ChampionsNews: Mr Keppler, the Global Advantage funds are based on your Top Value strategy. Which criteria do you apply? Are there discrepancies between the strategies of the two sub-funds Global Advantage Funds – Major Markets High Value (LU0044747169 ) and Global Advantage Funds - Emerging Markets High Value (LU0047906267 )?
Keppler: Our Top Value strategy is based on the findings of the American finance professors Benjamin Graham and David Dodd that were published as early as 1934 in the book “Security Analysis”. They form principles of security analysis that according to Warren Buffett, Graham’s most famous pupil, will still be valid 100 years from now – they wouldn’t be principles if they didn’t.
We have shown in many trade publications that the findings of the two finance professors, which related to the US capital markets, are just as relevant for international capital markets and we have been applying them since the foundation of Keppler Asset Management in 1992 not just for single securities but for entire stock markets in the developed and the emerging world: a combination of stocks or stock markets that are cheap compared to their intrinsic and earnings value will outperform capitalisation-weighted portfolios due to the higher growth rates of their underlying book values, cash flows and earnings. The average annual total return (price increase + dividend yield) of the stock markets we have classified as “top value”, for instance, amounted to 13.8 percent in local currencies and 11.3 percent in Euro over the 48 years since the first calculation at the beginning of 1970 until the end of 2017, outperforming the market capitalisation weighted MSCI World index, which returned 8.2 percent in local currencies and 7.0 percent in Euro, by more than four percentage points.
The study over the entire research period is available free of charge from:
Keppler: We measure the attractiveness of an investment at four different valuation levels: absolutely, relatively, in relation to its own track record and compared to the relative track record. The analyses of the developed stock markets yield the same results as the analyses carried out in the emerging markets. If anything, the top value markets in the emerging universe offered an even greater performance advantage. Interestingly, the excess returns were achieved with below-average loss expectations.
ChampionsNews: How do you select the individual securities after having identified the respective top value markets?
Keppler: In stock selection, we must first ensure that we really represent the relevant market. We achieve this by aspiring to a sector neutral portfolio for each top value market. Sector neutrality at the country level enables us to keep macro risks at bay. At the overall portfolio level, however, sectors can deviate substantially from their benchmark weight. That is also intentional where sectors are cheap. Generally speaking, we favour cheap stocks in our stock selection. That is only a marginal value tilt, however, since the attractiveness of the overall portfolio has already been ensured by our focus on the top value markets.
ChampionsNews: Why do you believe that active market selection is more promising than direct security selection? Does this help you to better identify and avoid market risks?
Keppler: The market selection process is the clear performance driver in both Global Advantage funds. Experience has shown us that an average stock in a cheap market can be expected to outperform a top player in an expensive market. Equal weighting and the focus on cheap markets enables us to reduce market specific and political risks. We cannot avoid them altogether, though, since unexpected events have a habit of cropping up from time to time.
ChampionsNews: Which countries and sectors do you currently favour in the Emerging Markets and the Major Markets High Value sub-funds?
Keppler: Both sub-funds are broadly diversified. In the Emerging Markets High Value, we currently hold 214 stocks, mainly from the following eleven countries: Brazil, Chile, China, Colombia, Korea, Malaysia, Poland, Russia, Taiwan, the Czech Republic and Turkey. The Emerging Markets High Value currently trades at a 24% discount to the MSCI-EM index and a 37% discount to the MSCI World index which captures the developed markets.
The Major Markets High Value currently holds 237 stocks, mainly from the following ten countries: Australia, Germany, France, the UK, Hong Kong, Italy, Japan, Norway, Singapore and Spain. Berkshire Hathaway, the only US stock and our largest position with close to 10%, is an exception. The Major Markets High Value currently trades at a 20% discount to the MSCI World developed countries index.
Author: Michael Keppler, Keppler Asset Management, and Timo Lüllau
Date of issue: 5/24/2018
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