Stock selection from a global perspective
November 11, 2013
Dan Newhall: Hello, I'm Dan Newhall of Vanguard's Portfolio Review Group. I'm here with Rama Krishna of ARGA Investment Management who manages a portion of the Vanguard International Value Fund. Rama, thanks for joining us.
Rama Krishna: Thank you for having me here, Dan.
Dan Newhall: How have your over 20 years of investment management experience shaped your approach to making investment decisions?
Rama Krishna: My 20 years of investment management experience have a direct link with ARGA's focus on valuation-based investing and our investment process as well. So I became aware through my many years of investing that there are some enduring concepts that should be applied to investing at all times. ARGA is built around those investment concepts. The first of these is that we see ourselves as investing in companies as opposed to stocks. The second is that the valuation of companies is determined by their long-term earnings power and the dividend-paying capability. Third, our research analysts should focus on forecasting long-term fundamentals of companies as opposed to analyzing investor sentiment. And, finally, we see portfolio construction as reflecting not just the magnitude of return to fair value that we have in any single investment, but also the risk that our forecast may not be correct.
Dan Newhall: Now one of the things that I think makes your firm interesting is that you have analysts in Connecticut, where you're based, but also in India. Can you talk a little bit about how you thought about putting the team together that way?
Rama Krishna: Our firm seeks to be global in every single way. Not just from the location of the team, but also by the kind of people we're able to attract to the organization. So our analysts in both locations do exactly the same thing—meaning our global business analysts are located both in Stamford, Connecticut, as well as in Chennai, India. They visit companies anywhere in the world the same way. They communicate with each other on video, physically in meetings with each other, and then visiting companies together as well across the world. On top of that, we require the analysts to work together in global industry teams as well. The reason why we do this is that it leads to better insight of our businesses because you've got people from both developed market perspectives as well as emerging market perspectives looking at every company in the world.
Dan Newhall: You've owned a number of European companies, including some banks that, along with difficult issues throughout Southern Europe, have been in the news. How do you get comfortable with the prospects for these companies and especially when they're operating in such a difficult environment?
Rama Krishna: Yes. European companies, particularly financial services companies in Europe, are a great example of our core philosophy that significant valuation opportunity exists where there is the greatest fear and uncertainty. Now when you look at these companies—the European banks that we were looking at or some of these other cyclically oriented companies—and you subjected them to some extreme stress scenarios, even under those scenarios what we found was the business franchises of these companies were going to stay very much intact. Not only that, the balance sheets would allow them to tide themselves over this really difficult patch from an economic standpoint. And on top of that, you're getting these businesses at extremely attractive valuations, perhaps, compared to any other part of the world at that point in time.
Dan Newhall: You've recently taken a greater interest in certain emerging markets' companies. What is it that is attracting you to those stocks?
Rama Krishna: Once again, our increasing exposure to emerging markets is purely a result of us finding more attractively valued opportunities there. It is not a strategy-based decision. What has happened is, as developed market economy has recovered, and equally, interest rates in the United States rose, the other investors who were focused in emerging markets suddenly became more aware of emerging market risks and decided to sell down or reduce their exposure in those markets. On the other hand, when they did that, very clearly, prices went down, even though the long-term earnings power of those businesses hadn't really changed. That, in turn, created a new valuation opportunity for us. And as a result of which, we did research on those companies, and we increasingly and steadily increased exposure to both businesses, which we believe are extremely attractively valued.
Dan Newhall: How important is it, do you think, to be selective in picking stocks, when we talk about emerging markets or Europe, versus just sort of buying the countries or buying the regions?
Rama Krishna: We tend to be extremely selective. We go stock by stock. And just going back through our process, we run a screen that identifies stocks that at least screen statistically cheap, based on various measures of value. And it's only the 20% of that universe that we focus our research on. And then we do one big research project to narrow down the list of companies further, once we identify what the issues are and whether those issues are temporary or permanent. It's only then that we go and do the detailed research project on the companies that, perhaps, we would consider for ownership in the portfolios. And so our processes tend to be very stock specific; not country specific, or even sector specific.
Dan Newhall: So I think you've implied that your deep-value approach has done well over the past year, certainly within some of these European financials and in a few other areas. Do you think the value opportunity is as attractive today as it was a year ago?
Rama Krishna: Yes, in select stocks, for sure. Clearly, the last 12 months have been very good for our investment approach of buying deeply undervalued securities. Our view is that we are still in a catch-up mode. We still have some ways to catch up with where normal valuations ought to be for the cheapest quintile or the deepest-value companies in the universe, a result of which there's still, perhaps, some upside left for the deepest parts of the universe. That being said, the value opportunity today is perhaps not as attractive as it was 12 months ago simply because stock prices have moved higher in the last 12 months.
Dan Newhall: And, Rama, do you have any final thoughts for our investors?
Rama Krishna: First, invest in companies, not stocks. Second, be patient. You might think that you've identified some extremely undervalued companies, but don't expect that right after you buy them that everybody agrees with that. And, thirdly, don't be afraid to go against the crowd. If there is a company that everybody feels is very, very attractive, it probably isn't. In the words of Ben Graham [author of The Intelligent Investor], "In the short run, the stock market is a voting machine. In the long run, it is a weighing machine."
Dan Newhall: Thank you for your time today, Rama.
Rama Krishna: Thank you very much.
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All investments, including a portfolio's current and future holdings are subject to risks, which may result in the possible loss of the money you invest.
Past performance is not a guarantee of future results.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
© 2013 The Vanguard Group, Inc.All rights reserved. Vanguard Marketing Corporation, Distributor.
A conversation with Rama Krishna of ARGA Investment Management
In this video, Rama Krishna of ARGA Investment Management, LP, which manages a portion of Vanguard International Value Fund, discusses his firm's investment philosophy and his views on global markets.
- All investments, including a portfolio's current and future holdings, are subject to risks, which may result in the possible loss of the money you invest.
- Past performance is not a guarantee of future results.
- Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
- Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.