A strong balance sheet and willingness to hold a stock for the longer term are key to successful value investing, said Brad Radin, the newly appointed manager of the C$120 million (US$118.3 million) IA Clarington Global Equity fund.
A balance sheet with a lot of net cash and minimal debt will help ensure the company's survival while it works to overcome short-term difficulties with its operations, Radin said. Meanwhile, adopting a longer-term investment horizon, Radin said, increases his chances of buying a company at its most inexpensive point as a way of generating maximum returns once the company rights itself and the stock rebounds.
"Many investors are so focused on the short term that they just don't want to touch companies that have any sort of issues in the short term," Radin said. But "I believe those are typically the companies that are at the cheap prices because the short-term issues are known" in the market, he said.
Toronto-based Radin's typical holding period for a stock is about three years, "so I am OK waiting a year or two before [a company's issues] get resolved," he said. When that happens, "the shares really start to move."
For the one-year period ended Dec. 31, the fund returned negative 9%, versus a negative 2.9% return for the MSCI World (C$) index, according to tracking service Globe Investor. But Radin only started managing the fund at the end of November and December was a transition month as he sold old holdings and replaced them with new ones. Globe Investor shows that the fund returned an average of 4.3% over the three years ended Dec. 31, versus 5% for the index.
Globally, Radin has found opportunities in the financial services sector, which has been operating under a cloud because of the ongoing European debt crisis.
Morgan Stanley (MS) is one of Radin's financial holdings. It's one of the major global investment banks, yet its share price is down about 82% from its peak of US$90 in 2007 and down around 43% over the past 52 weeks. The weak stock price reflects investors' well-known concerns over Morgan Stanley's potential exposure to the euro debt crisis, uncertainty over its derivatives book, and its capital positions, Radin said.
But Radin is focused on how the stock was trading at a 10-year-low price-to-book value of around 0.4 times, as of Friday. On average the stock trades at about two times book value and in good times, it will trade at about 2.5 to three times book value, he said.
Radin suggested that potential catalysts to move the stock higher include moves to resolve Europe's debt crisis. Morgan Stanley also stands to benefit from a backlog of initial public offerings and other investment banking work as markets improve.
Other financial holdings include money manager Janus Capital Group Inc. (JNS), a beaten-up stock that Radin likes because of the big fee stream it generates and the company's efforts to "clean up its balance sheet," he said.
About 40% of the fund's weightings is in financial stocks, though Radin doesn't have exposure to banks in the U.S. such as Bank of America Corp. (BAC).
"We don't have a comfort level ... yet" with their credit exposure and balance sheet risk, Radin said.
He added that most of the fund's exposure to banks includes those with significant operations in Asia and little sovereign debt that are inexpensive just because of the "global hate on financials right now."
One such holding is Standard Chartered PLC (STAN.LN, 2888.HK). About 70% of its business is in Asia, with the top four markets being Hong Kong, Singapore, South Korea and India. By comparison, continental Europe, the U.K. and the U.S. combined represent less than 10% of its operation.