Having read one of David's recent fund reviews, Towle Deep Value fund, while doing some research I thought it might be interesting to try to figure out how many of these really "deep value" funds there are that might have a chance of earning the value premium over time rather than the "value light" guys who don't.
One thing I think I've realized with M*'s style boxes is that I pretty regularly see growth funds that are off the charts to the right of the style box- really strong growth funds. On the other hand, I can't EVER remember seeing a fund that was off the charts to the left- what I was thinking of as the really "deep" value funds.
Does that represent an inconsistency in how M* places funds in its style boxes or am I just not finding the funds that are outside the box to the left?
Any thoughts about funds that would qualify as the really deep value stuff would be welcome as well. It seems like TDVFX does that and I think KGGAX does too. They're both on the left edge of the style box.
Most of the other "value" funds I keep track of, like QUSOX and even HUSIX, seem to be inside the left edge of the style box which suggests to me their more "value light" than "deep value". The guys who build up big cash stakes seem more defensive than "deep value". Do you think that's a fair assessment?
Thanks in advance!
Comments
On the foreign front, quite a few emerging markets funds are right at the border between value and deep value. I find BISMX and PZIEX to be past that border, as well as the international ICMIX, a new fund from Intrepid. ADVMX, DRPEX and BGOIX are all right at the border.
As for fund families, Brandes, Advisory Research and Intrepid seem to be very value-oriented (probably Pzena, too, I haven't really looked). Except for Intrepid, they don't seem to have built up particularly large cash stakes.
It confirms my impressions (which are admittedly vague and not well supported since I'm not a deep value enthusiast) - that the market has been trending toward growth for several years (okay, that impression is reasonably solid) and that funds have tended to drift along with the market.
As the article suggests, deep value funds have basically two alternatives - build cash (not to be defensive, but because there aren't enough companies meeting their stringent requirements), or drift with the market (staying toward the "left" side of the market as it moves "rightward"). LLPFX has been doing both - last year they had over 1/4 in cash; they've since made purchases and M* now classifies its portfolio as blend. In fact, M* has classified the portfolio as blend for each of the past several years except in 2014, when it apparently stuck closer to its knitting and let cash build.
For a fund to the left of value, take a look at TPEMX. Most of the really low P/E funds right now are EM funds.
Thank you for making a post on deep value funds.
One of the things that I look at beside what you noted above is P/E Ratios, both TTM and forward estimates. Take TDVFX which has a forward P/E Ratio of 11.8 and KGGAX at 10.0 both being well back of the S&P 500 Index forward P/E Ratio at 17.7. I guess what I'd like to know is how far back of the P/E Ratio, let's say for the S&P 500 Index, does a fund have to be to score before it would be considered a deep value fund? About 75%, or so, of the Index is my thinking.
I wonder what some others might think along these lines?
Derf
How is a P&E ratio determined for a mutual fund?
Even if a "blended P&E" of it's less than current (3 month old data) of the fund's equity positions could be determined, isn't this skewed by other fund holdings...cash, bonds, real assets?
Seems like a P&E ratio is real hard thing to assign a mutual fund or am I missing something?
Although, I agree, it might be a complex thing to do Morningstar seems to be able do it for funds that hold any equities. In addition, they provide both TTM and forward estimates as a tool in Portfolio Manager for each fund held within my portfolio, with equity positions, and for my portfolio as a whole.
My portfolio scores according to M* on a TTM P/E Ratio of about 85% (18.3) of what the S&P 500 Index reflects (21.7). In addition, it holds a little better of 40% in value style equities, about 35% core style equities and about 25% growth style equities. This information suggest, from my thinking, that the portfolio has a value tilt ... but, not a deep value tilt although I do hold about 20% of my portfolio's assets in cash. As MSF states a large cash position might put a fund (or perhaps even a whole portfolio by my thinking) into a deep value classification but I don't think I am there with a 20% cash position.
Old_Skeet
When I restrict the list to funds that have a price/book of less than 1 only 3 of the 9 funds survive, including PVFIX, and there are only 17 funds with a P/E of less than 12 and a P/B less than 1, quite a few of which were mentioned by @Vert (thank you!).
I guess it's clear I don't understand M*'s system because Chou Opportunity, which is indeed left of the style box in deep value territory, has a P/E of 16.51 and a P/B of 1.26. CHOEX has a tiny price/sales ratio of 0.25 so maybe that plays a bigger role in the style designation, but some of the others like KGGAX and TDVFX met my P/E and P/B criteria and also have P/S below 1 and they're still within the left edge of the style box.
advisorperspectives.com/articles/2015/08/11/why-you-should-allocate-to-value-over-growth
I suppose it would be interesting to know how well those cheapest P/B stocks do compared to the other 80% or to "blend" stocks because it could be that the deep value stuff suffers a lot more volatility or a bigger drawdown but doesn't outperform by nearly as much over time.
Thanks for the thoughts about cash! That seems at least as reasonable and how I was thinking about it and I guess it means I'd have to look at the details of those funds before drawing any conclusions about their approach. I do find it interesting, however, that Longleaf is pretty clear about their "deep value" orientation but the style box says large blend and their portfolio statistics don't lead me to the same conclusion. Obviously it hinges on what they determine the intrinsic value to be but it seems they've had a lot of difficulty keeping up with any of their peers for the last 10 years.
The Timothy Plan Emerging Markets fund you mentioned is pretty remarkable. They're really what I would expect to see in "deep value". Lots of Brazil, Russia, basic materials, utilities, industrials and very small P/E, P/B and P/S. The expense ratio is really high considering they have a 5.50% front-end load, but I guess that's what's necessary to earn any money when you only have $7.8 million of AUM.
Average Price Ratios To compute a fund's P/E, essentially compute the (weighted) average yield (E/P, rather than P/E), and then invert. As M* notes, this "harmonic method prevents outliers from skewing the result." That would happen if a stock had a very small amount of earnings (and thus a huge P/E, but a miniscule E/P yield).
Of course, all negative values (stocks losing money) are discarded before any averages are taken.
This paper goes on to note that a fund's P/E ratio does not directly affect a fund's style, because the fund's style is an averaging of its component stock styles, which in turn depend on a variety of different factors. Along those lines, note that the same P/E ratio for a stock could be considered "value" for a large cap stock, and "blend" for a mid cap (or vice versa), since styles for stocks are determined relative to size peers.
All of this, and more, is described in the M* Style Box Methodolgy paper.
http://www.mutualfundobserver.com/discuss/discussion/19993/woe-betide-the-so-called-value-investor#latest
I think I could, but must admit some slight hesitation in giving a definitive "yes." Call me wimpy, but I still remember (barely) that it wasn't easy to hold firm, in the best of times.
Good managers (and investors) have shopping lists and have done their homework and can easily see mispriced valuations in either individual securities or in overall sectors. I tend to appreciate the discipline of a seasoned manager to help me separate the short term emotion (risks) from the long term rewards.
When a mispriced investment idles too long at undervalued levels impatient investors can begin to consider whether they are caught in a "value trap", which can tax the patients of both manager and individual investors. In these situation I like to see something other than price as reasons to stay the course. Other positive events such as dividends, acquisitions, or restructuring...some form of positive action. If a manager can communicate these events in a manner individuals can understand it helps.
As a shareholder of BB's FAIRX, I feel he has done a poor job of communicating his value vision to his shareholders. I understand a desire to keep your cards close to your chest, but an occasional confident wink would do wonders for my morale as I sit wondering what cards he holds and may play.
It looks to me like 'deep value' is pretty much a small cap strategy. Possibly there's just too much analyst coverage on the larger stocks to leave real huge (40% margin of error) bargains around. Interesting you mentioned that Brandes hadn't looked so good in emerging markets. Recently Andrew Foster from Seafarer theorized that value didn't work so well in emerging markets because property rights hadn't been sufficient to allow investors to ever correct extremely low valuations (via takeovers or going private or shareholder uprisings, that sort of thing). Foster also suggested that emerging market property rights were now moving in the right direction.
Anyway, it's an interesting subject.
Thanks for the insight from Andrew Foster! There certainly seem to be a good number of "value" emerging markets fund because a lot of them were coming up on the screens I did for low P/E, P/B and such. I'm not sure how that works out on M*'s style box because I didn't check all of them but they seem to be going for low valuations.
Do you worry at all about reversion to the mean with these guys? Even though value has been trailing for a few years now, PVFIX, TDVFX, BISMX and QUSOX have all had pretty nice runs. In theory when value comes back into favor these guys should do very well but at some point I worry that they won't keep up anymore. A few good things on their sides is that none of these guys have grown a big asset base and the "deep value" approach doesn't seem flooded with competition either.
I think it is possible to get into at least mid-cap territory as David Iben has done with his Kopernik Global All-Cap fund. It's also true that a lot of these values come because of a fairly big fall in price which also has an impact on market cap. In the case of the international funds, the strong dollar is hurting too.
But it is hard to pull the trigger on a one or two star fund, isn't it?
Here's a formal mathematical definition of mean reversion:
http://mathworld.wolfram.com/ReversiontotheMean.html
In plain English, it's just stating what you did - that if a mediocre pitcher had a hot night, that was toward the high end of his performance range. So on his next outing, he's more likely than not to do worse than his sterling performance - not because he did well the previous game, but just because he's a mediocre pitcher who tends to give up 10 hits or so a night.
I think what Fairholme hasn't done is provide some realistic views on how the Sears journey has gone and what the destination even vaguely looks like.
Fairholme was buying Sears well North of $100. You can say he was early, but years later and a significant % lower (although there have admittedly been some spin-offs, albeit crappy ones), I think there needs to be some honesty and insights as to what the next steps may look like for SHLD.