It works because people are emotional and not analytical.
It works because people blindly project recent events indefinitely into the future.
It works because people tend to shy away from considering investments that have known problems.” Richard Pzena, Pzena Investment Management, Q2 2022 Earnings Call
In early February 2022, we started buying a small position in listed US Value manager, Pzena Investment Management Inc. The company had a market cap of $650m with net cash and investments in their funds of $170m meaning we were effectively paying an enterprise value of $480m for a business that generated $76m in FCF in 2021 – free cash flow yield of 12%
It was pretty contrarian buying shares in an illiquid, value manager when value was already out of favour
But they were growing AUM, at a time when most value managers (like us) were losing assets +20% in 2021 to $53bn
And I had great respect for Rich Pzena, a guru in the Value space
20 days later, Russia invaded Ukraine, and over the next few months, the MSCI World Index fell 16%, and the price of Pzena fell 30%
Did we buy more?
No, unfortunately (and unusually) not. We had lost 10% in Russian equities and were funding redemptions to some unhappy clients by selling slices of most holdings. Buying more of an illiquid asset manager didn’t seem prudent under the circumstances
However, we never sold shares in Pzena to fund those redemptions
Meaning remaining clients retained their weighting in the company despite the 30% fall in price
A few months later in July 2022, we received a cash bid for our Pzena shares at a 43% premium to the market price at the time
So, although buying just before a war was unfortunate timing, we still recouped our investment and added value on a relative basis – limited downside is one of the benefits of Value investing 😉
If you’re thinking about allocating money to Value amidst a rapidly changing and risky AI landscape, here’s a stat that may interest you to act decisively
At the peak of the dot com bubble in 2000, Pzena had underperformed for 10 straight quarters and were 60% behind the S&P 500
By the end of 2000, they were ahead
That’s how quickly performance can turn
There are many other nuggets of wisdom in another great Stephen ClaphamBehind the Balance Sheet podcast with Rich Pzena
And for all entrepreneurs out there, listen out for what he says about “failure” – he’s on the money
Enjoy