It may seem counter-intuitive, but Ian Lapey, lead manager of the team acting as sub-advisor to the new AIC Global Focused Corporate Class launched in April, is perfectly willing to invest in companies when their earnings are plummeting or when price-earnings ratios are at sky-high levels.
A strict value investor, he focuses on buying companies trading at a significant discount to net asset value, and frequently earnings are temporarily in trouble. "When you find companies trading at a significant discount, the short-term outlook is often terrible," says Lapey, a portfolio manager at New York-based Third Avenue Management LLC. Lapey sorts through the best ideas of Third Avenue's 16-person investment team to find up to 20 holdings for the AIC fund. "We're not afraid to wade in when earnings are depressed. A premium must usually be paid for short-term earnings certainty. Our key focus is the balance sheet and long-term growth."
Third Avenue manages about US$14 billion in assets, including four proprietary mutual funds and some institutional accounts. In a nutshell, the philosophy developed by the firm's 80-year old founder Marty Whitman is described as "safe and cheap".
The team looks first at a company's financial statements to ensure the assets are high quality and liabilities are limited. "A strong balance sheet gives the company the ability in distressed market conditions to invest in increasing productivity or buying competitors at distressed prices," Lapey says. "The company is in a position to wait until markets are jubilant to issue debt or equity at attractive terms, without having to access capital markets at a weak moment."
There is also a strong focus on what Lapey calls "the human element." He will often talk to managers of competing companies to get comfortable about an executive team.
"We don't just buy cheap, we buy a company with a terrific management team that can continue to grow the company," he says. "We also make sure the compensation of the senior executive team is aligned with shareholder interests. We don't like a history of repricing options."
Lapey doesn't try to forecast macro-economic factors such as the direction of interest rates or global growth. Nor does he try to predict what the stock price will do in the short-term.
In fact, he is suspicious of management that places too much emphasis on the stock price. "We like non-promotional, conservative people who focus on their business, and we are cautious about promises that seem based on a desire to pump up the stock price."
Lapey has a strong accounting background. He received a BA in economics from Williams College in Massachusetts, followed by a master's degree in accounting from Northeastern University in the same state.
He then worked as an accountant for Ernst & Young for two years in Stamford, Conn., moving to Revlon Inc. in New York where he was a financial analyst. He earned an MBA from New York University's Stern School of Business in 1997, subsequently joining Salomon Brothers Inc. as an equity analyst.
He moved to Credit Suisse First Boston LLC in 1998, and in 2001 switched to the "buy side" by joining Third Avenue. He admired the firm's investment philosophy and jumped at the opportunity when he saw a senior analyst position open up. He was promoted to portfolio manager in charge of sub-advised portfolios in 2003.
Lapey says that value is "dynamic," and he doesn't set strict target prices for determining when to sell, although he will exit if a company is "grossly overvalued." Companies may also get taken out of the portfolio naturally through takeovers and mergers.
There's no pressure to be fully invested, and he's not afraid to sit with large cash positions if valuations are stretched. Turnover has typically been about 20% annually in Third Avenue's portfolios.
Third Avenue likes to make large commitments to the companies it likes, and will hold up to 10% of fund assets in one firm (based on cost), building gradually as it gets to know the management team. It will hold no more than 25% of assets in any one industry.
AIC Global Focused is free to roam geographically and across market capitalizations from large to micro cap. The only restriction is that the fund may not invest more than 52% of assets in North America.
Lapey will consider investing in emerging markets if he's comfortable with a company's management team and financial disclosure. "We can look anywhere and go anywhere, as long as the company is safe and cheap."
