By Niki Natarajan
value investors stole the show at the recent InvestHedge FoHF
Awards in New York, "I got to thinking," as Carrie Bradshaw of
Sex and the City would say. I got to thinking about something
that Kathleen Phillips, president of Berens Capital Management,
winner of Fund of the Year, had said earlier that day at the
Global FoHF Forum: "Value is not cyclical, it is timeless
– it just takes patience."
A simple statement that turned my view of value investing on
its head. To be honest, my meagre textbook knowledge comes
straight from the teachings of Graham and Dodd and until now, I
too held the common view that this type of investing is
But now the human element of patience has entered the
equation, my mind is racing: surely this type of Warren
Buffett-esque intrinsic value analysis is qualitative and
therefore down to an individual’s judgement? Does
it take into account the people that do the work? If so, how
much of a company’s value is based on these
people, their values and their culture? Is value investing
really based on personal value systems of the analysts?
Berens and van Biema Value Partners both made their
award-winning returns in 2010 through value-based investments.
But based on Kathleen’s comment, I got to thinking
not about what defines value but who defines value?
I bring this up as yet another caveat emptor. This time on
the back of the wind of M&A that is starting to gather
pace, again. As BlueCrest Capital Management recently spent a
fortune buying its 25% stake back from the Man Group, one has
to wonder how much real value was added by that deal except to
the listed coffers of Man?
If life is indeed cyclical, one might want to look at
International Asset Management and Cadogan Management, both of
which have managed to extricate themselves from Fortis and are
now flying solo again. What lessons did they learn about life
under a bank owner?
While bank ownership (with 25.7% of the InvestHedge Billion
Dollar FoHF Club wholly owned by banks) has the benefits of
distribution, one needs to check who is in charge of investment
strategy. It takes a really savvy investor like Natixis to buy
a business and know where the value really lies. Its stake in
Aurora Investment Management seems to be paying off as the
group is nominated year after year at the awards, largely
because the original investment team is motivated to keep doing
what they have always done.
What Berens and van Biema seem to have in common –
aside from winning multiple 2010 awards – is that they
are still run by the founders, who are likely to have a lot of
their net worth at stake, as well as quite a lot of their
identity invested. What few realise is that if firms such as
these are ever sold unless the ethos, values and culture have
been engrained into the new leaders, much of what made the firm
successful will leave or retire with the founders.
While the processes may be repeatable, one needs to know how
much of it comes from the founder’s finely honed
gut instinct. Fund of funds, arguably more so than hedge funds,
are driven by people, the chemistry of which is as fundamental
to success as the process. Groups such as Aurum Fund Management
take so much time to ensure their hires are of the right
quality because they know on a value-based level that the
longevity of the business and returns is all about people.
So as the race to consolidate gathers momentum, one look at
the names of the most recent InvestHedge Awards will show that
those that have won or been nominated over the last nine years
are those where there is a discernable (positive) imprint of
the founder’s personal values.
Adam Smith had a very interesting take on the paradox of
value, also known as the diamond-water paradox. Although water
is generally regarded as more useful, in terms of survival,
than diamonds, the latter commands a higher price in the
market. In funds of funds, I would argue that it is the
people-assets paradox that is the one to watch.