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Hi, I'm Devin Armstrong, co-lead manager of the Invesco Comstock Fund.
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I'm here today with Kevin Holt
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co-lead manager of the Invesco Comstock Fund.
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We're approaching Kevin's 25th year anniversary
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of managing the Comstock product,
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and we wanted to take the time to take a step back and discuss
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how his approach to investing has changed during his tenure,
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and what he's seeing in the current market environment.
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So, Kevin, can you can you talk a little bit about,
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how you define value and what's going on with as far as the Comstock
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fund today?
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In terms of the evolution of value investing,
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the market's become much more short term oriented over the last
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25 years, a lot more technology in the market,
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the media, social media.
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I would say that the market is more sophisticated.
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Financial modeling,
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is much more thorough today than it was 25 years ago.
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Everyone has a cash flow statement, balance sheet,
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and then the income statement, which they've always had.
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Probably the biggest change
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I would say would be within the technology sector.
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It's a much larger part of the S&P 500 today.
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So traditional metrics like price to book
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have become less relevant and price to cash flow
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metrics are are much more important.
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So I think, as we, you know, as we look at that,
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and then evaluate the companies, technology companies generate
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lots of cash flow, higher returns on invested capital.
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So they are a much bigger part of the market.
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We have to acknowledge that and I think that's something
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that definitely has changed over the last, last 25 years.
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So, Kevin, can you share your view on the current market environment,
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including headwinds, tailwinds,
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and areas that you're finding attractive?
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Yeah, I, you know, within the market now,
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I think tailwinds,
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particularly for value investing with inflation, running
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two, 2.5%
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historically value has outperformed growth in that environment.
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So, you know, with cost of capital being, a bigger issue now
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given inflation is a bit higher,
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we think that's a positive backdrop for us.
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Additionally,
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I mentioned earlier the market’s very short term oriented.
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So our, the way you and I do a time arbitrage,
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I think gives us a competitive advantage
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having a longer holding period than than most funds.
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In terms of challenges
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and market's been, pretty narrow last ten years,
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and even the last three years.
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So, you know, top
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ten stocks in the S&P 500 represent about 33.5% of the S&P.
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Very large, very large concentrated bet within the market.
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Additionally, sector valuations don't have as much disparity
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as we've seen in the past.
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So I think it puts even more,
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onus on idiosyncratic stock picks as we as we move forward,
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at least in the near term environment.
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And then finally,
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differing political and economic views, not only in the U.S.
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but around the world,
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I think create a much more, dynamic environment,
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a much more unpredictable environment.
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So that's definitely become, that's definitely a challenge.
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as we as we try to maneuver the markets.
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so so so so so what factors do you consider
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when looking at a potential investment idea?
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So what we're really trying to accomplish is looking at what we think
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are normalized earnings and cash flow, over a full investment cycle.
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And that's really the crux of what our strategy is.
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So we're studying the history of the business.
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We're studying the management of the business.
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We're looking at the competitive positioning of these businesses.
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additionally, we're looking at capital allocation.
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You know, buybacks,
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dividends, dilutive acquisitions.
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So those are things that, you know, we want to try to avoid, in terms
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of, you know, management team spending money inappropriately.
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we want to give it back to shareholders.
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So, that really leads into the quality of management, too.
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I think I think you'd agree with me.
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We've seen,
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you know,
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bad management teams or managements that aren’t incentivized
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the correct way could make investing in those companies
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quite challenging.
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So, I would say that's primarily kind of how we're looking at things
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in terms of how we sell,
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you know, we're looking at selling an intrinsic value.
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So hopefully the stocks will appreciate
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what we think
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our fair value is based
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on our normalized earnings and cash flow metrics, over a full cycle.
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And, you know, we also are looking at these daily.
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You know, as you know, you know,
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you know, we're
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we're grinding through the whole team is grinding through,
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the investment thesis,
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the financials, making
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sure that those 3 or 4 key issues that we've identified,
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over our typical 5 to 7 year holding period, are still,
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relevant to our thesis as we kind of move forward.
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So we're trying to hold
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ourselves accountable,
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trying to be intellectually honest,
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which is a term, you know, I like to use.
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And avoid value traps the best we can,
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you know, it's with technology
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becoming such a great part of the market,
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which, you know, because you are a tech expert on the fund.
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You know, it's a much greater percentage of, S&P earnings
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and cash flow.
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So, looking at, book value has become more challenging.
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It's relevant in some of the deeply cyclical sectors or financials,
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but it doesn't have the relevancy,.
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it doesn't have relevancy necessary for,
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for the technology companies.
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So, you know, we've looked at
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and you've been an integral part
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of looking at enterprise value invested capital.
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And that it makes even identifying our normalized
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earnings and cash flow more important.
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So switching gears a little bit.
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How should an investor
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think about value
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and how to include that in their investment portfolio?
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So it's a value had a very challenging period
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when in zero interest rate environment from the 2010 to 2020 period.
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I mentioned earlier now that inflation is back at 2%.
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Historically.
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values performed very competitively versus
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growth in the overall market.
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So I think
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that's something that,
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you want to be conscious of
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when you're constructing your portfolios
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for your clients at this point in time.
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Additionally, the performance of the Comstock Fund,
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I've been at it for 25 years now.
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You've been on for 17 years now.
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So, our, historical returns
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are very competitive
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not only in the category, but with the overall market.
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So, hopefully our track record and our seniority
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and our ability to kind of maneuver these markets over time.
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I think that's something that, advisors would like to consider
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when they're putting together
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portfolios, long tenured management
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teams who have seen multiple cycles.
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And then additionally, you know,
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I think one of the things you and I talk about
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a lot is our competitive advantage with time horizon.
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I alluded to it earlier,
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but in a, in a market where everyone's short term oriented.
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Our ability to take a longer term time horizon and look at normalized
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earnings and cash flow kind of allow us,
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kind of this time arbitrage opportunity.
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And I think, you know, our returns,
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although moving with the equity markets
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are less
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correlated with other value funds
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and definitely with the overall market,
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because we look at things a little bit differently.
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Well, Kevin, congratulations on approaching your 25th year anniversary.
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It's truly an amazing, amazing accomplishment.
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Yeah, you're performance,
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during your tenure has been, extremely strong.
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And and just congratulations on a on a great career.
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I appreciate it. And thank you.
Kevin Holt, Chief Investment Officer and co-lead manager of the Invesco Comstock Fund, spoke with Devin Armstrong, Senior Portfolio Manager and fellow co-lead manager of the Invesco Comstock Fund, to discuss the 25-year history Kevin has of managing portfolios in the value equity space. Kevin reviews how his approach to investing has changed over the years, a look at the current market environment and what the future could hold.
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