What will be the catalyst for a value recovery? with Tobias Carlisle, part 3
We recently had the chance to chat with value investor and author Tobias Carlisle and, in the third of three resulting articles, we discuss what might act as a catalyst for a recovery in value investing
“The best opportunity in a generation.” Every time we meet with existing clients or prospective investors, this is the phrase we find ourselves using as we put the case for directing money towards a value-oriented portfolio. And almost as frequently, when we have finished talking, they say something along the lines of: “OK – but what is going to kickstart the value recovery? What will the catalyst be?”
Clearly we have our own responses to this but we were very interested to hear the thoughts of value investor and author Tobias Carlisle when he took part in our podcast recently.
“The last great value opportunity was the late 1990s and this is an opportunity on that scale,” he begins. “Value had some of its best performance ever through the early 2000s so I think it is likely we see some very good performance for value coming up.”
And the catalyst? “That is a much harder question,” he replies. “Like any value investor, I can tell you value is undervalued but I don’t know when the market is going to recognise that undervaluation – although it is possible we have already seen the catalyst to this time around.” That is an unexpected answer – and it turns out to spring from an episode we have addressed more than once of late, here on The Value Perspective.
“I think it could have been WeWork being unable to get through its IPO,” Carlisle says. “That was just one of the more egregious examples of venture capitalists abdicating their responsibility to exercise any adult supervision over a company.” It is by no means the only such example, however, and he runs through a list of recent Silicon Valley-related IPOs that have rarely turned out as well as their backers must have hoped.
“Often they would go and put more money into a company than the company itself was seeking,” says Carlisle. “All of that venture capital money has distorted this market to some extent. And, now the problems with that game seem to be surfacing – with all of these busted IPOs – I think it make it harder and harder for venture capitalists to raise more funds and keep on distorting the market.”
Pointing to value’s ‘flash rally’ at the end of the summer, Carlisle suggests it is not so much any economic implications of WeWork’s failed IPO that is key here as the psychological impact it could ultimately have on investors. “If you look at the companies that have performed best over the last decade,” he observes, “they have tended to be ‘software as a service’, compounded-type companies.
“So they are very asset-light – and the signature of each of these companies is that they have expanded their multiples extraordinarily. You can look at price to revenue, price to gross profits, price to EBITDA – all of those multiples have just expanded to the extent that, if you thought 30x was expensive, well, now you’re looking at 60x or 90x.
“And if your assumptions are sufficiently optimistic that you think these things can grow into enormous businesses that will be able to face down any competition they might meet, then it might make sense to pay Nifty 50-type multiples. But I think more likely, at some stage, you just can’t get any more return out of these businesses – they just can’t grow sufficiently big – and they become much more easy to compete with.”
Ultimately, argues Carlisle, it is just very easy to start an online business. “You just need some software engineers and you can build something similar,” he concludes. “And if you can build a better mousetrap, then people will flock to you. Yet investors eventually get tired of that game and start looking for a business with pretty good cashflows and which is defensible. And I think we have seen the start of that.”
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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