CAPITA Asset Management

Steven De Klerck & Christophe De Wit 1

CAPITA

Asset Management

CAPITA Global Quant Value Fund

Agenda


1. Founder of Fundamental Quant Analysis

2. Value versus Growth Investing: The Academic Evidence

3. Financial Safety: The Academic Evidence

4. CAPITA Global Quant Value Fund: Methodology

5. Intelligent Investing: A Mental Approach

6. Conclusions


Graham and Dodd, Security Analysis, 1934

Graham, The Intelligent Investor, 1949

“There is no guaranty that this fundamental

quantitative approach will continue to show favorable

results under the unknown conditions of the future. But,

equally, there is no reason for pessimism on this score.”

Benjamin Graham, 1949

Founder of Fundamental Quant Analysis


Graham and Dodd, 1934, p. 23



“We suggest that this psychological phenomenon is closely

related to the dominant importance assumed in

recent years by intangible factors of value, viz., good-

will, management, expected earning power, etc. Such value

factors, while undoubtedly real, are not susceptible to

mathematical calculation; hence the standards by which

they are measured are to a great extent arbitrary and can

suffer the widest variations in accordance with the prevalent

psychology.” Graham and Dodd, 1934


Value - Academic Definitions


Value stock: a stock with a LOW price-to-book, price-to-

sales, price-to-earnings and/or price-to-cash flow ratio.

Growth stock: a stock with a HIGH price-to-book, price-

to-sales, price-to-earnings and/or price-to-cash flow ratio.

Value - Empirical Results


Empirical findings by Chan & Lakonishok (2004)

15.6%

7.7%

6.2% 0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

110,00

120,00

1968 1973 1978 1983 1988 1993 1998

Value 2 9 Growth

15.0%

Value - Empirical Results


Extending the study by Chan & Lakonishok (2004)

15.2%

14.5%

9.7%

8.4%

0,000

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1970 1975 1980 1985 1990 1995 2000 2005 2010

Value 2 9 Growth

Value - Explaining The Outperformance


Skinner and Sloan, Don’t Let an Earnings Torpedo Sink Your Portfolio, 2002

Negative Zero Positive All

1 - value -3.57% 1.13% 5.44% 0.66%

2 -3.91% 2.01% 4.95% 0.35%

3 -4.89% 1.71% 5.29% -0.03%

4 -5.82% 1.54% 5.65% -0.40%

5 - growth -7.32% 1.65% 6.32% -0.58%

“The growth investor has paid in full and perhaps overpaid for the expected

prosperity.” Benjamin Graham, 1949

Value - Conclusion


The academic community has generally come to agree that

value investment strategies outperform growth

investment strategies. (Chan and Lakonishok, 2004)

There is a significant return premium for value in every

stock market, with the strongest performance in Japan.

(Asness, Moskowitz and Pedersen, 2013)

Financial Safety - The Devil’s Advocate


“The higher returns to value stocks are due to their higher risk

profile.”

Piotroski (2000), Campbell et al. (2008) and Asness et al. (2013),

among many others, provide evidence that the set of firms

included in a typical value portfolio can exhibit considerable

heterogeneity.

Financial Safety - Empirical Results


Piotroski, Value Investing - The Use of Historical Financial

Statement Information to Separate Winners from Losers, 2000

-12,0%

-13,6%

3,10%

-3,60%

0,00% 0,00%

1,20%

2,80%

1,20%

5,90%

-15,0%

-12,5%

-10,0%

-7,5%

-5,0%

-2,5%

0,0%

2,5%

5,0%

7,5%

1 2 3 4 5 6 7 8 9 10

One-year market-adjusted returns

weakest

fundamentals

3,30%

1,48% 0,97% 0,93% 0,58%

-4,41%

-7,97%

-6,80%

-16,44% -17,50%

-15,00%

-12,50%

-10,00%

-7,50%

-5,00%

-2,50%

0,00%

2,50%

5,00%

0005 0510 1020 2040 4060 6080 8090 9095 9599 99

One-year market-adjusted returns

Financial Safety - Empirical Results


Campbell et al., In Search of Distress Risk, 2008

weakest

fundamentals

Conclusions


“Investing is most intelligent

when it is most businesslike.”

• Focus on inexpensive value companies

• Avoid expensive growth companies

• Avoid companies with unsound fundamentals

• Don’t forecast

Methodology



The Building Blocks


value financial

safety

liquidity diversification

Methodology - 1


Country

level

• 32 countries

• compute valuations at country level

• screen out overvalued countries

“The buyer of common stocks must assure himself that he is

not making his purchases at a time when the general market

level is a definitely high one, as judged by established

standards of common-stock values.”


Methodology – 1 (12/2013)


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

US

UK

Thailand

Taiwan

Switzerland

Sweden

Spain

Singapore

Russia

Portugal

Poland

Philippines

Norway

New Zealand

Netherlands

Malaysia

Korea

Japan

Italy

Israel

Ireland

Indonesia

India

Hong Kong

Greece

Germany

France

Finland

Denmark

Canada

Belgium

Austria

Australia

Methodology - 2


Stock

level

• screen out illiquid and small-cap stocks

• screen out stocks with unsound fundamentals

• screen out overvalued companies

Methodology - 3


Portfolio

level

• apply the strongest value tilt taking into account:

• financial safety

• geographical diversification

• sector diversifcation

“Thus investment can be grounded largely on the time-tested

principle of insurance – which combines an adequate safety

factor in each individual commitment with a wide

diversification of risk.”


The Building Blocks (12/2013)


value financial

safety


P-B = 0.82

P-S = 0.57

EV-EBIT = 11.07

EQ - TA = 60%

TD - EQ = 33%

CASH - TA = 11%

Daily turnover €0.5 mio.

AUM €500 mio.

Diversification (12/2013)


19,04%

15,43%

12,86%

11,83%

7,72%

7,72%

7,72%

7,20%

5,34%

2,57% 2,57%

Japan

Hong Kong

Canada

South-Korea

Italy

France

Poland

Russia

Sweden

Belgium

Greece



40,84%

27,27%

19,04%

12,86%

Europe

Asia

Japan

North America



27,78%

24,89% 17,49%

9,26%

7,72%

7,72%

5,14%

Basic materials

Consumer cyclicals

Energy

Technology

Consumer non-cyclicals

Industrials

Utility

Results 1996-2013 period


0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

20,0

1/1

2/1

995

1/0

5/1

996

1/1

0/1

996

1/0

3/1

997

1/0

8/1

997

1/0

1/1

998

1/0

6/1

998

1/1

1/1

998

1/0

4/1

999

1/0

9/1

999

1/0

2/2

000

1/0

7/2

000

1/1

2/2

000

1/0

5/2

001

1/1

0/2

001

1/0

3/2

002

1/0

8/2

002

1/0

1/2

003

1/0

6/2

003

1/1

1/2

003

1/0

4/2

004

1/0

9/2

004

1/0

2/2

005

1/0

7/2

005

1/1

2/2

005

1/0

5/2

006

1/1

0/2

006

1/0

3/2

007

1/0

8/2

007

1/0

1/2

008

1/0

6/2

008

1/1

1/2

008

1/0

4/2

009

1/0

9/2

009

1/0

2/2

010

1/0

7/2

010

1/1

2/2

010

1/0

5/2

011

1/1

0/2

011

1/0

3/2

012

1/0

8/2

012

1/0

1/2

013

1/0

6/2

013

Value Value + FS Value + FS - Overvalued Markets

Intelligent Investing

A Mental Approach

Handling psychological temptations


Two Major Psychological Temptations


Underperformance of value strategies

Negative returns to value strategies

Underperformance & Negative Returns


Institutional investors are sorely afraid to take advantage of

the long-term outperformance of value stocks.

-40,0%

-30,0%

-20,0%

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

80,0%

Value Growth

2-year real returns



-50,0%

0,0%

50,0%

100,0%

150,0%

200,0%

250,0%

300,0%

350,0%

400,0%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Value Growth

10-year real returns

Institutional investors are sorely afraid to take advantage of

the long-term outperformance of value stocks.



Berkshire Hathaway lost 44% of its market value while the

S&P500 gained 18%, for a shortfall of 62%!

0,500

0,600

0,700

0,800

0,900

1,000

1,100

1,200

1,300

1,400

BH S&P500



0,400

0,900

1,400

1,900

2,400

2,900

3,400

3,900

4,400

BH Nasdaq

Berkshire Hathaway lost 44% of its market value while the

Nasdaq gained 314%, for a shortfall of 358%!

Stable Intrinsic Value, Volatile Markets


“It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which

prevents other people from taking advantage of them.” John Maynard Keynes, 1936

A Focus On Fundamentals


“He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and

impervious to business or stock-market forecasts. In a word, he must be psychologically prepared to be a true

investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the

public at large but of a specialized and self-disciplined group.”


value financial

safety


P-B = 0.82

P-S = 0.57

EV-EBIT = 11.07

EQ - TA = 60%

TD - EQ = 33%

CASH - TA = 11%

Conclusion


There is no guaranty that this fundamental quantitative approach will

continue to show favorable results under the unknown conditions of the

future. But, equally, there is no reason for pessimism on this score. Benjamin

Graham, 1949

Ben Graham taught me 45 years ago that in investing it is not necessary to

do extraordinary things to get extraordinary results.

Warren Buffett, 1994



NO management fee

Performance fee: 6% / 25% / HWM

100% reinvestment of performance fees

Cost structure: 50 bp (<< 185 bp)

NO participation in Securities Lending

Reading Material


Graham, The Intelligent Investor, 1949

Chan & Lakonishok, Value and Growth Investing, 2004

Piotroski, Value Investing, 2000

Haugen, The New Finance (Chapter 4), 2010

Questions…


Documents

CAPITA Asset Management