Justin Siken, MBA Class of 2015
When the economy began recovering from the financial crisis several years ago many experts warned investors to prepare for a future of lower market returns. However, despite persistent fiscal and monetary uncertainty in the United States and Europe, many asset classes have greatly exceeded historical returns and are trading at or near their all-time nominal highs. Finding pockets of remaining value and immunizing against the risks still in the system have become focuses for the investment community.
With this backdrop, the Stern Investment Management and Research Society (SIMR) held its 13th annual conference on November 1st with a series of distinguished speakers discussing this year’s theme “Finding Opportunities in Turbulent Times”. As in previous years, the conference was illuminating for the attendees.
The first keynote speaker of the day, Head of Municipal Bond Portfolio Management at PIMCO, Joseph Deane, provided an historical overview of the credit markets and explored current areas of concern. After Detroit filed for Chapter 9 bankruptcy in July, attention has refocused on widespread unfunded pension liabilities made worse by the retirement of the baby boomers and the increasing concerns that Puerto Rico will be unable to repay its $70 Billion in bonded debt. In addition to the fiscal concerns, the ability of courts to manage large restructurings and the equitable enforcement of the rights of different tiers of bondholders have become issues for fixed income investors.
Next Kevin Lydon, a Managing Director at Strategic Value Partners, a global alternative investment firm focused on distressed opportunities, explained his activist investing style and the opportunities and threats in distressed equities in several industries. He discussed how banks will continue to be constrained by a high percentage of non-performing loans on balance sheets, and that European banks will continue to depend on the ECB for funding. He also assessed the challenges facing the power, building supply, and shipping industries, but noted that there are opportunities for those willing to enter the large illiquid positions and take a leadership position in the restructuring process.
After lunch, Nik Mattal, a Partner at JANA Partners, discussed the tenants of value investing. He defined value investing as buying an asset that trades at a discount to its intrinsic worth. However, he cautioned that to extract value from a stock trading at a discount, a catalyst must exist that will reduce the market discount within a reasonable timeframe. He explained the steps of successful value investing as identifying intrinsic value, understanding what and when catalysts will occur, and having the ability to create catalysts through shareholder activism. Style drift and the failure to identify undervalued stocks with strong catalysts doom many aspiring value investing strategies.
The final keynote speaker, Partner and Co-Manager at Brevan Howard, Vinay Pande, reinforced many of the themes discussed throughout the day. He recommended beginning the analysis of a company or industry by looking at top-down macroeconomic themes that will drive growth. From there, a firm can be valued using consensus forecasts, sensitized based on points of uncertainty, and examined for potential alpha based on the manager’s outlook of specific factors. He was emphatic that before investing a manager must understand how the company will return money to shareholders and to what extent growth is already reflected in the price.
In addition to the keynote speakers, a morning panel examined event driven investing strategies. The panel discussed how a mispricing could be corrected by an acquisition, regulatory shock, restructuring, or management change. An afternoon panel of equity and credit researchers examined in more depth companies and sectors that still had potential upside in the current market.
As the conference broke for networking, the conversations clearly reflected the view that despite high asset prices and continued uncertainty in the market, opportunities still exist to find attractively priced companies. Those willing to take a long-term view, take judicious risk, and be proactive in influencing companies are most likely to identify and extract value regardless of where uncertainty arises next.