Matthew Fine, CFA, Portfolio Manager of the Third Avenue Global Value Strategy, recently joined fellow value managers in the Citywire Value Equities Panel to discuss the state of value investing today and share perspectives gathered from decades of global value investing.
Question: What does value investing mean to you and what may be an area of greater focus within the value investment discipline that you specifically lean into?
6:36 – Matthew discusses the importance of having a flexible global mandate and explains what it means to be a price conscious value investor. Our goal is to pay a substantial discount to our conservative estimate of the net asset value. Often times, we will be investing in companies that have strong balance sheets but also have a challenging near-term outlook. A lot of what we do looks and feels contrarian and special situation in nature.
Question: Many of you have been in the industry for a few decades. You’ve seen value investing over the course of time. How has value investing evolved? Are you using any different tools? Are you seeing a difference in the opportunity sets?
12:33 – Matthew speaks about the Tech, Media and Telecom (TMT) bubble of 2000 and witnessing the pressures exerted on value investors to evolve. Matthew explains how Third Avenue has stayed true to our philosophy despite the pressures to change.
Question: What are the risks that you are thinking about in the current environment?
17:25 – Matthew notes that he is not concerned about market risk, but rather the individual business risks within the portfolio. The market is incredibly influenced today by extremely expensive, U.S. large cap companies. When compared to our benchmark, MSCI World, our portfolio is 99% active share, has more exposure overseas, and has a weighted average market cap that is about one-third the size of the benchmark’s.
Question: I wanted to discuss the client perspective and I think rates are just a great segue for that. Do you know what else is top of mind for your clients? What are some of the conversations that you’re currently having?
28:30 – Matthew shares two observations about the equity market. One is that value strategies have not done badly but have been overshadowed by the high returns of U.S. large cap stocks. The second is that there is no historical link between interest rates and growth bubbles, and that the current narrative is specific to this tech bubble. Matthew closes with the fact that in 2022, the Third Avenue Value Fund produced its strongest relative year of outperformance in its 32-year history and explains that not all value strategies experienced outperformance in 2022.
Question: Can you discuss a recent investment case you encountered where you found hidden value in a company that the broader market may have overlooked?
43:09 – Matthew explains that he believes the value investing landscape may have changed throughout the past 10 years. The value space has become fundamentally less competitive with funds shrinking, people retiring and the lack of a younger class of analysts being trained in value investing. Matthew references a David Einhorn interview where David stated that historically value managers would benefit from the value accretion going on in the economics of the business, and that would grow value, and then somebody would come and discover that we were right, and the fundamentals of the business are there, and they would rerate it, and we would get the benefit of the economic value plus the rerating. Matthew is perfectly satisfied to operate in an industry that offers value opportunities producing strong economics relative to our purchase price.
Question: Where are you seeing the greatest opportunity for value today?
51:18 – Matthew explains that cheap stocks appear very attractive compared to expensive ones, especially in non-U.S. and small-cap markets. This is a rare opportunity to benefit from a value reversal, as happened in 2000.
Question: Can anyone speak to overseas value investing, including developed and developing? There appears to be significant value opportunities overseas with high dividends and compelling values. How do overseas markets compare to value investing domestically?
55:42 – As a bottom-up investor who manages the Third Avenue Value Fund Matthew states he is finding more value outside of the U.S., especially in smaller-capitalization stocks, in places like Japan, Europe and Latin America.
Question: You all talked about the evolution of value at the beginning of the call. Looking at the past 3 to 4 years, it seems to mirror what happened in the late 1990’s, when high valuation, growth-oriented tech stocks were outperforming just before the powerful value rally that ensued from 2000 to 2008. Is a valid comparison? History doesn’t repeat, but it seems plausible, especially with higher interest rates. Do we think this time period of value is a valid comparison to today?
1:00:27 – Matthew notes that the current stock market situation is similar to the late 90s, when there were huge gaps and anomalies in the prices and performance of different stocks. Matthew adds that he doubts interest rates will affect this situation and compares it to the dot-com bubble that burst without any clear trigger.