaulx: Thank you, great to be back.

Myooran Mahalingam: Could you outline how you manage money at International Value Advisers?

Charles de Vaulx: At International Value Advisers, we are long-­only investors. So we’re not a hedge fund, we don’t short securities, we don’t use leverage. Yet our goals are unique, because we are trying, if possible, to deliver positive absolute returns, as opposed to returns that have to be relative to a benchmark.

So to accomplish that, we use a value strategy around the world – investing both in small companies, mid-size companies and, sometimes, very large ones. We’re willing at times to consider high yield bonds, either corporate or sovereign, to try to achieve equity­-type returns – 7 to 10 per cent per annum. We are willing, at times, to hold gold, either the mining shares or the Gold ETF, with the view that more often than not, gold can be inversely correlated to stocks and bonds. Stocks and bonds may go down, gold may go up and vice versa.

And finally, if we don’t like the valuation of most securities out there, if we struggle to find enough cheap securities, we don’t mind letting the cash build up.

Myooran Mahalingam: With markets hitting all time highs over the past few years, where are you finding opportunities today?

Charles de Vaulx: It’s been a struggle, which explains why we hold approximately 40 per cent in cash, which is very high by our standards. You’re right, because of central banks having very low interest rates around the world, stocks and bonds (most of them around the world) trade at very elevated levels. But here and there, we have been able (over the past year or two) to find cheap names in Japan in the healthcare area. In Europe, in the aerospace area for instance and a few financials – but it’s very difficult.

Myooran Mahalingam: You talked about central bank influence. How has politics (for example, Brexit and Mr Trump being elected as President) influenced your portfolio?

Charles de Vaulx: In fact not that much – although both were viewed as a surprise by markets. Our view has been that for many years now, many decades, a lot of the goodies, if I may say so, have accrued to the owners of capital (to the shareholders), while wages have struggled to go up much, at least adjusted for inflation. As a result, corporate profit margins in many parts of the world are at very elevated levels. So our belief is that (so the populist movements that can help explain Brexit or President Trump) basically means that it’s another reason why corporate profit margins, we think, ultimately will go down.

Myooran Mahalingam: Thank you, Charles. You talked about corporate profit margins. Can you give an example of how you actually work with management to improve shareholder returns?

Charles de Vaulx: Well in fact we rarely do. We have a bias towards owning companies that are family controlled, with the view that eating your own cooking can do good things. Family controlled companies can have a longer-­term view, tend to be financially more cautious. Having said that, we own a company called DeVry Education Group Inc (NYSE:DV), where we were not pleased over the last two years with capital allocation (the acquisitions they’ve made). So we’ve spoken to them and we asked if one of our employees / partners could join their Board, which they’ve agreed to. And since then, it’s been a year ago roughly or less, the stock has more than doubled. So we’re pleased for that.

Myooran Mahalingam: IVA plays a very important component in some of MLC’s portfolios, particularly Inflation Plus. Can you give us an example of a stock in the portfolio that particularly excites you?

Charles de Vaulx: Yes, and I think inflation strikes me as more difficult to beat, as an investor, than deflation. Deflation is not a good thing, but all you have to worry about is counterparty risk. Inflation strikes me as trickier to beat as an investor. So one company which we think corresponds to (would give a good hedge against inflation) is Bureau Veritas SA (EPA:BVI). It’s a French based, yet global company, in the testing, inspection and certification business.

So it’s a service business, it’s not capital intensive, there’re no plant, product and equipment, no receivables. So they inspect ships or plants around the world and certify that those plants meet certain norms, certain standards. So they’re able to generate streams of free cash flows that can grow over time, both because of global economic growth, but also because of inflation. So it’s a wonderful business.

Myooran Mahalingam: And the “V” in International Value Advisers means that you would have got it at a reasonable price?

Charles de Vaulx: Yes, now this is not a mediocre business so we’ve had to pay up, because it’s such a high quality business. But we paid, ultimately, a very reasonable multiple – yes.

Myooran Mahalingam: Charles de Vaulx, thank you very much indeed for chatting to us today.

Charles de Vaulx: Thank you Myooran.

The views expressed herein reflect those of the portfolio manager(s) and are subject to change at any time based upon market conditions. These views may not be relied on as investment advice. Any reference to securities does not constitute a recommendation to buy or sell such security.