Justin Lowes founded Lowes Wealth Management, based in Beijing, in 2005. The company uses a classical value style to create discretionary portfolios for clients and recently launched its first retail fund.
Q. You are about to bring your first retail fund, East-West Value, into the British market. Why have you chosen to launch it in this difficult environment?
A. It was due to a combination of factors. IFAs we spoke to thought the idea of the fund was fantastic but they wanted a retail structure to be able to invest in the strategy. When we pressed the button on the fund we initially wanted a June launch but it took longer than expected. We decided December 1 was a sensible stepping off point.
In June we had moved clients 90% into cash because the macro outlook was terrible and we were in the middle of complete financial meltdown. We diversified across global currencies and went through the worst of the credit crunch in cash. If we had launched in June it would have been terrifying.
We don’t call market bottoms – you might get lucky but that is as good as it gets. There has been panic selling where people are selling good positions to cover bad. There are good companies around today and they will provide good opportunities for three to five-year investors.
Q. What is your definition of value investing?
A. The concept of value investing has morphed over the years – some approaches are not value at all. The concept rests on the distinctions of two values of a company. Value investors don’t look at the share price as an indicator. There are two measures, market cap and intrinsic value, which is more holistic and tries to capture underlying strengths and weaknesses. Markets can be driven by emotions such as fear and greed, but ultimately, company performance will be driven by the intrinsic qualities of that company.
The thing I like about value is the process of looking at the quality of a company, its margins, whether it is sustainable, the problems it faces, the advantages it possesses, and whether it has been through a downturn before. We don’t try to buy at the bottom and sell at the top, we just want to make decent returns and avoid large losses.
Q. Is value investing inherently contrarian?
A. There is a strong trend towards the contrarian in value investing – people are avoiding value stocks because they are out of favour for some reason. In 1999 and 2000 no-one wanted boring, steady utilities when they could buy dotcoms. Value is symbiotically linked with contrarianism – you may not start out contrarian but you could become so later. But you have to be wary of value traps. For example, people lost money on US housebuilders not believing the US could go through a concerted downturn. Banks have also been a value trap.
Value investing is simple – buy at a comparatively low price and sell at a comparatively high price. Psychologically, it has been hard for people to set themselves aside from the herd and take contrarian bets. People would rather be wrong as part of a herd than right alone.
Q. Value as an investment style has been out of favour for some time and many funds using this strategy have underperformed. When do you expect to see a turning point and what factors will drive it?
A. Classical value investing has never really been in fashion because the industry has been about selling the client a process whether they want it or not. To me value is fundamentally the right way to invest. I don’t care what the market does, if it will lurch downwards in three to six months and then stage a recovery, I just want to invest in a handful of the best value companies in the world. We are seeing opportunities to invest in select companies at prices that will come to be seen as attractive opportunities. That is all that matters, the rest is just noise.
Q.You typically create concentrated portfolios for clients, containing 25 to 35 stocks. Why is this?
A. Why pay an active manager who is showing he has no faith in his process by having 200 stocks to spread risk? We think having 18 stocks is sufficient for diversification. Studies have shown an extreme value portfolio can outperform, although it may be more volatile. If you don’t believe in a manager’s ability to do his job you may as well invest in a passive index tracker fund.
Q. In which areas of the market have you been finding opportunities over the last few months?
A. We take a fundamentally bottom-up approach but of course you can never disassociate from the real world. The US is further forward in the cycle than the UK so it will emerge sooner. UK housing still looks ridiculously bad but in the US less so. China is where things collide. Supply lines and the emerging consumer are strong themes arising from China’s emergence and to a lesser degree India’s emergence. GM Ford is in deep trouble but it is still doing well in China. Some companies can tap into these markets, which gives you a safety stop as an investor.
The only stock we bought in 2008 was Hardinge [an industrial firm]. The share price dropped 30% to 40% after it posted a loss of $1m (GBP 674,000), attributing this to temporary factors. We immediately bought it as we had been watching it for a while.
Q. What will happen to dividends over the next 12 to 18 months?
A.We have never invested in a stock that did not pay a dividend. We will consider stocks that are good value irrespective, but they would have to be exceptional to compensate for the lack of dividend. Theoretically we would consider non-dividend paying stocks but we like the income stream we get from the portfolio. We do not have a policy on dividends so I am not in a position to make predictions on them. They are just a bonus for us. We bought Lloyds in December 2005 when it was paying 7.2% and sold it when the share price went up 25%, regardless of the high dividend.
Q. What is your outlook for the global economy for 2009?
A. UK households need to save and reduce their debt but not save too much – they have to keep the economy going. Defaults on US car loans will start to filter through – there will be defaults in areas other than home loans.
There are a lot of problems that won’t be solved yet. It will be a difficult process but as a result of widely-reported problems there has been fear and forced selling, resulting in marked down prices for companies. There is a lot of low-hanging fruit when looking for the 35 best value companies in the world. Sustainable companies at the prices available today will produce wonderful returns.