Investors are often keen to share in the profits of companies they buy into by picking up healthy dividends. But Isaac Chebar takes a different view. He doesn’t want businesses to cream off their profits and hand them to him – he would rather they kept them.
This is all part of his value investing approach and, as manager of the DNCA Invest Value Europe fund, he believes companies should reinvest revenues and help themselves.
‘We are not big fans of companies that give us all their cash. Companies need to invest so management can continue to increase profits and deliver growth. As long as the strategic rationale is there, we will continue to own the company,’ he says.
The Citywire AAA-rated manager searches for stocks that are trading at a discount, holds on to them, and then sells when he thinks they have reached their true worth.
‘A company has assets and the key questions is: are those assets undervalued by the market in terms of their earnings capacity? If they are, we are more interested.
‘The valuation is important, along with the quality of the business and its management. It is this combination that makes a good stock,’ he says.
Chebar’s eye for a well balanced opportunity has certainly paid off. Over five years his fund has returned 92% versus a 63% rise by the FTSE World Europe TR index.
Two sides of the same coin
Chebar does not look for growth stocks but he believes these value and growth approaches can work together.
‘There is no growth theme in that we are not buying growth stocks. But the undervalued companies we look for could be on the right path and grow again.
‘Value shouldn’t be the opposite of growth. There is a point in the cycle where companies have value. All equities need to have a bit of growth, so we are not buying huge growth, but companies get re-rated through a combination of value and growth,’ he says.
Chebar selects value stocks by assessing them on an individual basis, rather investing in certain sectors or making country bets.
‘We try to be much more bottom-up than macro. We look at stocks and we buy what we feel is interesting and discounted from what we think it is worth. For example, we wouldn’t buy French companies on the basis of our view of the French economy,’ he says.
By sticking to his value strategy, Chebar believes he avoids unnecessary risks. ‘We try to cope with volatility by buying stocks that our analysis shows are lowly-valued.
No stock in the portfolio has a weighting of more than 5% and in this way we try to mitigate risk by not taking big bets. We don’t like bets, we prefer investment,’ he says.
Nevertheless, Chebar runs a concentrated fund. He caps the number of stocks at 55 and currently holds 50.
‘With 55 stocks we can still get a good focus and not be trading with the market. It makes a difference over the medium to long term,’ he says.
Those companies that do make it into the fund are considered very carefully. Chebar meets many companies throughout Europe and is in no hurry to make decisions.
‘We come to know the businesses with experience. We believe companies are more resilient than their management. Over many years you start to understand their business models. It doesn’t take you six months to understand a company, it takes years,’ he says.
‘Sometimes you don’t invest in it and you need to be prepared for the fact that the value might not be there. It could be a great company but that doesn’t mean it suits your disciplined approach. We may look at companies for many years but sometimes the margins of safety for buying them just aren’t there.’
Chebar likes to get to know a company, but he draws a line at interfering with the management. ‘We never tell the managers what to do. As shareholders we will always defend our rights and can suggest a lot of things, but we never tell management what to do. If we don’t like it, we have the option to sell.
‘We need to be humble enough to know we can’t direct companies with many thousands of people and define a strategy. It’s a little pretentious to think that we can manage a company. We are not managers, we are fund managers,’ Chebar says.
Although Chebar does not invest by region or sector, there are clear patterns that emerge within his portfolio along these lines. Based in Paris, and speaking to Citywire before the tragic events that occurred in the city recently, Cherbar’s largest country allocation in the fund, at 25%, is France.
Here he has small holdings in the telecoms corporation Orange and broadcaster TF1. Meanwhile, French bank Société Générale is the third biggest holding in the fund at 2.78%.
Currently, the largest holding is another French name, aerospace, defence and transport company Thales, which has operations in 50 countries and accounts for 3.17% of the portfolio. This stock is a good illustration of how Chebar hangs on to stocks he believes have further potential even after strong performance.
‘We have followed the company since 2011 and we haven’t sold much. It is getting more disciplined, the order book is good, its positioning is good and the management seems to be aiming for higher margins which could be reached in the next two years.
‘It had a very good run, but we are still confident in what the management can deliver,’ he says.
Typically, Chebar holds companies for a few years until they are doing well enough to sell on, although some names, such as equity trading platform Deutsche Börse and pharmaceutical group Sanofi, have been in the fund since 2009. However, he is not a strict buy-and-hold investor and as a case in point, he mentions an unnamed Swiss stock, which was off-loaded after a mere six months.
In terms of sectors, telecoms was one of the best performers in 2014 and made up 11% of the fund. The sector represents the third largest in the portfolio, but Chebar has cut this back to 8.3%. He thinks telecoms still show promise, as consumers are prepared to pay more.
‘We still own telecoms as the market in Europe is stabilising and the consumer now is more sensitive to the quality of the network. There is differentiation in the market between quality and low priced operators,’ he says.
‘The former is becoming increasingly important as people often have six to eight connections at home and we think customers are willing to pay more for a better service.’
Elsewhere, one of the top contributors to the fund last year was stainless steel producer Aperam, as it had a strong presence in Brazil and exposure to Latin America. However, it is now the portfolio’s biggest negative position.
‘We sold half of our stake in Aperam at good levels when the stock went up at the end of 2014 and early 2015. Nevertheless, we still believe the cash flow contribution of this stock is undervalued by the market.
‘At the end of September Europe introduced duties on stainless steel and Aperam is one of the few stainless steel producers in Latin America,’ Chebar says.
While all holdings in the fund have been picked through Chebar’s bottom-up approach, he acknowledges that it is still important to look at the wider economic picture.
‘Europe is recovering, but not as fast as one would think. We are definitely in a better situation than two years ago, but still we need countries to reform to increase the potential for long-term growth. This requires a lot of long-term structural change, because growth won’t come if the support is not there.
‘I think the region has stabilised but a huge acceleration is not on the cards. Companies have been restructuring over the past years, so now they might be ready to grow. Europe is still in a recovery phase, we would like it to accelerate, but it won’t happen without reforms,’ he says.
With a quarter of his fund allocated to France, Chebar keeps an eye on how the country is doing economically, but has faith in his stock-picking system.
‘I wouldn’t say we are buying France, we are buying stocks that are traded in France which have both French and international exposure. There are some instances where stocks might be oversold because of the economic situation in the country.’
Chebar thinks France will catch up with its peers, but meanwhile it is being overlooked by other investors. Unlike France, Chebar’s performance has been consistently strong. He has held his Citywire AAA rating since February 2014 and puts this consistency down to a team approach and hard work.
‘You try to be as simple as you can within complex situations, there is always news about buyouts and mergers. The fund will sometimes go down a rough path, but we need to have the conviction stick with it. Performance takes time and it is important to grow the team, it is not a one-man show,’ he says.
Overall, for Chebar, a disciplined approach counts for a lot. ‘Sticking to your process allows you cut through financial noise. News may move the market but it doesn’t change the overall picture of your analysis.’
This article originally appeared in the December-January edition of Citywire Global magazine.