Applying Value Investing Principles to Manager Selection
Executive Summary
Value investing, as pioneered by Benjamin Graham, involves buying stocks that are “undervalued” by the market – that is, selling for a price below their “intrinsic” (or true) value. Successful value investors profit by waiting to buy a quality stock only when the price is below its intrinsic value. As Graham said, stocks are subject to excessive price fluctuations and the time to buy is when the price is “unduly depressed by temporary adversity.”
But can this time-tested strategy also be applied in some fashion to the selection of investment managers and funds? If so, investors have opportunities to profit via the selection and retention of managers who significantly outperform over long periods of time. A comprehensive study by our firm found that managers whose 15-year returns from 1998-2013 were in the top quartile in their respective categories outperformed their benchmarks by an average of 4.5 percent per year – providing an average total benefit to clients of $935,000 for every $1 million invested.
Manager selection is a critical element of what we do at Altair. Our goal is to provide our clients with high-quality investment options that will outperform passive alternatives (indexes) over the long term, after all fees and taxes are deducted. We seek to achieve that goal by identifying and investing in exceptional money managers – ideally top-quartile performers like those discussed above. This approach has proven effective and very profitable over time. Choosing these managers is of course not as simple as calculating and ranking their long-term returns. We believe applying the principles of value investing can significantly aid the process.
While we typically recommend active managers, that is not always the case. At any given time, if we do not believe active management will be as effective in a particular asset category, we focus on minimizing cost and will invest in a low-cost index alternative.