Q: What is the history and mission of the fund?
I launched the Oppenheimer Global Value Fund on October 1, 2007, and have managed it since. Currently, the assets under management total about $570 million.
We officially refer to the MSCI All Country World Index as a benchmark, but I am completely benchmark agnostic. I never pay attention to the index or to what other funds are doing.
People come to professional money managers because they need more money to feel financially secure. My mission is to make money with money, to help people achieve their goals.
Q: How do you define your investment philosophy?
Every great investment starts by buying something for less than it’s worth. The idea of investing in growth, or core, or value, or a certain market cap is about achieving returns. When people choose a way to invest, it is because they think their choice represents a better return.
I look at the world as one stock market, and set out to find the best 40 to 60 ideas I can. How the allocation ends up is predicated on the ideas I find, not on where I think I ought to be. I own my best ideas wherever I find them.
Good companies generally start the same way, irrespective of geography: people getting together over a great idea, putting money and sweat equity behind it, and bringing it to fruition. I have found great companies in countries all over the world.
That said, I would value Amazon in Argentina differently than Amazon in California, because the legal, political, and regulatory environments are different. That affects what something is worth.
The bottom line is it is all about buying at a discount. I want to see a large gap between where a company is trading and the value of the overall business. That’s how to engineer great returns—buy something for less than it’s worth.
We never own something just because it is growing, with no regard for price. We believe that managing volatility leads to suboptimal returns long term. I accept higher volatility because, in the hands of a good investor, it leads to higher returns.
Q: What is your investment process?
I see great investing as opportunistic, so mine is a fundamental, bottom-up stock-picking approach. Over my 17 years at Oppenheimer, I have identified three questions we have to answer correctly in order to secure a great investment.
One: Is this business worth owning, ever? Certain businesses just aren’t worth our time, ever, at any price, where there’s either no advantage to be gained or the economics or return structures and the competitive landscape are poor.
Two, and this, to me, is most important: At what price is this business worth owning?
Three: Is the management team working for the shareholders? If they’ve made acquisitions that make no sense, or a long series of failed acquisitions, or if incentives are based on things that can be too easily manipulated by accounting tricks, the management team is not working primarily for shareholders.
Within a universe of about 67,000 companies, I have done detailed work on and visited thousands, generating a list of 700 to 800 companies that I am willing to own at a certain price. Within that, I need to find 50-plus good ideas that might matter. I don’t have to distill the entire ocean to find them.
I determine how we would value it. My key valuation metrics are private market value and LBO (leveraged buyout) types of valuations, and I start from a place that is devoid of sentiment and emotion.
Q: Can you illustrate this process with a few examples?
Alphabet Inc, the parent of popular search engine Google, I bought a few years ago. Google had just identified a key opportunity in the market, data centers, and invested $10 billion in building a web services business for commercial entities.
That dampened their margin by about 10% for one quarter, and the sell-side community went nuts. The stock halved over the next two or three months and was trading on a price-to-earnings ratio (P/E) of 6 when I looked at it.
Back then, based on its metrics, it was classified as a value stock. I wrote a piece about two companies, Company A and Company B. I modeled Company A after Google, trading at a P/E of 6, with an all-cash balance sheet and significant equity, and no debt other than working capital. It had significant asset value, including numerous physical assets as well as intangibles that had had market offers before, so they were easy to price, and was trading at about eight or nine times EBITDA.
Company B, on the other hand, I wrote, had 55% operating margins, was growing the top line compounded over the previous decade at 39%, generated double-digit net margins and operating cash flow of several billion dollars a year, year in and year out, which was growing at about 50% a year. That, I stated, would classify it as a growth stock.
Notably, both Company A and Company B were Google when I bought it—both descriptions fit. This is why I don’t care if something is considered to be value or growth.
What people missed was that Google’s decision was purely discretionary. They could have decided not to, and their margins would have remained 50%-plus, boosting earnings and accumulated reserves.
The market valued Google as if that cash didn’t exist and there was no value in what they were creating, despite Google having a long track record of spending money wisely on behalf of shareholders. We chose to be unemotional about the valuation and it paid off. Now, it’s up about 250%.
Q: Would you share a contrasting example, in another industry and country?
Barely a year ago, Alibaba Group Holding Limited, a Chinese e-commerce company, was trading at $57 a share. I had been to China to visit Alibaba pre-IPO, and when it first came out at IPO, I wasn’t that interested. It wasn’t clear to me whether its corporate governance was appropriate and if the fundamentals of the business were trustworthy.
I continue to analyze the business, talk to management, and keep a handle on what was going on there, however. And then, come August of 2015, concerns about China arose. The Chinese macro environment and the entire Chinese internet space underwent a fairly tumultuous period, with one quarter in complete chaos, and the share price of Alibaba fell from about a $120 down into the $60s. At that point, I took a small piece.
The week before, I happened to have been in China, meeting with the management teams of JD.com, Alibaba and Baidu, and meeting with various analysts on e-commerce and the Chinese internet. By the time I got home, prices had fallen 30% or 40% in some cases.
Over the ensuing year, the fundamentals continued to strengthen, although the Chinese internet and e-commerce names had a problem with revenue quality and fake goods, similar to what eBay suffered during its inception. These were solvable problems, so I wasn’t overly concerned.
The fundamentals of the business were steadily improving and the valuation was falling. That’s a situation I look for. Then, last year, Alibaba had one bad quarter. They made some investments that impaired the cash flow and earnings for a quarter, and the stock fell from north of $90 to as low as $56 or $57 a share.
At that point, I was looking at the largest e-commerce company in the world, the largest provider of wireless services to corporates, with substantially improving quality, corporate governance, a ton of optionality, and the financial equivalent of Visa or MasterCard. I bought a position up to about 300 or 350 basis points, and it has since tripled.
While I had established a price target, it was not so much a firm target than a conservative approach to valuing the business. That way I know I am always fairly well protected on the downside.
Q: What if a stock’s price drops?
Because I focus on the overall value of the business, if it dropped, I would be buying it the entire way down, and at the bottom, I would be extremely aggressive in my purchases.
The valuation, and the reason why I have migrated to the approach I take on valuation, is because it does tend to withstand the test of time. One of the most important things I learned when I came to Oppenheimer Funds was to focus on operating cash flow, which is a difficult number to manipulate. Working out to private market and LBO values from operating cash flow yields a number that withstands the vagaries of sentiment and emotion that the market is subject to over cycles.
Q: What is your portfolio construction process, and does diversification play a role?
Portfolio construction is an art as well as a science, something that differentiates good stock portfolio managers from simply good stock pickers. Portfolio construction is a great alpha- and return-generating tool. For instance, when we find a good idea with a high probability of significant upside and little probability of downside, owning a lot of that name leads to a very different outcome versus owning just a little. I always look for names that I can own with conviction.
The other key aspect of portfolio construction is that position size is a good risk management tools. Risk management is embedded in everything I do—what I am willing to own, what I am willing to conservatively pay, and the work I do to evaluate a business’s people, weight the fund, and construct the portfolio.
I tend to weight the portfolio by upside/downside conviction, with a bias toward quality. I can own 50 to 100 basis points of a name in the fund with a higher range of outcomes as opposed to 300 basis points of a name. Where I see an opportunity, where I see crazy prices for businesses with little downside and very large upsides, high-quality established seasoned companies that are misunderstood and misvalued by the market, then I will own more.
The benefits of diversification are clear and indisputable, but one needs only about 20 stocks to get the majority of diversification’s benefits. Being overly diversified yields little chance of ever outperforming, and most investors are over-diversified. I run a more concentrated fund, right now at 40 or 41 names. I am diversified enough to mitigate downside risk but not so much that I can’t generate good returns.
Q: How do you define and manage risk?
Risk to me is about investing risk, whereas using volatility- and benchmark-relative measures speaks more to career risk than investment risk. When people measure volatility, they measure it relative to an index, which means that index-oriented thinking is embedded in their investment and stock selection philosophies—that approach is wholly about career risk.
Investing risk is losing money, buying the wrong thing at the wrong price and aligning myself with people who don’t treat me well as a shareholder. Investing risk comes in two forms: financial risk and operating risk. Financial risk is a good business with a bad balance sheet. The business is good, but the balance sheet impairs the business and must be fixed. It is a solvable problem when in the hands of smart, hardworking people.
Business or operating risk is when the business has, say, a competitive entrant changing the industry structure, or the company has to recover from a bad decision, but the balance sheet is good and provides sufficient latitude to solve the problem.
A company with both financial and business risk—a struggling business with a bad balance sheet—is a recipe for investing risk, for losing money. Most of our investing opportunities come from having one of the two, coupled with low market value, giving us the opportunity to buy at the right price.
