We saw a massive price outperformance of Growth since 2009. Since 2016, however, Growth has no longer been able to achieve any EPS outperformance. This graph already shows that Value is still significantly undervalued in comparison.
Source: Downunder Daily, capanum
In 2020, we have already gradually started to balance our portfolio, which was previously very growth-orientated, and added more value markets and value managers in a broadly diversified manner. We started with a very cheap market like Vietnam, with the Lumen Vietnam Fund, as well as Gold Miners, Commodities, “Next Generation” Commodities, European Value with the Fidecum Contrarian Value Euroland Fund, Japan with the Man GLG Japan CoreAlpha Equity Fund and finally last year Brazil with the DWS Invest Brazilian Equities. We even diversified the Liquid AI Market Neutral side with value orientated mandates like MontLake Cooper Creek Partners North America Long Short Equity and DNB TMT Absolute Return.
On the global side, I would highlight the Heptagon Kopernik Global All-Cap Equity Fund (IE00BH4GYD31) which is very broadly diversified into the cheapest sectors and stocks and currently has very exciting opportunities allocated.
After the very good performance last year and also at the start of this year, the questions are of course: Is the value rotation already over? Is it too late to chase value?
Maybe an exciting observation and view from of highly respected quant house AQR gives a bit of advice:
Hopefully the single graph is again self-explanatory. Such a spread says little about timing, when it will work is not the question. A common question is “what’s the catalyst.” Looking back at times like the peak in March of 2000 (tech bubble) and note that nearly 22 years later nobody still doesn’t know what the catalyst was for it stopping there. But, while timing will always be bedevilling, it’s possible that the odds get better the crazier prices get, and the medium-term expected returns get better too. But, the bottom line, as usual, is there are no guarantees (particularly over the short term) but achieving relative outperformance on value last year while it’s gotten way cheaper (and record cheap) is not a bad combination and is very exciting for 2022 and beyond.
Fund analysis: Heptagon Kopernik Global All-Cap Equity Fund
David Iben CFA, Chief Investment Officer and Lead Portfolio Manager
Kopernik Global Investors, LLC is a registered investment adviser launched by David Iben in 2013, providing investment management services to individual and institutional investors. Kopernik is a 100% employee-owned firm, organized to ensure a culture centered on client success.
Philosophically, we view ourselves as owners of businesses. Our job is to appraise these businesses and take advantage at times when an inefficient, emotional marketplace offers securities at a price that is significantly different from our appraisal. Like our namesake, Kopernik (better known by the Latin spelling, Nicolaus Copernicus) we trust the results of our own analysis especially when it generates vastly different conclusions from those of the crowd and/or those taught by many academics.
In a highly cyclical world, we believe now is a compelling time for active and value-oriented management. We continue to find investment opportunities in two broad areas of the market: traditional value companies outside the U.S. and companies with latent value. In both categories, we are invested in high-quality franchises that are difficult to replace. However, the most important difference is the visible level of cash flow; in the traditional value group, our holdings are producing cashflow that the market is ignoring, while in the latent value group, our holdings tend to be in projects that are in their pre-cashflow stages. Our latent value holdings own very valuable, scarce assets that should produce significant cash flow when the cycles normalize. We believe these companies should be analyzed based on decade’s worth of future cash flows rather than last quarter’s cash flow numbers.
Our latent value holdings own very valuable, scarce assets that should produce significant cash flow in the future. We are finding latent value companies in the materials sector, owning large amount of resources which in often cases are underground. For example, Newcrest, a senior gold producer in Australia and one of the strategy’s largest positions, is down 65% from 2011 when gold was at today’s price even though they have improved their operations and have diversified their reserve base. In addition, the stock continues to trade below its liquidation price.
For traditional value, our holdings are producing cashflow that the market chooses to ignore because they are located in parts of the world that are currently unloved. These include energy, utility and agriculture companies in Emerging Markets. As an example, we continue to have conviction in KT Corp, the dominant fixed line provider and second largest mobile phone company in South Korea which trades below book value and whose margins are 1/3rd that of the global average. In addition, from a quality standpoint, we believe KT Corp offers the same service and technology offerings as its developed market counterparts and see potential for its margins to converge.
We continue to be excited by the portfolio’s significant potential for upside over the long run. We persist in opportunistically buying and holding companies that we believe are trading at significant discounts to their risk-adjusted intrinsic value, using volatility to our advantage. As appraisers of business, we view risk as the permanent loss of purchasing power and continue to be focused on mitigating risk by understanding the companies we own and through diversifying across sectors, regions, and countries.