e-fundresearch.com: With the exception of one convertible bond fund and a corporate bond fund, METROPOLE Gestion is solely focusing on managing equity strategies that follow a value approach: What is behind all that passion for value investing and why do you believe it to be the most superior investment philosophy in the long run?
"Value investing is not superior to other philosophy. A style in fund management is correlated to the psychology of the asset manager (...)"
Isabel Levy: Value investing is not superior to other philosophy. A style in fund management is correlated to the psychology of the asset manager and is the insurance for the investor to get the same process on a long term basis, thus the same profile of performance. Visibilty on performances, on top of performances matters to investors.
e-fundresearch.com: The European fund universe counts hundreds of different value strategies and managers: How do you differentiate yourself in this highly competitive market environment and what characteristics make your value investing approach unique?
Isabel Levy: Value Investing is about choosing stocks that are considered as undervalued comparing to their intrinsic valuation, meaning that current fluctuations of the stocks markets have nothing to do with the real valuation of quoted companies. This is the common concept shared by most value investors as described by Warren Buffett or Benjamin Graham.
Then arise the question about how could be measured the undervaluation or the intrinsic value of a company, and this is the main subject where value investors differentiate.
Most often, value investors are choosing stocks for a mixture of the following reasons: “good balance sheet”, low PER, “measurable assets” and thus low P/B, high generation of cash flows and high dividend yield, and finally good products that could drive growth in the future. This is what we found in the literature of value investing but also in the definition of the MSCI value which is centered on low PER, low P/B, and high dividend yield.
This approach sound to us a bit dogmatic as this general view doesn’t take care about the fundamental differences between the characteristics of various industries. Metropole Gestion put in place in the past 13 years a way of not being dogmatic in the various approaches of value investing and to apply the same philosophy through the whole stock market, a process that could be applied for all industries and not only a few of them. In that way Metropole Gestion differentiate itself from some classical value investors following the instructions of the first half of the twentieth century minds of value investment.
We are following the same philosophy in the way that we buy undervalued stocks but adapting it to all industries with its different industrial characteristics and adapting it to the changing world we’re facing for the past 20 years meaning that the classical profitability of industries might change, leading to different level of valuations and not return to past mean valuations, and taking into account businesses that didn’t exist in the past.
"Metropole gestion is not dogmatic in its value investing approach as the MSCI value is, doesn’t exclude any business models (...)"
Metropole gestion is not dogmatic in its value investing approach as the MSCI value is, doesn’t exclude any business models and is open to new business models sometimes needing some research from the team to valuate them properly.
In that way Metropole Gestion is working more like people in mergers and acquisitions by adopting an industrial point of view and not a pure financial market approach.
e-fundresearch.com: What types of value cases are your strategies typically looking for and what does the ideal catalyst look like?
Isabel Levy: Any company can be at some point undervalued compared to its industrial valuation never mind if it’s a high or low margin company, cyclical or not cyclical…So there is no typical value case across the years. Catalysts should be any news regarding the changes in the company or the evolution of the sector that could be highlighted at some point in the market.
"(...) there is no typical value case (...)"
The only companies that we don’t look at are distressed companies as we are minority shareholders for the account of our clients and our work is not to recover ourselves the company.
e-fundresearch.com: What is your strategy for avoiding “value-traps”?
Isabel Levy: Our strategy is to identify catalysts.
e-fundresearch.com: How many positions do the METROPOLE equity portfolios usually contain and what is the minimum upside, a position must promise in order to qualify for the portfolio?
Isabel Levy: Our portfolios are very concentrated. Metropole Selection is usually a portfolio of 35 stocks. The minimum upside should be 15 or 20%.
e-fundresearch.com: Compared to growth, value has delivered significant underperformance in the last years (e.g. a recent study of Kempen Capital Management has come to the conclusion that value has been underperforming growth for the last 102 months in the US) – what is your view on this development and what are possible trigger events that could lead to an overall outperformance of value strategies?
"Investors should start to think again at valuations."
Isabel Levy: Value has underperformed Growth for a while that is true even if the performances of all value managers are very different from one to another depend on the approach of value investment as mentioned previously. The markets, for the past few years had been mainly driven by fears of the euro zone collapse in 2011, and then by the massive decrease in interest rates and the exceptional growth of the emerging economies. All those events are not very favorable to make investors think of undervaluation; it’s a kind of one way market, fears and macro driven. We are probably in a changing world, emerging economies are not willing to keep on growing at the same pace, US started to recover, positive signs are appearing in Europe, leading to a recoupling of growth rates around the world, with much lower oil prices. We are maybe getting out of a major financial crises and its consequences that lasted 8 years. Investors should start to think again at valuations.
e-fundresearch.com: How optimistic is your view into the future and what obstacles and challenges should European equity investors be prepared to overcome going forward?
"We are entering a period of normalization after a period of time where everything was abnormal."
Isabel Levy: Investors are pretty much lost for the time being as we are in this transition times. End of super easy monetary policies, end of the bubble of raw material prices, end of super profitability for companies exporting to emerging economies,etc… We are entering a period of normalization after a period of time where everything was abnormal. Investors have to adapt themselves to another era and it will take a bit of time but this new era is much better and safe for the economy worldwide.