ARGA Investment Management
A. Rama Krishna, CFA, is the founder and Chief Investment Officer of ARGA Investment Management. He was previously President, International of Pzena Investment Management and Managing Principal, Member of Executive Committee, and Portfolio Manager of its operating company in New York. He led the development of the firm's International Value and Global Value strategies and co-managed the Emerging Markets Value strategy, in addition to managing the U.S. Large Cap Value strategy in his early years at Pzena. Prior to joining Pzena in 2003, Mr. Krishna was at Citigroup Asset Management, where he was Chief Investment Officer and Head — Institutional and International, and represented the asset management business on the Citigroup Management Committee. He also directly managed the Global Emerging Markets Equity strategy. Prior to Citigroup, Mr. Krishna was Director of International Equity Research, Portfolio Manager, International Equities and Chief Investment Officer, Emerging Markets Equities at AllianceBernstein in New York, London and Tokyo. He has also worked at Credit Suisse First Boston, first as an Equity Research Analyst and ultimately as Chief Investment Strategist and Director — Equity Research, in New York, Tokyo and Singapore. Mr. Krishna earned a joint M.B.A./M.A. in Asian Studies with a Japan Specialization from the University of Michigan in 1987 and a B.A. (Honors) in Economics from St.Stephen’s College, The University of Delhi in 1984.
Mr. Krishna received the Prize Fellowship in Japanese Business and the University Fellowship at the University of Michigan as well as the Middlebury College Scholarship. He was on the MSCI Editorial Advisory Board and is a Chartered Financial Analyst.
Graham & Doddsville
(G&D): Can you tell us how you got into the industry, and how you founded ARGA?
A. Rama Krishna (ARK): Until I went to business school in the 1980s, I didn't know that the role of an investment research analyst even existed. Then I learned you actually get paid to analyze and critique other people's businesses. Well, that seemed like a lot of fun—and I wanted to apply the many useful learnings from business school in an intellectually rigorous profession. I started out on the sell side because I wanted to understand businesses. After about five years, one of my clients—now AllianceBernstein—asked me to join them to help build their research and manage portfolios in global, international, and emerging market strategies. Based first in New York, then in Tokyo and London, I built and led Alliance’s international research team, along with managing investment portfolios. I found my instincts about the profession were right—investing was very dynamic and challenging. Much later, when I had some career flexibility, I decided to return to what got me into the business: investment research.
All I had learned reinforced the importance of research in building client portfolios. I knew I wanted to bring together a team of people with the same investment beliefs. That’s why I started ARGA.
G&D: How would you describe ARGA and its investment philosophy?
ARK: ARGA is organized around some enduring concepts that drive our investment decisions. First, as investors, we think of investing in companies, not stocks. Second, we think the value of companies is determined by their long-term earnings power and dividend-paying apability. Third, our research analysts focus on understanding longterm company fundamentals, not analyzing investor sentiment. And fourth, our portfolio construction reflects the magnitude of the discount to fair value at which we buy in, as well as the risk that the forecasts may not be correct. By incorporating these concepts into ARGA’s valuation-based investment process, we take emotion out of investing. The process often results in our investing in currently unpopular companies and industries. The long-term benefits of this contrarian approach have been documented by a number of studies.
G&D: How does ARGA implement its investment approach?
ARK: One of ARGA’s core beliefs is that pricing anomalies are created by emotions in investment decision-making. These anomalies provide opportunities for investors who can capitalize on them. Our valuation screens and our proprietary dividend discount model provide a systematic way to uncover these anomalies and measure them.
By sticking to our disciplined investment process and staying the course amid short-term pressures, we remove emotion from investing.
We do only one thing at ARGA: valuation-based investing. The pond that we fish in is deeply undervalued businesses. Our process begins by running several screens to identify companies’ long-term value: price-to-book, price-to-earnings, dividend yields, normalized earning yields. Our screens are only the starting point. They simply give us a rich universe of companies on which to focus our research.
The companies that rise to the top of our screens, generally speaking, have some sort of issue—otherwise, they wouldn't be so cheap. The portfolio construction team for each investment strategy reviews the screens, focusing on the top quintile, then works with research management to assign companies to analysts.
At this stage, the analyst has one week to come back with answers to two questions: 1) "Why does the valuation look attractive?" and 2) “How are the fundamentals of the business likely to evolve over time?”
To implement this process well, you need to have the right kind of people. A number of analysts who joined during ARGA’s early stage were people who I had worked with in the past so they were familiar with the investment approach from day one. The new analysts that we hire often have experience working in analytical roles at various businesses such as insurance companies, management consulting, and private equity. We haven't recruited much from the typical Wall Street sell-side analyst pool because we view our research team as business analysts, not stock pickers.
There’s an important behavioral reason: we see ourselves as business analysts. When you start thinking about companies as stocks and try to time their purchase, you end up not owning the stocks when they may in fact be most attractively valued—which is probably when there’s the most amount of stress and controversy associated with them. By focusing on the business analysis, we detach ourselves from emotion. Our investment process tells us when to buy and when to sell.
Our analysts spend nearly 95% of their time developing inputs that go into the investment process. The inputs are all about company fundamentals and related risks.
A unique aspect of our firm is we started on day one as a global firm with two locations—one in a developed market, the U.S. (in Connecticut), the other in an emerging market, India. We felt that in today's world, you cannot look at any business without having both developed and emerging-market perspectives. We then staffed both locations with a very global team. ARGA’s Connecticut office includes people from Japan, mainland China, and India. Our India office has had people from Korea, the U.K., the U.S., and Singapore.
While ARGA’s global team brings diverse perspectives, it is highly consistent in how we look at industries and accounting across geographies. This consistency is critical in comparing company valuations across the world on an apples-to-apples basis. We follow a strict set of rules to adjust different accounting standards in different parts of the world, so we can reflect the companies’ underlying economic value. We are also consistent when we evaluate global market shares and link revenue forecasts for companies within an industry. While making all these consistency adjustments is time-consuming, it is core to our investment process of comparing company valuations.
Also at our core is completely aligning ourselves with the interests of our clients. We know most firms claim this, but we have actually turned down several institutions that offered to take a stake in ARGA, give us assets to manage, or even pay for our operating expenses. We flatly turned them down because we knew at some point, their interests and those of our clients would diverge. We're proud to be 100% privately owned, with many employees sharing in ARGA’s earnings and value. Yes, ARGA’s business has grown rapidly. But what's most important is that we do what we truly believe in: unconstrained investing, where the sole focus is valuation backed by research. The only way to do that without interference is by being completely independent. The only people we answer to are our clients.
G&D: What are some of the adjustments you make for valuation or accounting across geographies?
ARK: Let’s take China Resources Power in China, which uses steam turbines to generate a portion of its electric power. The company depreciates its turbines rapidly over roughly 16 years. The same steam turbines in Germany or the U.S. would probably depreciate over 25 years. So China Resources Power’s reported earnings seem much lower than if you adjusted the turbines’ accounting life to reflect their true economic life. If you didn’t make such an adjustment, you could miss a company with greater earnings power than its reported numbers imply.
G&D: How do you organize your analysts given the multiple locations, various markets, and need to constantly adjust for such nuances?
ARK: We organize our research team by global sectors. Typically, more than one person has responsibility for a particular sector, which encourages and facilitates collaboration, both across and within offices. While it may not seem efficient for two people to cover a smaller sector, it ends up being more effective. These analysts build industry models together, and also link their individual company models. This helps ensure best possible inputs, as the analysts would object to linking company forecasts if they didn't believe their colleague’s industry forecast. There’s a level of quality control even before an analyst brings a company to the research management or the portfolio construction teams for discussion.
ARGA’s teamwork philosophy also ensures our businesses are well understood by persons beyond the industry expert. The two or more analysts with related coverage hold frequent discussions on sector businesses, often travelling together to visit companies. We believe this teamwork leads to better business insight, and, in turn, better investment decisions.
G&D: Could you talk about some of the lessons you’ve learned from investing over the past couple of decades and how that’s influenced what you do today?
ARK: What has stuck with me most is that no matter how great the operating leverage in the business, if you have a lot of financial leverage, you might never reap the operating benefits. A big lesson for me was how to manage financial risk. Even if the financial leverage doesn’t seem high at first, if the operating leverage is high and the business deteriorates faster than you expected, then financial leverage starts to grow exponentially. Be very wary of financial leverage.
G&D: Tell us about your portfolio strategies. How many positions do you usually target?
ARK: ARGA has three primary strategies: global equity, non-U.S. or international equity, and emerging-markets equity. Each strategy today has approximately 50 to 60 holdings. We do have a highly concentrated version of our global strategy that has 15 to 20 holdings, but most strategies are in the 50-60 range. In constructing these portfolios, we do not consider the regional, industry, or stock weights of the market benchmarks. Of course, our clients compare us against benchmarks for long-term performance but benchmarks are non-factors in our portfolio construction. We focus purely on owning the most attractively valued businesses in the world.
G&D: What is your process of generating ideas? Could you walk us through one of those ideas?
ARK: It goes without saying that most investors want to buy a good business. But the reality is, for a company with a solid management, a strong balance sheet and good growth prospects, it's extremely difficult to get those characteristics at an attractive valuation. We’re very realistic on what we can buy for our clients. Almost every candidate tends to be a company that has some issue.
What we're doing through our research is figuring out whether the issues are transitory or permanent. If we believe the issue is transitory, and the business is attractively valued on our dividend discount model (DDM), then we consider buying the stock. We invest with a three-five year view at ARGA. We want to ensure any downside risk over that timeframe is limited. We think about downside risk as permanent loss of capital— “What is the downside risk of losing money when we sell the stock in three years' time?”
Take Samsung Electronics. It came to the top of our screened list around early 2014. Our analyst spent a week researching Samsung’s business and came back with answers to our two questions. First, “Why is the stock cheap?” A key reason was that Samsung was losing market share in smartphones to Apple. Its share had tumbled from around 32% to the mid-20%s. The smartphone business was a huge cash generator, about 60% of Samsung’s profits. Concerned that this profit stream was under threat, many investors had sold off.
Additionally, Samsung’s DRAM semiconductor business was facing an end-market slowdown as PCs slowed and smartphones became saturated. For these reasons, almost every analyst covering Samsung issued either a hold or a sell rating for the stock. The stock’s valuation collapsed. The second question our analyst addressed was, “How are the fundamentals of the business going to evolve over time?” The handset business is a consumer business. We can't really forecast which smartphone model is going to be successful, so we treat it as a commodity business, where scale matters. In that light, even if Samsung margins tanked to 10%, the stock’s valuation still looked attractive.
For Samsung’s DRAM business, our analyst’s thesis was unique. Unlike most analysts who at that time were saying the DRAM cycle would go through its typical boom-bust rotation, our analyst pointed out that the number of DRAM players had gone from as many as ten a decade ago to currently only three. It’s now an oligopoly. The third largest player, Micron, barely made money in the best of times and would set the floor for pricing during the next downturn. So even though DRAM volumes might be off, our analyst’s view was that pricing would not collapse. That meant Samsung or even peer SK Hynix would end up making 20%, possibly 30%, margins during the next downturn. He believed that would surprise the investment community when it happened. We thought the analyst’s thesis was plausible, and decided that Samsung justified a detailed research project.
At this stage, we usually reject about 80% of companies under consideration. Companies can be rejected for any number of reasons. It could be structural. If the business faces structural challenges, we pass, as we know the stock will appear expensive on our DDM once we input our forecasts for growth and profitability. If the business has huge financial leverage, we may pass knowing it may not survive stress over our three-five year time horizon. The point is we proceed with detailed research on only 20% of companies.
G&D: What does this next step of research involve?
ARK: This is where we start behaving like a private-equity firm, except that we invest in public markets at ARGA. We behave as though the New York, London, or Shanghai stock exchanges will close for the next three years, and we won’t have the liquidity to exit. We leave no stone unturned in our research. Otherwise, we wouldn’t have the confidence to own the business. We go to work on building detailed industry and company models. We talk to company competitors. We develop the income statement, balance sheet, cash flow forecasts by segment and full company.
As we're doing all this, we come up with questions for management. When we talk to management, we aren’t there to hear a presentation on the parts of the business that are doing well. We’re there to talk about their strategy for business recovery. We come back and update our models. Then, we talk to an analyst in the brokerage community who may have a different view of the company to see if we have a structural flaw in our analysis. If we have a structural flaw, we go back to the drawing board.
In the case of Samsung, the so-called “flaw” we heard from brokers was, “why would you not want to wait until you see the handset business pick up again, or the DRAM business go through the next up-cycle?” That's music to our ears. Because if you waited for the good news to come through, you're going to miss the best part of the upturn in Samsung’s stock price.
The point is, we’re almost always buying stocks pre-catalyst or pre-good news. We all read the same newspapers. The difference at ARGA is we have a disciplined process from which we never deviate, no matter how we might feel emotionally about the company. Once we put the numbers into our DDM, if the stock valuation looks attractive relative to our computation of the company’s intrinsic value, we consider the stock for our portfolio. For Samsung, our process indicated more than 100% upside in our base case scenario.
In addition to a base case that normally tilts conservative, we do a stress case for every company we research. The analyst sometimes finds no downside risk. When that happens, as it did in the case of Samsung Electronics, we pay very close attention. From a balance-sheet viewpoint, we found a company with little risk. We saw more than $60 billion of cash that would allow ample financial stability. Our analyst had pointed out that a few of Samsung’s smaller businesses were losing a lot of money. We concluded that if the core business ever came under serious threat, Samsung could immediately shut down these two smaller businesses to boost profitability overall. Because Samsung’s stock had already declined so much, our base case upside was very significant, while our stress case showed little downside. It was one of those good skewed outcomes that we generally look for at ARGA. If we’re right on our forecasts, we make a lot of money for our clients, and if we’re wrong, there’s very little risk of losing money over time.
G&D: One concern that investors have had about Samsung and the Korean conglomerates is how their managers allocate capital, overspending or engaging in outright related-party transactions. How did you think about that when you were evaluating management?
ARK: That was a big concern. In fact, one of the reasons Samsung was so cheap was related to concerns about capital allocation. We had no crystal ball to forecast what management was going to do, so we focused on obtaining a very clear understanding of its underlying businesses. Our analysis showed the industry dynamics had changed dramatically in DRAM and even in NAND, becoming very consolidated. All players now appear very focused on returns, not just growth. It became apparent that even if Samsung didn’t act in the near term, management would eventually realize that with its cash-generating handset business and flexibility to rein in capex, it was building excess cash on the balance sheet, which depresses returns.
We felt the interests of Samsung’s management, the controlling family, were at least aligned with minority shareholders in the desire for good returns in the long run, if not outright cash returns. We felt they’d be forced to do something about the more than $60 billion in cash as the business matured. Our analyst noted that Samsung rarely made acquisitions, as these had not delivered great returns in the past. Viewing management as good stewards of shareholder capital, the only option left as cash builds to over $100 billion is to begin returning cash to shareholders.
If management did anything right with the business, or if capital allocation turned out just a bit better than expected, it would be a big, positive surprise. This is an example where everything in our analysis pointed to an incredibly undervalued business for this kind of franchise and strong free cash flow generation, relative to the market cap. At ARGA, it always comes down to valuation.
G&D: How do you think about the politics of Samsung? The broader conglomerate controls so much of South Korea’s economy. Plus, the heir to the Samsung empire was arrested earlier this year for his alleged connection to a corruption scandal.
ARK: Governance is an explicit part of the research for any company ARGA looks at. We even have a checklist that helps analysts understand companies’ governance issues and associated risks. Yes, we identified a large risk with the Samsung group that they probably have a finger in every area of the Korean economy. At least in Korea, it's not just the Samsung group that is exposed to Korean political winds and economy. Other conglomerates have had similar issues. Governance at the larger Korean groups hasn't been positive in general.
The Samsung group has never willfully destroyed value at the Samsung Electronics level. It's their flagship company. They’ve done an incredible job of building a fabulous franchise by taking a long-term view of the business over the last three decades. The good thing about Samsung Electronics is you can't build and run a big, global company unless you have professional managers in each of the business lines who know what they’re doing. Samsung Electronics certainly has its share of high-quality managers who we believe will continue to run the business well despite the detention of the Samsung heir.
G&D: When you’re looking at emerging markets, how do you get confidence in the financials and that the business is being properly represented?
ARK: There are certainly groups or companies, particularly in emerging markets, where ambiguous financials are an issue. These typically tend to be private-sector or smaller companies. What we do in these cases is try to understand if the company has a history of questionable practices. Have they changed auditors often? Do the auditors have qualifications? We’re constantly on the watch for these and other early warning signs.
In emerging markets, there are always going to be situations where you could be surprised by risks. Even with Big Four audits, there are cases of fraud. This is something you do your best to minimize through serious due diligence. You talk with management and peer companies, seeking to comprehend management’s backgrounds and motivations. Still, it’s a risk you always worry about. Of course, those very risks can also make stock valuations very compelling. That’s why it’s worth doing deep research.
Interestingly, state-owned companies mostly have a greater degree of scrutiny. Though there are cases of corruption, with most state-owned firms, there are at least processes and probably more government oversight in the form of regular audits. The less regulated countries have potentially higher risk.
G&D: India is often considered as the one emerging market where private-sector firms are of higher quality. In your experience, is corporate governance better in India than in China or Korea?
ARK: Not necessarily. We don’t think it’s any better, or any different, in India. We can identify companies in Korea and China that are as well-managed and have as good corporate governance as companies in India. Our view is that governance is company-specific, not geography-specific. Every part of the world, including China, India, Korea, and Russia, has outstanding businesses and outstanding managements running those businesses, along with attractive valuations.
G&D: Have you ever run into situations where you find a good, undervalued company, but because of its location, you don’t invest?
ARK: At ARGA, it’s never a macro view. The only reason we won’t invest somewhere is if we believe we’ll never get our money back—if there’s the risk that some country like Argentina expropriates our capital. Beyond that, our focus is owning attractively valued businesses.
Typically, the only time businesses get to the valuation levels that make them incredibly attractive is when there are all kinds of concerns at the country level. For example, a couple of years ago, we had 24% of our emerging-markets portfolio in Russia. That’s a pretty significant weighting, especially given all the news you were reading regarding sanctions, or about Russia going into a massive recession for a year or two. Our research showed there were businesses in Russia that would survive a major economic downturn in very good shape, even if that downturn lasted for a couple of years. Further, when Russia would eventually recover, those businesses would emerge stronger than ever because its peers would have been wiped out.
We embrace stress and uncertainty—not because we love them. Our investment process forces us to consider such businesses because they are probably the most attractively valued just when they’re subjected to perceived or real stress of a significant degree. By the way, this process is not for everybody, as you can imagine. It is not fun for most people, even for us at times. The reason value investing works in the long run is because it doesn’t work all the time. If it did, everybody would do it.
G&D: Could you give us an example of one of those Russian businesses that you felt was solid enough to weather the downturn?
ARK: Look at Russia’s largest bank, Sberbank, which has close to 50% market share of Russian retail deposits and is also Russia’s largest corporate lender. Pre-recession, this bank was extremely well capitalized and, in our view, could withstand a big increase in NPLs. Keep in mind, when you have a bank that has close to a 50% market share in retail deposits, chances are good that returns will be high. Sberbank had an average return on equity of 20% over the past decade.
As soon as Sberbank saw what was happening with the Russian sanctions and slowdown, the management made sure they could pull back every single loan or credit line possible. They went into a very severe damage assessment mode. They were very methodical and prompt about this to get maximum money back, way before other Russian banks even thought about doing this.
The company was not only able to survive a massive Russian recession, but more crucially, it emerged stronger. It turned down the Russian government’s offer of capital infusion because their view was, once you take that assistance—as some of the other weaker Russian banks did—the government could then influence you, like demanding you lend money to unappealing groups. Sberbank wisely wanted to stay completely independent. We think Sberbank management is as good as at any bank in the world today, maybe better. They’ve come out of the recession nicely. They’re already making ROEs in excess of 15%. You can imagine how they’ll perform when the Russian economy actually picks up. Most other banks are still burdened with problems from the recession.
G&D: We see that Sberbank still trades below consensus estimates of forward book value. Would you still think it’s attractive?
ARK: It’s still a good franchise. But the stock became less undervalued than it used to be. Valuation is always the driving force and there were better valuation opportunities. We did sell out of most of our Sberbank position last year and used the proceeds to invest in higher-return opportunities. Declines in the stock’s valuation may make us reconsider the business again.
G&D: When you were looking at Russian investments, was there a focus away from, or towards, some of the natural-resource players?
ARK: We did have some natural-resource exposure, particularly Russian oil-and-gas businesses. These had U.S. dollar-denominated revenues, very clear agreements on tax and royalty payments to the Russian government, and fairly good transparency on capital allocation. If oil prices went down, their payments to the Russian government would also go down. They’re less leveraged to oil prices than most other oil and gas companies worldwide and they’re also fairly well-managed operationally.
A company like Gazprom has perhaps among the most undervalued energy assets you’ll find anywhere in the world. It has decent corporate governance processes, despite concerns by some investors. Yes, capex is high because it’s seeking ways to reduce dependence on Europe, so it is spending billions of dollars building multiple pipelines. The Russian government, as the controlling shareholder, has the same incentive as minority shareholders to ensure Gazprom pays dividends. The government wants those dividends too. We like that Gazprom’s earnings are mostly in U.S. dollars. If the local currency weakens, there’s little dollar impact. In contrast, local-currency earnings and dividends went up a lot when the ruble fell.
G&D: Going back to your lessons of being wary of leverage, would you automatically reject companies that seem cheap because they are having issues with debt?
ARK: No, this depends on whether the business can handle the leverage under our stress case scenarios. Our stress scenarios help us assess whether, no matter how low profitability may go, the company we are considering can still support certain levels of leverage. You make sure the stress case truly reflects a worst-case scenario. You cannot forecast events, and there could be a situation where things get to that extreme worst-case scenario. You always want to make sure your companies can survive.
In the case of energy stocks, for example, when we built our stress case scenarios, we assumed $30 oil prices for two years in a row, both 2016 and 2017. Consequently, we ended up dropping a lot of companies that looked really cheap on our initial screens because they wouldn’t have survived at sub-$30 oil prices for two years.
G&D: One dilemma for a lot of value investors is deciding when to exit an investment. Do you sell when it’s successful, or when some negative news has come out?
ARK: Everyday, we get a list of exactly where every stock in the portfolio ranks on valuation with respect to our universe. In a very real sense, that’s a daily reminder of the discipline we need in implementing our valuation-based approach. The moment a stock in the portfolio hits the valuation midpoint of the universe (depending on the strategy, the midpoint rank could differ), it’s sold from the portfolio. We don’t even discuss it. We just sell it. We sell even if the stock has strong momentum at that time.
The reason we sell immediately is that our strategies are solely focused on owning the most undervalued businesses in their universe. No matter how great the stock price momentum at the time of sale, there should be other more attractively valued companies in the portfolio or in the universe that should do a lot better on a three-year view.
To continue the Samsung Electronics example, the stock hit the midpoint of the ranking in our universe in August of last year. At that moment, we automatically sold Samsung from our portfolios. We didn’t even discuss it. We just sold the entire position.
G&D: Any advice for students who are trying to get into the investment industry? How would you suggest they develop their investment philosophy?
ARK: All of us at ARGA are gratified that many investors have entrusted us with the responsibility of managing their financial assets. Here’s my parting advice to students interested in the investment profession. First, remember you are purchasing companies, not pieces of paper. Second, be patient—just because you figured out that a company is underpriced doesn’t mean that the day after you buy it, all investors will agree. Third, be prepared to go against the crowd. If everyone thinks a company is attractive, it probably isn’t. As Ben Graham once said, “In the short run, the stock market is a voting machine. In the long run, it is a weighing machine.”
At ARGA, we happen to favor valuation-based investing. That doesn’t necessarily mean we think the value framework is any better or worse than momentum in terms of delivering investment results. There’s a long history of value strategies and of momentum strategies performing well. They’ve performed almost identically over the last 45 years or so. It’s more a question of you finding what you believe in and what you find most stimulating. So it’s a question of temperament—how you look at data and figure out how a business might evolve in the future.
You need to determine what kind of an analyst you are. What do you like doing best? Is it trying to forecast whether a fast-growing business can sustain its momentum? Or trying to understand what the business should earn over the long run? A career in value investing can be stressful. The rewards of exploiting behavioral anomalies compensate for that stress over time, but do you have the patience to wait for them? Depending on that, find a place that can serve as a home for you to develop your industry expertise and analyze businesses. The great opportunity for Columbia MBA students is that you are in close proximity to a large number of firms in the New York area with a variety of investment approaches. Once you figure out your investment temperament, you can identify a number of firms that are closely aligned with your objectives.
G&D: How did you figure out what your temperament is?
ARK: In my first corporate finance class in business school, the first thing the professor said was that the value of any business is the present value of future cash flows. As soon as I heard that, a light bulb went off. It became very clear how to value a business. From day one, my focus has always been trying to forecast what businesses should earn in the long run, then coming up with the present value of that.
G&D: Do you think other investors lose sight of this fundamental aspect, of having an idea of what the company should look like in the long run? Or is it apples and oranges because different people have different styles?
ARK: Even though there is convincing evidence that highly undervalued companies should do well over time, most investors are not interested due to the anxiety associated with owning them. This behavioral dynamic is why ARGA’s disciplined process and deep fundamental research, which leads us to buy out-of-favor stocks, should yield good returns in the long run.
Time horizon is an important factor in investing. It depends on the clients you have and whether they share your time horizon. We know we cannot outperform every single year. We tell all our clients that upfront. ARGA is the right choice for clients who have a three-five year horizon. If someone had a 12-month horizon, and that's how they're going to evaluate us, then we’re probably the wrong manager for them. We know there will be some 12-month periods when we do poorly, by virtue of the fact that ARGA focuses on the most undervalued businesses. Value investing doesn't always work in the short run.
G&D: Thank you so much.
