Investment menu design

25 years in large value equity

Kevin Holt is interviewed by Devin Armstrong.

Transcript

00:00:00:06 - 00:00:03:59

Hi, I'm Devin Armstrong, co-lead manager of the Invesco Comstock Fund.

00:00:04:23 - 00:00:05:56

I'm here today with Kevin Holt

00:00:05:56 - 00:00:08:29

co-lead manager of the Invesco Comstock Fund.

00:00:08:29 - 00:00:10:58

We're approaching Kevin's 25th year anniversary

00:00:10:58 - 00:00:12:35

of managing the Comstock product,

00:00:12:35 - 00:00:15:39

and we wanted to take the time to take a step back and discuss

00:00:15:55 - 00:00:18:55

how his approach to investing has changed during his tenure,

00:00:19:07 - 00:00:21:37

and what he's seeing in the current market environment.

00:00:21:37 - 00:00:23:37

So, Kevin, can you can you talk a little bit about,

00:00:23:37 - 00:00:27:58

how you define value and what's going on with as far as the Comstock

00:00:27:58 - 00:00:29:19

fund today?

00:00:29:19 - 00:00:32:47

In terms of the evolution of value investing,

00:00:33:16 - 00:00:35:53

the market's become much more short term oriented over the last

00:00:35:53 - 00:00:37:57

25 years, a lot more technology in the market,

00:00:37:57 - 00:00:39:28

the media, social media.

00:00:40:37 - 00:00:43:02

I would say that the market is more sophisticated.

00:00:43:02 - 00:00:44:32

Financial modeling,

00:00:44:32 - 00:00:48:06

 is much more thorough today than it was 25 years ago.

00:00:48:21 - 00:00:50:40

Everyone has a cash flow statement, balance sheet,

00:00:50:40 - 00:00:53:40

and then the income statement, which they've always had.

00:00:53:42 - 00:00:55:25

Probably the biggest change

00:00:55:25 - 00:00:57:47

I would say would be within the technology sector.

00:00:57:47 - 00:01:00:46

It's a much larger part of the S&P 500 today.

00:01:01:39 - 00:01:04:10

So traditional metrics like price to book

00:01:04:10 - 00:01:06:00

have become less relevant and price to cash flow

00:01:06:00 - 00:01:08:29

metrics are are much more important.

00:01:08:29 - 00:01:12:39

So I think, as we, you know, as we look at that,

00:01:13:04 - 00:01:16:35

and then evaluate the companies, technology companies generate

00:01:16:35 - 00:01:19:34

lots of cash flow, higher returns on invested capital.

00:01:19:49 - 00:01:22:00

So they are a much bigger part of the market.

00:01:22:00 - 00:01:25:13

We have to acknowledge that and I think that's something

00:01:25:13 - 00:01:28:12

that definitely has changed over the last, last 25 years.

00:01:28:25 - 00:01:30:56

So, Kevin, can you share your view on the current market environment,

00:01:30:56 - 00:01:32:39

including headwinds, tailwinds,

00:01:32:39 - 00:01:35:01

and areas that you're finding attractive?

00:01:35:01 - 00:01:37:35

Yeah, I, you know, within the market now,

00:01:37:35 - 00:01:38:29

I think tailwinds,

00:01:38:29 - 00:01:42:18

particularly for value investing with inflation, running

00:01:42:19 - 00:01:43:46

two, 2.5%

00:01:43:46 - 00:01:46:46

historically value has outperformed growth in that environment.

00:01:46:46 - 00:01:51:01

So, you know, with cost of capital being, a bigger issue now

00:01:51:01 - 00:01:52:40

given inflation is a bit higher,

00:01:52:40 - 00:01:55:36

we think that's a positive backdrop for us.

00:01:55:36 - 00:01:57:29

Additionally,

00:01:57:29 - 00:02:00:18

I mentioned earlier the market’s very short term oriented.

00:02:00:18 - 00:02:03:29

So our, the way you and I do a time arbitrage,

00:02:03:29 - 00:02:05:19

I think gives us a competitive advantage

00:02:05:19 - 00:02:08:00

having a longer holding period than than most funds.

00:02:09:02 - 00:02:11:15

In terms of challenges

00:02:11:15 - 00:02:14:08

and market's been, pretty narrow last ten years,

00:02:14:08 - 00:02:15:37

and even the last three years.

00:02:15:37 - 00:02:16:46

So, you know, top

00:02:16:46 - 00:02:21:06

ten stocks in the S&P 500 represent about 33.5% of the S&P.

00:02:21:26 - 00:02:24:26

Very large, very large concentrated bet within the market.

00:02:24:38 - 00:02:27:56

Additionally, sector valuations don't have as much disparity

00:02:27:56 - 00:02:29:17

as we've seen in the past.

00:02:29:17 - 00:02:32:17

So I think it puts even more,

00:02:32:17 - 00:02:36:07

onus on idiosyncratic stock picks as we as we move forward,

00:02:36:07 - 00:02:38:03

at least in the near term environment.

00:02:38:03 - 00:02:40:24

And then finally,

00:02:40:24 - 00:02:43:26

differing political and economic views, not only in the U.S.

00:02:43:26 - 00:02:44:29

but around the world,

00:02:44:29 - 00:02:47:20

I think create a much more, dynamic environment,

00:02:47:20 - 00:02:49:06

a much more unpredictable environment.

00:02:49:06 - 00:02:52:06

So that's definitely become, that's definitely a challenge.

00:02:52:34 - 00:02:55:03

as we as we try to maneuver the markets.

00:02:55:03 - 00:02:56:41

so so so so so what factors do you consider

00:02:56:41 - 00:02:58:22

when looking at a potential investment idea?

00:03:00:00 - 00:03:03:17

So what we're really trying to accomplish is looking at what we think

00:03:03:17 - 00:03:07:32

are normalized earnings and cash flow, over a full investment cycle.

00:03:07:33 - 00:03:09:58

And that's really the crux of what our strategy is.

00:03:09:58 - 00:03:12:34

So we're studying the history of the business.

00:03:12:34 - 00:03:14:08

We're studying the management of the business.

00:03:14:08 - 00:03:17:01

We're looking at the competitive positioning of these businesses.

00:03:17:01 - 00:03:20:00

additionally, we're looking at capital allocation.

00:03:20:00 - 00:03:23:02

You know, buybacks,

00:03:23:23 - 00:03:26:07

dividends, dilutive acquisitions.

00:03:26:07 - 00:03:30:01

So those are things that, you know, we want to try to avoid, in terms

00:03:30:01 - 00:03:33:35

of, you know, management team spending money inappropriately.

00:03:33:54 - 00:03:35:57

we want to give it back to shareholders.

00:03:35:57 - 00:03:39:15

So, that really leads into the quality of management, too.

00:03:39:20 - 00:03:42:05

I think I think you'd agree with me.

00:03:42:05 - 00:03:42:40

We've seen,

00:03:42:40 - 00:03:43:21

you know,

00:03:43:21 - 00:03:46:25

bad management teams or managements that aren’t incentivized

00:03:46:25 - 00:03:49:15

the correct way could make investing in those companies

00:03:49:15 - 00:03:50:26

quite challenging.

00:03:50:26 - 00:03:54:54

So, I would say that's primarily kind of how we're looking at things

00:03:54:54 - 00:03:56:50

in terms of how we sell,

00:03:56:50 - 00:03:59:18

you know, we're looking at selling an intrinsic value.

00:03:59:18 - 00:04:01:44

So hopefully the stocks will appreciate

00:04:01:44 - 00:04:02:16

what we think

00:04:02:16 - 00:04:03:24

our fair value is based

00:04:03:24 - 00:04:06:55

on our normalized earnings and cash flow metrics, over a full cycle.

00:04:07:23 - 00:04:11:03

And, you know, we also are looking at these daily.

00:04:11:05 - 00:04:12:08

You know, as you know, you know,

00:04:12:08 - 00:04:12:34

you know, we're

00:04:12:34 - 00:04:14:50

we're grinding through the whole team is grinding through,

00:04:14:50 - 00:04:15:56

the investment thesis,

00:04:15:56 - 00:04:16:53

the financials, making

00:04:16:53 - 00:04:20:38

sure that those 3 or 4 key issues that we've identified,

00:04:20:38 - 00:04:24:03

over our typical 5 to 7 year holding period, are still,

00:04:24:03 - 00:04:27:28

relevant to our thesis as we kind of move forward.

00:04:28:29 - 00:04:30:03

So we're trying to hold

00:04:30:03 - 00:04:30:48

ourselves accountable,

00:04:30:48 - 00:04:32:03

trying to be intellectually honest,

00:04:32:03 - 00:04:33:57

which is a term, you know, I like to use.

00:04:33:57 - 00:04:37:25

And avoid value traps the best we can,

00:04:37:46 - 00:04:40:30

you know, it's with technology

00:04:40:30 - 00:04:42:16

becoming such a great part of the market,

00:04:42:16 - 00:04:45:16

which, you know, because you are a tech expert on the fund.

00:04:45:34 - 00:04:48:05

You know, it's a much greater percentage of, S&P earnings

00:04:48:05 - 00:04:49:16

and cash flow.

00:04:49:16 - 00:04:54:16

So, looking at, book value has become more challenging.

00:04:54:16 - 00:04:57:28

It's relevant in some of the deeply cyclical sectors or financials,

00:04:57:50 - 00:04:59:47

but it doesn't have the relevancy,.

00:04:59:47 - 00:05:01:47

it doesn't have relevancy necessary for,

00:05:01:47 - 00:05:03:48

for the technology companies.

00:05:03:48 - 00:05:05:23

So, you know, we've looked at

00:05:05:23 - 00:05:06:38

and you've been an integral part

00:05:06:38 - 00:05:09:17

of looking at enterprise value invested capital.

00:05:09:17 - 00:05:11:33

And that it makes even identifying our normalized

00:05:11:33 - 00:05:13:14

earnings and cash flow more important.

00:05:13:14 - 00:05:14:49

So switching gears a little bit.

00:05:14:49 - 00:05:15:43

How should an investor

00:05:15:43 - 00:05:16:46

think about value

00:05:16:46 - 00:05:19:46

and how to include that in their investment portfolio?

00:05:19:58 - 00:05:22:06

So it's a value had a very challenging period

00:05:22:06 - 00:05:26:05

when in zero interest rate environment from the 2010 to 2020 period.

00:05:26:33 - 00:05:28:58

I mentioned earlier now that inflation is back at 2%.

00:05:28:58 - 00:05:30:10

Historically.

00:05:30:10 - 00:05:33:49

values performed very competitively versus

00:05:33:49 - 00:05:35:10

growth in the overall market.

00:05:36:08 - 00:05:37:54

So I think

00:05:37:54 - 00:05:39:02

that's something that,

00:05:39:02 - 00:05:40:09

you want to be conscious of

00:05:40:09 - 00:05:41:38

when you're constructing your portfolios

00:05:41:38 - 00:05:43:31

for your clients at this point in time.

00:05:43:31 - 00:05:46:24

Additionally, the performance of the Comstock Fund,

00:05:46:24 - 00:05:48:09

I've been at it for 25 years now.

00:05:48:09 - 00:05:50:09

You've been on for 17 years now.

00:05:50:09 - 00:05:53:36

So, our, historical returns

00:05:53:36 - 00:05:54:37

are very competitive

00:05:54:37 - 00:05:56:57

not only in the category, but with the overall market.

00:05:56:57 - 00:06:00:20

So, hopefully our track record and our seniority

00:06:00:20 - 00:06:03:20

and our ability to kind of maneuver these markets over time.

00:06:03:20 - 00:06:06:49

I think that's something that, advisors would like to consider

00:06:06:49 - 00:06:07:34

when they're putting together

00:06:07:34 - 00:06:09:13

portfolios, long tenured management

00:06:09:13 - 00:06:11:17

teams who have seen multiple cycles.

00:06:11:17 - 00:06:13:55

And then additionally, you know,

00:06:13:55 - 00:06:15:34

I think one of the things you and I talk about

00:06:15:34 - 00:06:17:33

a lot is our competitive advantage with time horizon.

00:06:17:33 - 00:06:18:54

I alluded to it earlier,

00:06:18:54 - 00:06:21:53

but in a, in a market where everyone's short term oriented.

00:06:21:56 - 00:06:25:49

Our ability to take a longer term time horizon and look at normalized

00:06:25:49 - 00:06:28:49

earnings and cash flow kind of allow us,

00:06:29:01 - 00:06:31:32

kind of this time arbitrage opportunity.

00:06:31:32 - 00:06:34:18

And I think, you know, our returns,

00:06:34:18 - 00:06:35:50

although moving with the equity markets

00:06:35:50 - 00:06:36:13

are less

00:06:36:13 - 00:06:38:06

correlated with other value funds

00:06:38:06 - 00:06:40:01

and definitely with the overall market,

00:06:40:01 - 00:06:42:07

because we look at things a little bit differently.

00:06:42:07 - 00:06:45:19

Well, Kevin, congratulations on approaching your 25th year anniversary.

00:06:45:19 - 00:06:47:50

It's truly an amazing, amazing accomplishment.

00:06:47:50 - 00:06:48:59

Yeah, you're performance,

00:06:48:59 - 00:06:51:57

during your tenure has been, extremely strong.

00:06:51:57 - 00:06:54:19

And and just congratulations on a on a great career.

00:06:54:19 - 00:06:55:26

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.

Related insights