November 10, 2024
Fund

How a $33 billion fund manager scored a perfect record betting on value


(Bloomberg) — To those who argue that value investing has gotten too hard in today’s momentum-chasing, passive-driven world, Scott McBride’s results are a bit of a conundrum.

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His firm, Hotchkis & Wiley Capital Management in Los Angeles, just hit the investment perfecta in terms of stock-picking acumen. All 10 of its actively managed mutual funds — from US large-cap stocks to high-yield bonds and international small-cap equities — beat their benchmarks in the three and five years through August.

The red-hot run for the 44-year-old shop is a rare rebuttal to conventional wisdom saying active management has lost its edge when passive funds regularly trample anyone trying to beat them. It’s also a measure of vindication for value investing itself, a strategy long overshadowed by growth funds and their market-beating gains. Several of Hotchkis & Wiley’s funds beat broader equity indexes — not just those tuned to cheapness — for long stretches of the period.

To McBride, the chief executive, it’s the very trends said to doom the value style — relentless passive flows into growth names, fickle investor tastes — that create exploitable inefficiencies and let stock pickers shine. Even with the S&P 500’s price-earnings ratio approaching all-time highs, he says it’s still possible to build portfolios with multiples in line with the historic average — and find winners among them.

“The market is driven by sentiment, it’s driven by emotion,” said McBride, whose firms oversees $33 billion in assets. “When you don’t have a lot of folks who are thinking about what long-term value is, that creates opportunity.”

Hotchkis & Wiley’s 100% win rate is the highest among 91 large firms with 10 or more mutual funds and well ahead of the group’s average of 40%, according to data compiled by Bloomberg Intelligence’s mutual fund analyst David Cohne.

The results land amid a raging debate about the viability of value investing. Venerable managers have decried a market overrun by price-insensitive products such as index and exchange-traded funds, leaving no natural buyer to lift the laggards and close a valuation gap between cheap and expensive stocks that is among the widest in history.

McBride’s success is proof that those trends don’t doom stock pickers — that outsized returns can still be located. Certain data bears it out. An earlier study by Bloomberg Intelligence equity strategist Chris Cain found that among the cheapest fifth of the Russell 3000 Index, the proportion of stocks whose return topped the broader market rose to a five-year high of 54% in 2021 and stayed there the following year.



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