The man with the 100-year plan

Category: Asia, China, Global

Legendary Charles Brandes isn’t joking when he says he’s in it for the long term

The father of value investing in the US, Benjamin Graham, has spawned disciples over the years and decades. Perhaps no one is as famous or as successful as Warren Buffett, the sage of Omaha. Mr. Buffett’s investments have produced stunning long-term returns, and in doing so, have propelled him into the upper ranks of the world’s richest.

Charles Brandes, a native of Pittsburgh, comes from the same school of learning. Mr. Brandes met Mr. Graham in 1971 while training as a stockbroker on the west coast and over the next few years, learnt valuable lessons from the then retired Wall Street legend. Mr. Graham started his career on Wall Street in 1914 and in 1926 formed an investment partnership that managed to survive the crash of 1929. Mr. Graham wrote two seminal books, Security Analysis in 1934 (co-authored with David Dodd) and The Intelligent Investor in 1949, both required reading for students of finance and investments. Mr. Graham passed away in 1976.

Convinced of the beliefs and approach of Mr. Graham, Mr. Brandes set his mind on adopting those principles when he established his firm in 1974. It was a challenging period to start a business, but he saw the opportunity after a severe market shakeout in 1974 when the market fell 47.5% from top to bottom. That was just after the oil crisis of 1973. With a few million dollars pitched in by friends and former clients, Mr. Brandes threw open the doors of Brandes Investment Partners. Working with limited resources (he did not hire his first portfolio manager until a decade later), Mr. Brandes persevered and then saw assets under management rise to several hundred million dollars by 1985. The firm’s AUM hit a historic high of US$111 billion in the market euphoria of 2007; as of December 31, 2013, its AUM was $29 billion.

While Mr. Brandes has enjoyed success through the basic fundamentals of investing, in particular deep value investing, he was among an early group of investors who promoted international diversification of portfolios. His first international holdings started in 1975, with exposure to European and Canadian stocks, and this was expanded in the 1990s to Asian equities. In recognition of the demand for international exposure, he launched a non-US portfolio in 1990. “In the mid-1970s, the amount allocated by US pension funds to overseas investments was less than 5% of their port-folios, but then it grew to 10%, then 15% and now it is more than that,” notes Mr. Brandes.

Last month, Mr. Brandes visited several Asian cities with speaking engagements in Singapore and client meetings. In his brief stopover in Hong Kong, Mr. Brandes talked to Asia Asset Management. Excerpts of the interview follow.

On investing in China and Japan

We started investing in Chinese stocks in the late 1990s; we do not have QFII quota so we started by buying stocks listed in Hong Kong including H-shares and red chips. We are under allocated in China right now compared to the index. There are certain issues in the market that we are concerned about including the problems associated with the shadow banking system, so we are staying away from that area. The economy however will continue to expand at its recent rates of growth. Taking the long view, when people are fearful, that is when we will begin to raise our allocations and indeed, with the slow down, we have been increasing investments.

In Japan, we currently do not see as much value as there was two years ago. Having said that, we do see companies with strong balance sheets and net cash and whose rates of return on assets are low. And that is why the market does not like this. I think stocks there will eventually get back normal rates of return on equity.

On the firm’s business strategy in Asia

We recently established an office in Singapore as part of our global expansion. We see good opportunities to expand our client base in the region and we think there is tremendous appreciation for the kind of work that we do. Value investing in Asia is no different from what we do in the US or Europe.

While we are relatively new in terms of the office in Asia, we do think long term and by that I mean that we have a 100-year vision for the firm. The fundamental values that we espouse are long term and this is why when we look at investments, we are talking about a horizon of ten years. At the minimum, investors should be looking at investments over a three-to-five year period. We have had some discussion with big funds in the region and they do appreciate the things that we do.

On the asset management landscape today

In the 40 years that I have been in the business, I have seen quite a lot of things that are not good for the industry; people tend to be a lot more short-term oriented. For me, big is not necessarily a good thing – that is why I do not want to build scale for the sake of it.

When you become too big, you do not do your clients a lot of favours. I believe it is more beneficial to the managers.

On his firm’s growth and long-term strategy

We want to cap our assets under management at about $100 billion. For a while, some of our strategies were closed to outside investors and we were not taking in new money. I will not want to sell our business to a third-party institution as then that particular institution will be directing how our business should expand and grow. I don’t want to launch products just because it is fashionable. That is not necessarily a good thing for our clients. So I do not want outside shareholders ever and I have said this to our 21 partners. – TLH