Jeroen Bos has more than twenty years of investment experience and is one of the premier deep value investors in Europe. He worked as a scout for Peter Cundill in the London market and authored Deep Value Investing: Finding bargain shares with big potential, published in 2013.
Jeroen currently manages the Church House Deep Value Investments Fund, a small-cap fund that looks for unloved companies priced at a discount to their liquid assets. The fund is largely UK weighted and has a bias to the service sectors.
Jeroen Bos on deep value investing
Rupert Hargreaves: You’re one of the remaining traditional value investors that looks for companies trading at a discount to net current assets. In today’s market, are you still finding companies that look attractive from a value perspective?
Jeroen Bos: Yes, there are plenty around. They’ve actually become a lot easier to find over the past year or so. Before that, it was difficult, but now the market is getting very fed up with small companies that are not performing to expectations. These companies tend to be treated quite harshly when they miss expectations and for that reason their share prices are severely compressed creating the opportunity.
RH: You’re still finding deep value opportunities then?
RH: What are you looking for specifically?
JB: Really any company that in the past has been able to make money and is now available at prices where they’re cheaper than their liquidation value. And that’s all over the market. Any sector that’s performing badly. You don’t have to look that hard. For example, the oil sector or the oil services sector, bargains are starting to appear there.
RH: In the past you’ve mentioned a preference for service companies. What is it about service businesses that attracts your attention?
JB: They tend to be more resilient, they’re not capital intensive, and as a result, they’re easier to manage in a downturn. Once the company pulls through a downturn any additional turnover usually translates into profit on the bottom line. After the recovery starts to gain traction these service companies generally tend to rebound very quickly.
RH: These sort of service businesses tend to be very cyclical. Do you consider macro implications in your investment thesis?
JB: Well, I’m usually more interested in the company itself and what’s in front of me, rather than the immediate economic outlook because that’s not my main concern. But the stocks and values I’m looking for tend to appear at the bottom of the cycle when people have given up on the sector. If the company has no debt, and you buy at a deep enough discount to intrinsic value, with a large enough margin of safety, then you’re usually onto a winner.
RH: Do you have a particular margin of safety you’re looking for?
JB: Obviously it depends on the company in question. If the company I’m looking at is heavily loss making, then I’d want a large margin of safety because, in this case, any assets on the balance sheet will evaporate relatively quickly. However, if the company is only marginally loss making then the margin of safety I require will be a lot smaller.
RH: Is there one company in particular that’s attracting your interest right now?
JB: One example, if you look a UK stockbroker Panmure Gordon. The company recently issued a trading update where they alluded to the fact that M&A activity slowed down during the first half of the year; the market wasn’t as buoyant as they would have hoped and earnings would come in below expectations. Management still saw opportunities to remain marginally profitable, but the market punished the company pushing the share price down by 30% on the day. The share price has fallen from 150p to 80p in the space of a few months. If you look at the balance sheet, the liquidation value is 105p. So, a margin of safety has been created. I don’t know what the outlook for their market is in the near-term, I know it’s not that exciting, but this broker has been around for a long time, they have plenty of experience. You can definitely say that the stock is very cheap by looking at the balance sheet.
[At the time of the interview Rupert owned a position in Panmure Gordon & Co]
RH: You tend to run a very concentrated portfolio with the top ten holds accounting for around 70% of assets. How do you go about managing risk in a portfolio like this?
JB: Really, I’m not worried about the risk here. Yes, it may create some volatility in the fund but you buy the stocks when interest in them is pretty low, and you may be sitting on them for quite a while before something happens. It can take a while, and sometimes it’s frustrating, but as long as the value is still there the share prices should reflect that over the long-term. You’re bound to suffer a period of short-term underperformance. We’re all in a hurry, and we’d like the investment to turn positive on the day we buy it, but you know, that doesn’t happen in the real world.
RH: Your fund is UK based, but you’re allowed to allocate 30% of assets to overseas investments. One of your top ten holdings is Icahn Enterprises…
JB: Yes we’ve owned that for a long time, we brought it at $50 or so.
RH: What do you like about the company, is this play on Carl Icahn’s management expertise or an asset play?
JB: Carl Icahn is an investor with a very successful track record, and he’s done this for many years. I like his way of operating because he is a value investor but unlike many other value investors he is active and will force management to do whatever to liberate assets and make share prices appreciate. His timeframe is much shorter, and he’s more active in trying to dictate the behavior of the share price by getting involved with management.
RH: He’s looking to unlock value faster…
JB: Exactly, he’s not afraid to immediately fight for seats on the board and get involved.
RH: Do you think there’s a contrast between value investors in Europe and the US? Value as a strategy isn’t as popular in Europe as it is in the US.
JB: Yes, it is much more popular in the US than in Europe, the UK is an exception but only just. I think in Europe there’s a different mentality. European’s are only interested in this kind of investing in hindsight, once the opportunity has been presented and disappeared. We’re [the European’s] not experienced in actual value investing, we take a look at the positive historic data and say “yes this is a great style and strategy” but then, we become distracted by the media and the growth stories, which are currently doing the rounds, and then we forget about value.
RH: You’ve worked with some of the great value investors over the years, including Peter Cundill and Walter Schloss. Do you have any great nuggets of advice from these investors that you can pass on?
JB: Yes, Peter Cundill would always travel at the end of every year to visit the country that had the worst performing stock market for the year because that’s where the bargains would be. I think that’s a very smart way of looking for bargains. If you go where there’s trouble, that’s where you’ll find them.
RH: Peter Cundill clearly wasn’t afraid of investing overseas but many value investors struggle to invest outside their home countries for a variety of reasons. What’s your view on international value investing?
JB: Well, Walter Schloss never invested outside of the US. He didn’t trust the regulators in other markets, so he stayed well away. He never really trusted the figures he looked at, and couldn’t figure out his legal protection as an investor in many markets. And that’s why he stayed away.
I tend to stay away because I’m not sure how well I’m protected in various markets. You can find plenty of bargains overseas, but I’m not sure how well my assets would be protected. Overnight regulatory changes can alter the market entirely. So I tend not to invest aggressively in overseas markets. That said, I’ve been investing in Japan recently. There are plenty of opportunities there. What makes it fascinating to invest there is that I think the regulatory environment is quite good. Also, the companies you tend to find are usually much bigger than you’d find elsewhere. Most pay dividends and are profitable.
RH: Japanese companies are becoming more alert of shareholder interests as well….
JB: Yes exactly. I remember many years ago Peter Cundill traveled there a lot. He had a big exposure there, but he became very frustrated in the period of the early 80’s because the market wasn’t reacting to the value on offer.
RH: Japan has always been a great place to find net-nets…
JB: Yes but the problem with net-nets has always been picking the ones that are going to outperform. Statistically, the numbers show that value investing and net-nets investing works, but you need to have a catalyst. The trick is knowing what will make the stock move. And if you have a weak regulatory environment, it won’t matter how cheap the stock is, the share price will never react — investors will just avoid the company. So you have to be quite careful investing overseas.
RH: You have been an active value investor for several decades now and over this time, many traditional value investors have changed their style away from traditional value, towards a more quality/value slant. Why do you think so many investors have abandoned the value discipline?
JB: I think there are several reasons. Firstly, I think value investing is painted as being quite boring, like watching paint dry. You make these investments in companies that are going through a difficult period and these things take time to work out, which takes patience. It’s completely against the trading mentality that most of the media portray. Value investing does not fit the casino style, get-rich-quick profile many investors desire. I think that the whole financial industry is geared against the value style. From a commission-generating income perspective value investing is useless, trading is much more subdued in value investing than in growth oriented investing.
There’s plenty of statistical evidence supporting value investing, that it tends to work extremely well over the long-term. But there are periods when value underperforms, and these periods are enough for investors to abandon the strategy and start following something else again — despite the overwhelming amount of evidence, which shows that value is the best strategy to follow over the long-term.
RH: And lastly, what has been your most notable mistake over the years?
JB: There have been many. I think one of the greatest things I’ve learnt is to pay attention to debt. As you noted at the beginning, on the whole, these companies tend to be pretty cyclical and going into a downturn with a balance sheet full of debt brings a lot of pain and tears down the road. So that’s something to be extremely careful of.
RH: Stay away from indebted companies?
JB: It does depend on where you are in the cycle, though. If earnings start to recover, and things are starting to pick up then that’s fine, but when you’re heading into a downturn. Take Glencore for example. Gearing helped them fantastically when the commodity markets were favorable but when things started to turn sour, cracks started to appear. You need to know at which point of the cycle you are, to determine if debt is going to be earnings enhancing, or if it’s going to become a problem for the company.
If debt does become a problem, management is no longer in control and the company becomes a slave to the market or its bankers.
RH: I think that’s covered everything, thank you very much for your time today Jeroen.
JB: My pleasure.