ChampionsNews: Value investing has spent a fairly long period of time in the doldrums. Last year, the S&P Value Index underperformed the S&P Growth index once again, despite the correction in technology stocks. This situation is unchanged from previous years. Why was the ACATIS AKTIEN GLOBAL FONDS (ISIN DE0009781740 ), your equity fund which focuses on value, barely affected by this trend?
Dr. Leber: Over the past few years, we have developed our value strategy further as we believe that the weakness of value shares is more than just a prolonged phase of underperformance, which will soon be over. If we look at ten-year rolling yields since 1936, we can see that value as an investment style has never before underperformed growth over such a sustained period as it has in recent years. We don’t think that this is a coincidence. Rather, it is crucially related to the technology-driven disruption we are seeing in virtually all industries. In all likelihood, it constitutes the most significant upheaval since the Industrial Revolution. This is something to which we as investors need to respond to.
ChampionsNews: Can you name a few examples of this transformation?
Dr. Leber: Business models which worked well for decades and recorded steady growth are under attack from the new platform businesses. The castle moats to which Warren Buffett referred to are suddenly being demolished in many industries. Where the major food manufacturers previously used to divide the supermarket shelves between themselves as they were the only ones able to afford the listing fee, they are all of a sudden facing competition from companies such as mymuesli in Germany or Dollar Shave Club in the US. It begins with competition on the internet via online shops and platforms such as Amazon and Ebay, and at some point, the supermarkets start including brands derived from them in their own range because customers ask for them. While this does not spell the end of Kellogg’s, Nestlé or Procter & Gamble, it does mean that their growth may be hampered significantly as a result. Forecast corrections such as those lead to perceptible price slumps. AirBNB has turned the entire hotel industry upside down without having to build a single hotel. Record stores have long been consigned to history, download platforms are essentially heading down the same route since streaming services such as Spotify are taking their place. Internet banks such as Bank 26 or Google and Apple Pay pose a threat to the business model of American Express and the traditional banking business in general. The list could go on indefinitely. Take a look at the German automotive industry. E-mobility is expected to make more than 100 years of competence in the combustion engine and gearbox construction obsolete. And so, we won't be able to simply buy a Daimler share because its PER is seven and its dividend yield totals six percent.
We invest only if the discounted cash flows expected in the future result in a higher value for a company than is being paid on the stock market.Dr. Hendrik Leber
ChampionsNews: How exactly did you respond to the developments outlined above in the ACATIS Aktien Global Fonds?
Dr. Leber: ACATIS has been and remains a clear value investor; nevertheless, we have to include these new developments in our analysis. The question as to whether a business model is viable assumes greater importance than it once did. Although future earnings have not become the only factor overnight, their importance has grown. This does not mean, however, that we follow just any growth trend. We invest only if the discounted cash flows expected in the future result in a higher value for a company than is being paid on the stock market. In this way, we are staying true to the principles of value investment but we are moving them into the 21st century. We call it Buffett 2.0. Incidentally, Buffett himself now invests in Apple after abstaining from technology stocks for many years.
ChampionsNews: And what stocks are in your portfolio? Do you still favour the likes of Facebook, Amazon, Apple, Netflix or Google or Alphabet, FAANG for short?
Dr. Leber: Absolutely. Our fund does not include all of them, but it does have Alphabet, for example, as well as Microsoft. We had some Apple holdings but took profits before the last sales warning. Alphabet as well as Microsoft benefit hugely from their cloud services and the artificial intelligence applications they are able to offer their customers. One of the reasons they are predominant in this field is because they have a huge treasure trove of data, Alphabet in particular. But we wouldn't buy Facebook. Although it enjoys a monopoly-like position, it is subject to certain trends in the zeitgeist. It is highly uncertain whether, in future, people will want to continue putting everything online. Moreover, the younger generation is now not so much found on Facebook as on Instagram. Although the online platform belongs to Facebook, it is difficult to predict whether the same kind of advertising revenues can be generated. The situation is different for Google as the search engine of Alphabet. The company is already our permanent companion when we need information or directions. This is unlikely to change.
ChampionsNews: Some of your critics claim that you no longer practice any real value investing. What would you say to them?
Dr. Leber: I would quote Warren Buffett. It is worth recalling what this value investors’ value investor wrote in the annual report of his investment holding company Berkshire Hathaway in 1992: “Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” We view this as fuzzy thinking. In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. Typically, value investing connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.” In a setting characterised by technological change, the subject of growth assumes huge importance. We take this into account through Buffett 2.0.
Author: Dr. Hendrik Leber and Yvonne Raßbach
Date of issue: 5/2/2019