25 years in large value equity

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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.