Money Life Interview – Brian Barish

TRANSCRIPT

Chuck:

Welcome to the big interview on the August 15th edition of Money Life. And I’m very pleased right now to be joined by Brian Barish. He’s President and Chief Investment Officer at Cambiar Investors, Portfolio Manager for the Cambiar Opportunity Fund, involved in all of their funds as well, and perhaps most importantly, because we will definitely discuss it on this interview, he is the manager of Cambiar Aggressive Value, which is an ETF that was launched in February of this year.

Like I said, we’re going to get into the concept of Aggressive Value as one of the things we’re going to talk about here, but if you want to get into the Cambiar Funds, see what they’re all about, see more from Brian, go to Cambiar, C-A-M-B-I-A-R, Cambiar.com. Brian Barish, it’s great to have you back on Money Life.

Brian:

Great to be back on, Chuck. Nice to talk to you.

Chuck:

So last time we spoke was almost two years ago, and one of the things that I came away with at the time was that whether you used it or my notes about it or what have you, was that you were, what some people would call, a QPD investor. QPD, which is not a common acronym, you are quality, price, and discipline. Those are the three things that most, if I recall correctly, impacted and drove your investment decisions.

Well, we have a market at this point right now where those three things are tough. If you’re maintaining discipline in a market that for a long time has been driven by a handful of names, you’re not necessarily doing as well as some of the other funds and all the rest of that stuff. So let’s talk about your take on the market, but let’s do it with that idea of the way you are trying to make this work is through quality, price, and discipline.

Brian:

Sure. QPD, it’s an acronym that we came up with just to describe what we do. We are value investors and within the value universe, we adhere to something called relative values. We’re looking for prices that are inexpensive relative to history or relative to peers. There are weaknesses to the value process, particularly if you have a very quantitative definition of it. Specifically those are you can wind up buying companies that screen cheap, but it’s because they participate in poor in market. So think of airlines for example, or companies that are overly financially levered and therefore they have low earnings multiples because they have a lot of operational and financial risks because they have a lot of leverage. So what we do with our QPD process is we really screen out, to the best that we can, companies that don’t meet our business quality or financial discipline requirements, and the net result has been really very favorable just in terms of risk-adjusted performance and performance that’s a lot better to the value indexes when value is doing well and hangs in there, when growth is more dominant.

So that’s the basis of the approach. I think if I could just segue a little bit in terms of where we are in financial history, we believe the era of 0% interest rates ended in 2022. It went on for a long time, as you know, and what having a 0% cost of risk-free capital did for really many, many years is it flattered certain investment concepts and approaches and flattered certain business models, but it is unlikely to continue to do so just because it’s gone away.

And specifically, that is a focus on big TAM disruptor type of business models where you don’t have profits upfront. Those would seem a little more challenged if you have a real cost of capital. And it also, for that matter, flattered index investing and allowed index investing to do probably a lot better than it would do if you had a more tangible cost of capital. We can go deeper into that if you want, Chuck, but those are just some high level thoughts.

Chuck:

Well, in this environment, talk about we’re out of the lower for longer interest rate cycle that we were in, but we were in a very long cycle of how should we call this? Value sucks? Right? We went from the financial crisis-

Brian:

Value sucks.

Chuck:

We went from the financial crisis of 2008 until a year and a half ago, I think, with people going, “Is value dead? Is value dead? Is value dead?” Now admittedly, the answer was always, it really depends on how you define value, but now it’s not just that nobody’s asking is value dead, they’re really looking going, “Hey, it looks like value moving forward.” Whether it’s absolute value or as you do, relative value might be in the sweet spot. So your outlook for value in these conditions generally is?

Brian:

It’s generally favorable, but you’ve got to make some adjustments. So let me give you a sports analogy, if I will. You remember back when the San Francisco 49ers football team first became a dynasty when Bill Walsh invented the West Coast Offense. I think to this day he’s the most influential coach in modern NFL history and it really meant a change in how you thought about football. How you thought about passing, how you thought about offense, how you thought about how you would need to defend this. Nothing was ever the same after that.

And what I would tell you is something similar is true for value investing in the post mobile internet. So post smartphone era. You really saw the efficacy of value as traditionally defined, go down once mobile phones, and particularly mobile smartphones with the iPhone and Android phones, proliferated. It just changed a lot of things.

It doesn’t mean value is dead. Value is not an attribute. Value is a philosophy. The philosophy says I want to buy stocks that embed conservative assumptions. I want to buy stocks with a margin of safety. It doesn’t say that the lowest absolute PE stocks and the lowest absolute price to book stocks are by definition better than a higher cohort. It never said that. But for some reason, and it would take way too long to explain this, Chuck, but for some reason that low price to book, low price to earnings, quantitative approach got embedded in how value indexes are composed. And in a world where intellectual property and intellectual property formation and unique market structures such as some of these big digital ones that exist online have come to predominate in terms of the drivers of return and in terms of the drivers of economic activity of business value, it’s a bad definition. It’s just a very, very bad definition. People persist with it. I don’t know why. We don’t, we persist with a different definition, but that’s I think the basic issue.

Now, going back to my earlier comments, Chuck, that we were in an era of anomalously low interest rates around the world, not just in the United States, for a period of about 13 years, that did flatter growth and growth investing approaches in a way that could not be the case, but for the fact that you had these ultra low interest rates and with that gone and now you have a positive nominal and real cost of capital again, I think it puts growth and value on a more even footing. That doesn’t mean value’s going to do better or growth is going to do better. It just means, “Hey, it’s a fair fight.” Whereas it wasn’t a very fair fight for a fairly long period of time.

Chuck:

When we’re talking definitions, et cetera, as I mentioned, Cambiar opened Cambiar Aggressive Value, an ETF, in February of this year. So we’re about six months in to that fund. Aggressive and value are not words that the fund industry puts together very often. And I mean relative value because that’s your base case doesn’t normally sound particularly aggressive either. Explain aggressive value and why you’re doing that in these conditions?

Brian:

Sure. Well, thanks for the question. So you’re right, there are no other funds called aggressive value. There’s aggressive growth funds, and I always thought, “Hey, if there could be aggressive growth, well why couldn’t you have aggressive value? Why is that not allowed?” So it’s kind of part of my personality, I guess. I decided that we should have an aggressive value strategy. So what it is, it’s very concentrated, mostly large cap value fund. That’s what it is. It is intended to serve two potential audiences. So one is people that just really like stock picking. So rifle shot approach to stock picking. And if you only own 20-some odd stocks, which is what it owns, by definition, you’re going to have to exclude a lot of stuff from your fund, and that’s okay. That’s part of the difference between index investing and not index investing, is there’s a lot of exclusion when you’re not an index.

Independently of that, we know that there has been a lot of indexation, particularly in the large cap space, and I kind of liken it to a decision to move out of the city and into the suburbs. People are not likely to move back into the city once they’ve moved into the suburbs. So for those folks who are scratching their heads thinking maybe I don’t want to own everything quite the way I used to, maybe it would be a good idea to have a core satellite approach to my asset allocation and have some managers in there that are going to take some shots, basically. This can be a good satellite portfolio relative to an index core in that it’s going to have very high active share, not super high tracking to the index, all that stuff. So that’s the thought process in terms of who would own it and what.

And then, okay, so what makes a stock an aggressive value stock? So I’m a value investor going on 33 years of this now, and I’m looking for companies that are trading at a discount to fair value. And usually when you do your investment research, you come up with what I would call a fair value estimate and a blue sky estimate. Okay?

So the fair value estimate is you’re making certain assumptions about how financial performance will go, how operational performance will go, and how the market will appraise that from a stock valuation point of view. And then there’s a blue sky valuation, which means basically everything that could go right, goes right, and you wouldn’t want to bank on that, but it’s possible, right? You don’t want to preclude the possibility. And the stocks that I buy for the aggressive value strategy, like everything else, they have base case in blue sky scenarios, but I think they have a much higher chance than one might suppose of the blue sky scenario unfolding. And that’s why I put them in aggressive value might not include certain other positions where I think that blue sky case is either already embedded in the stock or just has a less clear possibility of becoming part of the stock.

Chuck:

I want to use the time we have left to talk about where you’re finding those aggressive values because you’re looking at everything. I know that I could ask you about just about any sector and you’d have thoughts about it, but what are the areas that you think are most fertile right now in terms of where the best values are in a market that has gotten back towards record highs?

Brian:

Sure. One area that I’ve been quite active in since the second quarter has been energy. Energy stocks have kind of come back to life after being rather doggy in the first half of the year. And a lot of that is just because energy prices were high in 2022 and unsustainably so. So oil prices fell, gas prices fell and the stocks fell along with them. But I’ve come to believe in the energy space, particularly for oil and gas, is that all the noise in the general media around global warming and in the political sphere around global warming and how we address that, it leads to a lot of uncertainty. It leads to a lot of fear from a business management perspective. And what that leads to in turn is hesitancy on the part of suppliers to invest aggressively. And if you don’t invest aggressively in supply in a depleting resource like oil and gas, you get less of it.

And that in turn leads to a market that leans tight. So we’ve built positions in a couple of the Canadian oil majors, Canadian… It’s a long story, but you have very, very consistent production capability, very low decline rates. Those are very attractive and some other energy majors. So those are some positions I’ve built fairly recently. We have been active in technology, just not so much this year because tech has done really, really well in 2023 and it just hasn’t been a case to build positions.

If anything, I’ve been snipping stock off here and there as positions have appreciated, but we still like tech. And then the last area that I think is also very interesting is the healthcare space. Healthcare was a big outperformer in 2022. It’s been fairly bad in 2023. I honestly don’t have a great answer as to why, other than maybe it was overcrowded late last year and so far this year there’s been a lot of noise about these anti-obesity drugs from Lilly and Novo, and it seems to have crowded out all the oxygen in the room for other more pedestrian type of healthcare stories. Those have been the three areas I’ve been the most active in the aggressive value strategy this year.

Chuck:

Well, I wish we had more time to talk about the other areas and the things that you’re looking out and maybe moving away from, but we’re going to have to save that for a future conversation, because we’re out of time. Brian, this was great. Thank you so much for joining me on the show. Let’s do this again soon.

Brian:

Awesome. Thanks, Chuck.

Chuck:

That’s Brian Barish. He’s the President and Chief Investment Officer at Cambiar Investors. Cambiar.com, on Twitter @CambiarInvestor. And again, Cambiar Opportunity, the Cambiar Aggressive Value ETF and more. Check them out online and we’ll be back to wrap up today’s show, cross the finish line together right after this message.

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