IVA’s Charles de Vaulx on Global Economy, Markets, and Value Investing

Barron’s recently reprinted the transcript of value investor Charles de Vaulx’s recent conference call with financial advisors. De Vaulx is chief investment officer of International Value Advisers (IVA). The call focused on recent market and economic changes, the firm’s performance (including its Worldwide and International portfolios), why IVA is holding cash, and why it has added to its gold holdings.  De Vaulx maintained that “value investing – if executed properly – is more relevant than ever” because of forces such as widening credit spreads and the realization that “liquidity is very poor in many high-yield and distressed situations.”  He observed that investors now also realize that lower oil prices act “as a major tax cut for consumers” by lowering inflation expectations and interest rates in many currencies.  However, he also pointed to “evidence that several sovereign wealth funds of oil exporting countries have had to liquidate billions of dollars of stocks and bonds around the world.” Other significant forces, according to de Vaulx, are the impact of negative interest rates and geopolitical uncertainty. De Vaulx said that recent S&P 500 fluctuation shows that the U.S. is “not immune at all to what’s happening around the world.” Further, he said, “it has not been that surprising in that context to have seen gold being rediscovered and benefiting from investment demand.” IVA’s allocation to gold is up, and it hasn’t put much cash to work during the recent correction.  He explained that some of the larger names offered modest discounts, but were not offering “the 20% to 30% so called margin of safety Ben Graham wrote about.” He maintained that “slower economic growth ahead in China and Asia has taken a toll on the intrinsic value estimates of many industrial and cyclical tech companies, while lower and sometimes negative interest rates are taking a toll on the intrinsic values of many banks and life insurance companies around the world.”  In this context, de Vaulx suggested, the firm his willing to let cash levels remain elevated. He also expressed particular concern about China’s economic outlook, citing fear that devaluation of the yuan would force a wave of deflation in the world economy. Finally, de Vaulx explained that his firm tries “to be more eclectic in our value approach, putting full emphasis on qualitative aspects, pricing power, strength of the moat, etc., than we are acting as pure deep value investors,” maintaining that “stock picking and value investing still works very well.”  Looking forward, de Vaulx expects low returns – quipping, “a low return world is no fun but that is the card we believe the investment community has been dealt” – and high volatility, which he said creates opportunities for value investors.