Charles Brandes – Independent Value Investing: Reflections on an Enduring StrategyVW Staff
Commemorating the firm’s 40th anniversary in 2014 was both an accomplishment and a reaffirmation of Brandes Investment Partners’ commitment to value investing and to our clients. In this Q&A, founder and Chairman Charles Brandes, CFA, reflects on this important milestone, how he got started in the business and why value’s relevance remains intact today for long-term focused investors.
[ALSO SEE – Charles Brandes On Value]
- Solid roots in Graham-and-Dodd value investing principles—40 years of value, with many more to follow, based on an unwavering commitment.
- Buyers beware—some of today’s financially engineered products, are just old fish in new wrappings.
- Don’t forget about active equities—to potentially generate alpha and long-term wealth.
- Value is borderless—potentially undervalued opportunities can be found anywhere in the world.
- Commitment to our clients—our goal is to provide excellence in client service and outperform relevant benchmarks over the long term.
Charles Brande: Solid Roots in Graham-and-Dodd Investing Principles
Q: The firm marked its 40th anniversary in 2014. How different is value investing today than when you opened your doors?
Charles Brandes – A: The world surrounding value investing has grown much more complicated. But the basic security analysis discipline that Ben Graham pioneered in the 1930s hasn’t changed. It’s a fundamentally objective technique of looking inside a business to estimate what it is worth over the long term compared to its stock price.
Q: Were you always a follower of Graham-and-Dodd principles?
Charles Brandes – A: I’m a convert. I started in the business in 1968, which was during the Go-Go Era and the Nifty 50. These were two very different but equally devastating stock bubbles that eventually led the country into dire economic times by 1973. As a young broker, I was completely turned off by the speculative nature that led up to the collapse. I loved investing, but really wanted to take all the guess work out of it. Once I was introduced to the logic and rational tenets of Graham-and-Dodd investing principles, I embraced them and never looked back.
Q: Was this before you met Benjamin Graham?
Charles Brandes – A: Yes, this was just before our introduction. I had studied Ben’s writings during my broker training, so I was familiar with his value approach, but I hadn’t embraced it totally. One day, out of the blue, Ben walked into my brokerage office in La Jolla, California, to open an account and buy a stock he believed was undervalued. The transaction took just a few minutes, but he stuck around at my request and we talked for a long time about value investing in the modern world. That first meeting, and subsequent chats with Ben over the next couple of years, changed my life. Value simply made total sense. I’m a math guy, so value gave me the rigorous, fundamental approach I was looking for. It wasn’t long afterward that I set out on my own to start my firm focused only on value investing.
Beware of Today’s Financially Engineered Products
Q: What complicates the investment arena today compared to when you started in the business?
Charles Brandes – A: The continuous flood of financially engineered products has hyped up and confused investors. Alternatives, derivatives and hedge fund offerings are just the recent “hot dots” that are distracting many investors from their long-term mind-set. And most of the new and different investment approaches investors chase are the same old fishy offerings we’ve seen before. Unfortunately, by herding to these new offerings, investors—individual and institutional alike—may miss the potential benefits offered by real wealth-producing investment products built for the long term, such as equities.
Equity Investing: Potential for Alpha and Long-Term Wealth
Q: How does the ongoing flight from equities into alternative investments impact institutional and other investment portfolios?
Charles Brandes – A: I believe it will impact them poorly, if the trend continues. This so-called de-equitization could stymie longterm growth. The quest to control the downside tends to limit your upside. So, by dialing down on equities to address one type of risk—volatility—you create another risk—long-term underperformance. You can’t forget about alpha—not if you’re serious about producing wealth over the long term.
Q: Who should be concerned about de-equitization?
Charles Brandes – A: Practically everyone, whether you’re running a retirement plan or expect to benefit from one. Unless fiduciaries are willing to take on a little volatility risk in the short term, they may not meet their long-term obligations. We’re all living a lot longer and need to plan accordingly to generate income in retirement. In Canada, teachers are retiring in droves, living longer, and their public pension plan—the country’s third largest—has been facing funding shortfalls since 2003.2 They have over 120 centenarians on their payroll alone—that’s a long time to be collecting a pension from an underfunded plan.3 In Newfoundland alone, there are about 6,000 working teachers funding a public trust that supports about 8,500 retirees.4 In the United States, many Taft-Hartley plans are precariously underfunded as well. This concerns me, because it’s not going to change without a desire by fiduciaries to take action.
Q: Are some fiduciaries increasing equity exposure in their strategies?
Charles Brandes – A: Outside North America, some are starting. One example is Japan, which hosts the world’s largest pension plan and in the last few months announced plans to more than double its international equities exposure. Japan’s allocation represents $50 billion in U.S. stocks alone.5 Denmark’s Danica Pension is now jumping in as well. The scheme recently unveiled a first-ever strategy to invest some $10 billion kroner directly in companies.
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