Value Managers Embrace Volatility

Terry Flanagan

For long-term value investors, volatility yields “cheap” opportunities.

August and September continue to harbor erratic market swings, and investment managers may not be able to deny that volatility is embedded into the markets for the long haul.

For short sellers, volatility is a good play.  But, value investors also find this great volatility era armed with “cheap” stock buys.

“Value works,” said Richard Pzena, chief executive and founder of Pzena Investment Management, a sub advised fund of American Beacon Advisors. “Things get cheap because people get scared and it’s been working that way for all our lives.”

Pzena remarked that history illustrates fearful investors turn to “safe” names. For bottom-up investment managers, volatility paves the way for good buys at a discount. “An uncertain environment is where the opportunities come from. The key to being successful is not making the word volatility a bad word—it’s a good word.”

Pzena spoke at the 2011 American Beacon Investment Forum, alongside other value equity investment managers, who unanimously argued for the advantages of value investing, especially during times of high volatility.

Because of its macroeconomic issues, Europe is particularly facing extremely volatile markets—but inflicts little worries on some value managers.

Dodging the macroeconomic turmoil in Europe can be achieved through an in-depth study of particular companies, according to Mike Bennett, managing director and portfolio manager at Lazard Asset Management.

“What often happens is that when negative news comes out on Europe, everything goes down,” Bennett said, “But that gives us an opportunity to buy companies that have nothing to do with the macro.” Bennett commented bullishly on InBev, a Belgian-based beer company, which bought American brand Anheuser-Busch in 2008.

“It’s sitting in the middle of Europe, but if you look at their business model, you’d see most of their business is in the U.S. and Brazil. So, the stock price has a lot more to do with beer consumption in the U.S and Brazil,” said Bennett.

However, investors remain wary of the high market volatility despite efforts by value managers to assuage fear.

For Chris Garrett, institutional portfolio manager at Brandes Investment Partners, the message is to convey that investors need to have a long-term view.

“We’re long-term investors,” Garrett said. “The short term is important to pay attention to, but it’s not the driver of our investment process.”

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