Distinguished Speaker Series: Jean-Marie Eveillard, First Eagle Funds

Value investing makes sense; it works over time, so how come there are so few of us?

On August 9th, CFA Society Chicago welcomed Jean-Marie Eveillard, senior investment adviser to First Eagle Funds, at the Chicago Club. The famed investor behind $110 billion First Eagle Investment Management has long believed that value investing can be a lonely place.

The septuagenarian still follows the advice of Warren Buffet and his predecessor Benjamin Graham. “The best book on investing ever written is [Ben Graham’s book] Intelligent Investor,” he said. Despite the sustained popularity of those pioneers today, pure value investing is becoming increasingly rare, Eveillard said.

Value investors must shun the wisdom of the crowds, and more importantly, they must be right. Sometimes value investing is fashionable, oftentimes it is not. Eveillard estimates that only 5% of the investment industry practices value investing. The limited embrace of a value tilt is partially due to the career risk portfolio managers face when choosing out-of-favor stocks. Sometimes investing in these stocks may take years for an investment thesis to play out, and asset owners are frequently less patient. The fear of losing a job causes herding into more socially acceptable stocks, and this dynamic makes it very hard for an investor to commit to value. This often tilts mutual funds towards becoming “closet indexers”, said Eveillard.

Eveillard discussed how he uses both qualitative and quantitative in his process. As a value investor, he marches to the beat of his own drum, eschewing the tactics used by marketing-focused money managers.

Jean-Marie Eveillard, First Eagle Funds

“I never spent a penny on advertising,” said Eveillard, contrasting his near singular approach to investing to more commercially-minded mutual fund companies. In his talk, which connected his years working in the industry with the thinkers that most influenced him, one area mentioned was the Austrian school of economics, particularly its 1974 Nobel Prize winner Von Hayek. Margin of safety was also mentioned, with Eveillard saying that it was the secret of strong investors.

Interestingly, Eveillard reckoned that a great deal of his success as a portfolio manager didn’t come from the stocks he picked; it came from what he didn’t own. Eveillard cited a number of examples such as Japanese stocks in the late 1980s, tech stocks in the late 90s, both of which he avoided. Eveillard was asked if he thought there is currently a bubble reminiscent of the late 1990s in today’s tech stocks, and Eveillard opined that today isn’t as bad as the dotcom bust era defined by the epic failures of Webvan and Pets.com.

Covering his use of qualitative data, Eveillard told a story about Enron, saying that he asked a research analyst on his team to look into the firm for a possible investment. The analyst found Enron’s statement footnotes incomprehensible, to which Eveillard responded that if that was the case, they’d move onto something else and wouldn’t invest.

Eveillard noted that so many of the numbers you see in accounting estimates are estimates. He said that in the late 1990s, he would often spot crafty CFOs who would observe the letter of the regulation, but not necessarily the spirit. In some ways, Eveillard said, accounting is more a reflection of a cultural mindset, with more conservative, risk-averse cultures taking earnings provisions on potentially low risk items. A good international investor needs to be mindful of the cultural differences in preparing accounting statements.

On the Efficient Market Hypothesis, Eveillard said that “it denies human nature.” He’d often debate the EMH with his academic friends and they would say that although they might agree, they needed to find a new theory before abandoning an old theory.

He mentioned the topic of moat, a means of ensuring that a company has a long run sustainable advantage. One reason that Warren Buffet rarely sells stocks is because it is hard to find companies with sustainable advantages, and once one is identified, an investor simply needs to be patient.

Given the strong outperformance of growth vs value stocks in the US over the past decade and the dearth of dedicated value investors, a change in investor mindset might be needed before value investing returns to vogue. But patient investors such as Jean-Marie Eveillard will be willing to wait it out.

Distinguished Speaker Series: Brian Singer, CFA, William Blair

CFA Society Chicago hosted Brain Singer, CFA, on July 19, 2017 at The Standard Club to present on the topic – Riding the Waves: Dynamic Asset Allocation (DAA) and Evolution of Top-Down Investing.

Singer is the head of the Dynamic Allocation Strategies team and a portfolio manager at William Blair where he shares responsibility for strategy setting and portfolio construction across all DAS portfolios. He serves on the endowment investment committee for Exeter College at Oxford University and on Rehabilitation Institute of Chicago Foundation’s board. He is also the chairman of the “Free to Choose Network.”

In 2015, Singer received CFA Institute’s Distinguished Service Award and has formerly served as a board member and chair of the CFA Institute board of governors. He has written extensively on global portfolio, currency, and performance issues. In 2015, he was also inducted into the Performance and Risk Management Hall of Fame by The Spaulding Group.

While the hot debate of traditional active vs. passive consumes most talks in the investment industry, Singer focused on the other leg of liquid investment strategies, Liquid Alternative Investing. He focused his presentation on the following four broad strategies:

  • Risk Parity;
  • Smart Beta;
  • Risk Premia; and
  • Active currency.

Quest for a superior investment strategy has given birth to many new ideas and terms that have changed the investment landscape as it was known two decades ago. After the advent of efficient market hypothesis and rise of CAPM, we now live in the world of smart beta and where CAPM is seen as dead by many. However, Singer believes CAPM is not all that dead. He advised to consider long-term horizons rather than the short-term when evaluating the relevance of CAPM as his initial remarks. He expressed how Modern Portfolio Theory post financial crisis has been seen as wounded where risks are known to be non-static and non-symmetric and that tail size does matter. He recommends focusing on the Macro investing models with dynamic allocation strategies for dealing with systematic risks in line with return expectations.

He re-iterated validity of CAPM while discussing risk parity strategies from a passive (35% Global Equity – 65% Global Fixed Income) and an active (traditional asset allocation) standpoint.

He also presented how the understanding of betas and alpha in the pre and post CAPM world has changed. In the advent of Smart Beta – Systematized Alpha, he cautioned against considering it as a free lunch and discussed smart beta strategies. He noted that such strategies aim at exploiting “Persistent” systematic risks following an auto-pilot strategy. He also cautioned against them as being static in nature relying on back tested rule sets. Further along in the presentation, he explained how such narrow rule sets can bring about volatility and fragility in the investment process and later provided recommendations to overcome such issues.

While discussing the risk premia strategy, Singer stressed on macro diversification based on fundamentals with a long term focus. For the short term, he advised to utilize unique rule set disciplines to navigate a dynamic path and ignore the media ripples which tend to make investment management process more fragile. He explained differing strategies using an example of a village at the foot of a mountain facing the risk of an avalanche taking extreme actions such as complete evacuation of the area vs. building fences to contain the snow to tackle the risk. He discussed different strategies to cope with risks faced in the investment world based on narrow vs. broad rule sets and impact of such rule sets on the overall investment process and asset allocation.

The speaker also spent a fair amount of time to share the active currency investment strategy. Despite not being an asset class, Singer explained that active currency investment is an effective alternative investment strategy as correlation of passive and active currency with assets is very low. He noted that currencies tend to converge to equilibrium prices (using PPP and IRP) faster (average of ~4-5 years) compared to assets (average of ~8-10 years). He presented varying half-life of currencies and asset classes along with correlation of USD index with monthly MSCI returns being as low as 30%.

He shared his Antifragile Investment Process methodology consisting of identifying and assessing opportunities of value to price discrepancies and designing portfolios with integrated risk exposures. He noted that such investment processes are dynamic, imperfect, progressive and make use of evolving tool set stating it to be analogous to growth of a living organism.

Singer also shared the idea of forming an Antifragile Investment Team for which “cognitive diversity” is key as he believes such team resources back multiple ideas using “wisdom-of-crowd framework” for survival. Such teams work continually to Research, Implement, Perform and Review numerous ideas as opposed to fragile teams which resources back few ideas that cannot afford dismissal.

He concluded by making a recommendation to identify market inefficiencies as dynamic investment opportunities stating: “There needs to be a level of market inefficiency to have market efficiency”. He again stressed on following wider rule sets for asset allocation decisions for a less fragile investment process.

At the end of the presentation he commented on the following questions from the audience:

Big Geo-Political risks to consider

  1. Domestic to US – Impact of proposed regulatory changes to Volcker Rule which may cause tail risk.
  2. International – Follow European Union market especially outcomes of the Italian Election and monitor the risk of national banks going bankrupt.

How to tackle Behavioral Risk?

  1. Incorporate it in Risk Premium.
  2. Since behaviors cannot be predicted, focus on identifying significant behavioral shifts – both frequency and magnitude of signature behavioral shifts.

Near term opportunities in Active Currency

  1. Short on Developed market currencies including USD (currently expensive).
  2. Long on Emerging market currencies.