International Value Advisers on lowering volatility

Funds Management

by Clive Tompkins

MLC Portfolio Manager Myooran Mahalingam talks with International Value Advisers’ Chief Investment Officer Charles de Vaulx about IVA's absolute focus on value and preparedness to hold cash and gold when asset prices are elevated.

Myooran Mahalingam: Hello. My name is Myooran Mahalingam, Portfolio Manager, Global Equities at NAB Asset Management, and it is my very great pleasure to welcome Charles de Vaulx, Chief Investment Officer of International Value Advisers. Welcome Charles.

Charles de Vaulx: Thank you, good afternoon.

Myooran Mahalingam: Charles you've been managing money for well over 30 years now, can you give us a brief description as to how you run money?

Charles de Vaulx: Yes, Myooran we invest around the world, long only, but we put a lot of emphasis on minimising losses. We believe that most individuals, clients, do not stand volatility, especially when markets go down. So we have a strategy, which minimises the wild rides basically. We invest around the world, mostly in stocks small, large, or mid-size, and sometimes we like to buy high-yield bonds when they offer equity type returns, 8% plus per annum. If we don't like anything, if we cannot find enough cheap securities, we'll let the cash go up in the portfolio, and also we believe that gold is an important asset, and so at times we'll have 5, 6, 7, 8% in gold, with the belief that gold can go up when stocks go down, and vice versa.

Myooran Mahalingam: The V in International Value Advisers, how important is valuation to your process?

Charles de Vaulx: Well it's key. What will determine whether you make money or lose money as an investor has a lot to do with the price you pay. You're supposed to buy low, sell high, and so we are big believers that valuation is the key to investing.

Myooran Mahalingam: And Charles you mentioned how cash is a residual to your holdings. Your cash levels has been elevated in recent times. Can you perhaps give some colour as to why you've been so defensively positioned?

Charles de Vaulx: Yes, Myooran for many years now central banks have followed quantitative easing policies, making sure that interest rates are as low as possible, often times even below the inflation level, and that has convinced investors, wrongly I believe, to pay up for stocks and bonds. So worldwide, whether the stock is small, or large, or big, we think that most stocks are overpriced, rather than underpriced. The second reason has to do with the fact that many industries are going through major disruptions. Think about e-commerce with Amazon, streaming and the impact on media, fintech, and think about battery powered cars going forward, maybe challenging the established car manufacturers. These are major risks that are happening at a time when profit margins are very high, and I should also mention that there have been, what we believe are major excesses in terms of credit in China, and that's also a risk to the global economy, as far as we can see.

Myooran Mahalingam: There has been some volatility in recent times, as we do this interview Charles. Maybe some comments on the market volatility and what would your advice be to people that are watching this?

Charles de Vaulx: Yes, clearly the reason for the volatility seems to be tied to interest rates rising on the back of higher employment data and wages in the United States, and so basically going forward, if interest rates keep rising, which would not surprise us, especially if the inflation picks up, then one should expect stocks to struggle for a while. Now I don't think that's a reason to be 100% in cash. It means that you should invest with managers who are careful about the valuation, who can pick their spots, and who are willing to hold cash, or be partially in cash until real bargains emerge. But ultimately, investors should expect modest returns with a three to five year view.

Myooran Mahalingam: Charles de Vaulx, thank you very much indeed for your time.

Charles de Vaulx: You're welcome, Myooran.

Myooran Mahalingam: And thank you very much for your attention.