Some Anecdotal Stuff from a World Class Value Manager

The economy is slowing and the stock market is expensive.

There, now you know what the data says, empirically speaking.  Now let’s talk anecdotally…

I was visited last week by one of the largest global value managers in the world (AUM $50 billion plus) last Friday.  Their flagship fund, the one I use in that slot for client accounts, is running about 18% cash right now, 9% Japanese equities and only 36% US stocks.  They rarely hold cash as cash, usually they’ll buy the short-term commercial paper of the companies they like on the equity side – this allows them to pick up some extra points when they’re highly liquid.

I ask them why the almost 20% cash position, is there something they’re seeing in the macro data or the headlines that their peers (who are much more heavily long) don’t necessarily see?

No, they tell me, they don’t play that game in terms of trying to read the macro tea leaves or anticipate the political outcomes in the 17-nation Euro Zone.  Rather, they’ve got a 20% cash pile because as they’ve sold things, they’ve not been able to find replacement candidates worth buying given their bottom-up approach.  It’s a combination of stocks not being cheap enough around the world to offer the “margin of safety” they live by and earnings growth being non-existent across much of the global landscape.

One pocket of interesting buys is in European multi-nationals that do most of their business outside Europe.  These stocks are being pressured because of the Euro exchanges they are listed on despite the fact that they don’t have the perceived exposure to Euro economies that people assume.  The Japan overweight is derived from a similar viewpoint – large corporations in Japan that are selling outside of Japan.  There are some buys in areas like forestry and cement as well in these regions.

Ordinarily the fund would be looking at the European bank equities, but there’s that nagging margin of safety dearth again – how can you calculate the value of a business when everything on a balance sheet is being masked from shareholders?  So while Euro bank stocks may appear “cheap” on the surface, they fail the litmus test that’s gotten this fund through some rough times over the last 30 years.

Worth noting here is the fact that this fund was also peaking out in cash as a percentage of assets in 2007.  Again, it wasn’t that they were studying the macro concerns and coming to the right conclusions then either – their cash hoard was a function of not being able to find value with good fundamentals and a margin of safety.  Stocks were expensive and underlying fundamentals were beginning to turn the wrong way, so they sat back and bought nothing.

They are in much the same position today.