Saturday, November 18th, 2017

Cundill Value Fund – loaded with bargains

In a recent commentary from Andrew Massie, lead manager of the Cundill Value Fund, he highlighted two of the major themes the fund is currently following – the recovery of US financial institutions and the values available in some large technology companies.  I have provided a few of the questions and answers below and my short commentary for each to help you understand its meaning for your investment.

Investing today is a little harder than it was in 2009 and 2010. How are you approaching the market?

Andrew Massie: Our approach is the same today as it was when the Value Fund was launched in 1975. We still look for cheap stocks like Bank of  America that people don’t necessarily want to hold. But we’ve done our analysis and believe the opportunity to make money is going to be terrific.

Dave: The Cundill style has always been to seek out unloved and severely under priced shares.  This happens when most investors are pessimistic and the share price has been sold down substantially.

Let’s look specifically at your US bank stocks

Andrew Massie: We think the opportunity in our US financial holdings is still strong, simply because they’re cheap — absolutely cheap. Bank of America, JPMorgan and Citi, are all trading below what our estimate of their net asset value actually is. And on top of that, there are real break-up possibilities at B of A and AIG is selling off core assets. In fact, while their share prices have rallied hard, book values have grown tremendously leaving our US financials trading at the same valuation today as they did in the first quarter of 2009 during the financial crisis.

Dave: The companies Andrew refers to are currently priced at panic low levels.  I expect the fund will hold these companies for at least a few years as it will take time for the recovery Andrew sees to be fully realized by many other investors.

Are their balance sheets healthier today than in 2008?

Andrew Massie: Their profile has improved dramatically. Assets to shareholder equity, was at 25 to 35 going into the financial crisis and is now in the low teens. By that measure, and price to book they look better than Canadian banks. We’re also seeing the banks’ fundamentals improve every day. US housing indicators also seem to have bottomed with the news tilting slightly to the positive. This is an  important element to long-term improvement that they can take advantage of.

Dave: Most investors are still shying away from these companies as their impressions are still dominated by events of a few years ago instead of present information.  The Cundill deep value investing style is designed to profit from the judgment errors of other investors.  The best opportunities are created during dramatic changes such as the recent US financial crisis.

Let’s take a closer look at Dell

Andrew Massie: Dell has increased its NAV by more than 50% since we bought it, and has bought back north of 14% of its stock. Michael Dell also continues to buy the stock, so we are assured that our interests are aligned. He has a laser-like focus and we think Dell will be at the crossroads in trends of digitalization and mobile connectivity.

Dave: At the turn of the century when many investors were desperately buying technology stocks at any price, the Cundill team was staying away from such overpriced shares.  As tech stocks fell dramatically since then, companies like Dell and Microsoft grew their businesses dramatically.  The combination of much lower prices and much higher value has recently led the fund into a few tech companies.

What do you like about Microsoft?

Andrew Massie: There are few companies, if any, capable of compounding earnings per share the way Microsoft does and still sell at single-digit earnings multiples. And there are very few businesses with the solid EPS and NAV growth potential of Microsoft at the type of multiples that deep value investors salivate over, with a margin of safety.

Dave: The five companies Andrew Massie mentioned above are all in the top ten holdings of the fund and represent about one third of the fund’s investment value.  The Cundill style is generally concentrated on about thirty investments in which they have a great confidence. For more than three decades their approach has served investors well and this fund is one of my favorites.

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