Manager Views

Finding value in today’s market

As a value investor, Lawrence Chin wants to buy stocks when they’ve traded down. It takes patience to find a bargain, but then Chin has had a front row seat on two major corrections: the tech bust in 2000 and during the financial crisis – the worst since the Great Depression. In both cases, stock prices tumbled – often below what the underlying assets of the companies were worth – and in the process created opportunities for value investors. Chin, lead manager, Mackenzie Cundill Canadian Security Fund, and co-manager, Mackenzie Cundill Canadian Balanced Fund, says that many stocks that were cheap before the record-setting rally off of the March 2009 market bottom, are now fully valued. In the following interview he discusses his strategy and where he’s finding value in today’s market.

Are you finding many value opportunities now?

It is dramatically harder to find value stocks these days. The market has moved up and there are some stocks now trading close to what we think is fair value, so we’re slowly pruning those, or selling those out of our portfolio. Last year was unique but in general, it’s very hard to find new names. And if there’s nothing to do, we’re going to hold cash.

How high are you willing to let the cash position go to?

I prefer to not let cash get very high, especially with cash yielding zero. But if there’s nothing to do, we’re not going to invest just for the sake of investing. That’s part of the patience and discipline that Cundill Investments founder Peter Cundill taught us.

What else did you learn from Peter Cundill?

The first thing was patience. The second thing is, don’t overpay for anything. Third, really focus on balance-sheet strength [That is, investigate the assets listed on company balance sheets and estimate a market value for these. Also scrutinize the liabilities – i.e., the debts on the balance sheets.] Because we’re buying distressed companies, we want to know that they can weather the storm. By carrying out our own independent assessment of the assets and liabilities, we can establish a level of comfort in the company’s ability to survive in difficult circumstances. So even if the share price says one thing, we have the analysis to assure ourselves that the company isn’t going to go broke and that the value of its assets are very likely to be recognized when the environment improves. The last thing Peter always harped on, in terms of portfolio construction, was that it should be highly concentrated.

Why is that?

Like I said, it’s always hard to find value companies that meet our strict criteria. Within a year, each person at Cundill might only find between three to five new names. If you’re going to spend a whole year finding three to five names, then you should make it a really big position. Small positions simply cannot contribute that much. Peter has always said too that the funds that performed the best were always the concentrated funds, primarily because you make your best names the biggest positions.

Have you added anything recently to Cundill Canadian Security Fund?

Over the last six months, we’ve found two or three names in the oil and gas sector. One of them is ConocoPhillips. We think it’s trading below its net asset value (NAV) and just as importantly, we think it’s trading below replacement value. There have been quite a few transactions in oil and gas and these transactions have highlighted the fact that these companies’ reserves have been undervalued by the market.

Cundill Canadian Security can have as much as 49% foreign content, but you’re concentrated in the US. Why is that?

I’m geographically agnostic. I prefer it to be anywhere – wherever the cheapest stocks are. That being said, a lot of my experience at Cundill has been in the US. Also, the US is just so big. And in terms of corporate governance, things tend to happen much faster there than anywhere else. Finally, the US has really been beaten up hard. When you combine all those facts, we were just finding more opportunity in the US than anywhere else. [Note – Cundill funds have the ability to hedge currency, which can diminish the effects of foreign currency moves on the value of your investments. For more information on currency hedging, go to mackenziefinancial.com/currency.]

Were you able to add a lot more names in 2009 then?

I was. Because every stock was going down, our stocks went down a lot as well. So we had to make a choice: do we sell our names and buy new ones or do we buy more of the names that we’re comfortable with? Well, the majority of the time, we ended up buying more of what we already owned.

Note – Cundill funds have the ability to hedge currency, which can diminish the effects of foreign currency moves on the value of your investments. For more information on currency hedging, go to mackenziefinancial.com/currency.