Value investing has suffered for more than a decade. One possible reason, according to Brian Barish: The traditional value approach applies 20th-century thinking to a 21st-century marketplace.
The chief investment officer for Cambiar Investors says classic value investing favors asset-heavy companies with mostly physical capital, and overlooks the intellectual property-driven businesses dominating the stock market today.
In addition, the relative value assessments that emphasize cheapness based on history or peers may not reflect intrinsic value—and don’t effectively capture how intellectual property can accelerate growth, he says.
Barish’s investing approach instead focuses on buying high-quality companies that are good stewards of capital and trade at attractive valuations. It’s a philosophy he has honed over 23 years as portfolio manager of the $362 million Cambiar Opportunity fund (CAMOX).
It’s working. The fund has beaten the Russell 1000 Value index (.RLV) and Morningstar’s large value category on a one-, three-, and five-year basis. The Opportunity fund sits in the top 11% of its peers on a five-year basis, with a 14.6% annualized return. It has an expense ratio of 0.84%, average for the category.
Denver-based Barish, 53, graduated in 1990 from the University of California, with a degree in economics and philosophy. After stints at Bear Stearns and Lazard Freres, he joined Cambiar Investors in 1997 and became the Opportunity fund’s portfolio manager at its 1998 inception.
Barish sums up the fund’s value-investment philosophy in three words: quality, price, and discipline. He and his analytical team seek business models where companies make superior products or have a good market structure, or both. Credit-card payment networks Mastercard (MA) and American Express (AXP) are two fund holdings that exemplify this. In an industry with few competitors, both firms have high transaction volumes, so the small fees they charge companies add up. Given the necessity and convenience of credit and debit cards, volumes can typically withstand changes in the economy.
Credit-card companies “have phenomenal market structures as it’s hard to see how you’d break them up, and the shift to electronic forms of payment versus cash continues,” Barish says.
American Express was hit harder than other cards during last year’s economic lockdown because of its higher exposure to travel, and Barish used the stock’s swoon to add to a position Cambiar Opportunity had held since 2014. The stock has bounced back amid a rebound in travel, and American Express benefits from having a greater share of high-net-worth clients. Barish has taken some profits since, but still believes in the stock.
Barish also seeks companies strong capital discipline—with low debt, little merger and acquisitions activity, stable capital returns, high rates of reinvestment in the underlying business, and “sensible” management compensation.
“Companies that grow through M&A versus their own product innovation/reinvestment are always riskier,” Barish says.
A sweet spot for the fund is when a company meets some of these criteria, but negative market sentiment is dragging on the share price, creating value.
This “perception gap” is the difference between the current share price and the stock’s possible valuation if sentiment improves. Barish will buy if a stock nears a price where the team believes the upside greatly exceeds the downside.
No. 1 holding Biogen (BIIB) has a “massive” perception gap, Barish says. The controversy surrounding the Food and Drug Administration’s accelerated approval of its Alzheimer’s drug, Aduhelm, stems from concern that there’s a lack of sufficient evidence about its effectiveness.
Barish says the FDA approved Aduhelm because it works in early-stage Alzheimer’s. However, the data from Biogen’s initial study was hard to interpret because of the high number of patients and certain measurements used, he adds. Biogen, in a July letter to investors, acknowledged that the data set was complex, but stands by its studies’ clinical evidence.
Investors, however, are overlooking Biogen’s portfolio of drugs for multiple sclerosis, skin aliments, and rheumatoid arthritis, Barish says. The company also has a pristine balance sheet and is very profitable, although it isn’t growing much with its current portfolio. When the stock fell to around $250 in late 2020, the fund increased its position in the stock at a valuation equivalent to the company’s non-Alzheimer’s portfolio. “You were getting the Alzheimer’s stuff for free,” Barish says.
Plus, he says, Biogen has another Alzheimer’s drug in its pipeline to treat a different problem caused by the disease. Barish sees the potential for significant upside, and says the Alzheimer’s drugs could eventually represent two to three times the revenue for the whole company, as the disease has “such a huge, unmet medical need.”
Some of Barish’s current investment approach stems from a rough patch between 2011 and 2012, when a combination of macro events—including the U.S. debt downgrade, looming fiscal cliff, European debt crisis, and a heavy energy overweight—sank performance. It’s why Cambiar is so focused on strong market structure and capital discipline, to avoid a repeat of that time, he says.
Barish expects a lot of uncertainty for the rest of 2021, both for the economy and markets, and has a sharp eye on the Federal Reserve. He believes inflation isn’t as transitory as the Fed has signaled, and he says stocks are disconnected from fair value as questions linger around reopening. If the current market sentiment sours, whether from the Fed tapering or other reasons, that could benefit Cambiar Opportunity’s defensive positioning and its roster of high-quality businesses with low debt.
“We should fare relatively better than most if this is what we get,” he says.
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