Manager Profile: True Value

The year 1974 would have to rank up there as one of the least auspicious years to start a money management firm. After all, the U.S. economy discovered a new phenomenon stagflation and the stock market reflected that unhealthy economic condition, plunging an agonizing 45 percent in the 23-months ended that December. Charles Brandes, then a 31-year-old stockbroker in La Jolla, Calif., saw an opportunity.

The year 1974 would have to rank up there as one of the least auspicious years to start a money management firm. After all, the U.S. economy discovered a new phenomenon — stagflation — and the stock market reflected that unhealthy economic condition, plunging an agonizing 45 percent in the 23-months ended that December.

Charles Brandes, then a 31-year-old stockbroker in La Jolla, Calif., saw an opportunity. Being a disciple of the value gods Benjamin Graham and David Dodd, he saw gold in the equity wasteland. “Even though everyone was bearish, it was a great time to be buying stocks,” he has said.

Twenty-eight years later, his firm, Brandes Investment Partners, is managing $62 billion for institutions and individual investors via managed account programs and mutual funds. While hardly a household name, Brandes, which offers a variety of value funds — including international and small-cap portfolios — has created quite a cult following among registered reps and independent advisors alike.

“I work with them as part of an asset allocation for a couple reasons — they have a consistency of style, they've demonstrated an ability to be successful in all types of markets and they are very good stock pickers,” says Wade Evans, RIA, Evans Investment Advisors in Baton Rouge, La. “Brandes is the type of manager — year in, year out — you never have to be embarrassed by.”

In fact, Brandes tops Cerulli Associates' rankings of the largest separate account managers, with 5.4 percent of the market's assets at the end of 2001's third quarter, the latest figures available.

It's not hard to see why, given Brandes' returns. Its U.S. Value Equity portfolio was up 34 percent in 2000 (see performance chart for its largest portfolios on page 55).

The money manager is on track to stay on top, says Phil Kosmala, manager of investment research at Chicago-based DiMeo Schneider & Associates. What can hurt Brandes, he says, are a return to growth investing, and getting too big to manage effectively.

Brandes can't do much about investing trends, but it has dealt with the size issue. Last November, in an effort to control the growth of two of its better-known products — the Global Balanced and the Global Equity portfolios — Brandes closed them to new clients. It had already done that in 1998 with its International Equity product, its largest portfolio, which was down 14 percent in 2001 compared to the Morgan Stanley Capital International European, Australasian and Far Eastern Index, which was off 21 percent.

“In our business, there are promoters and there are performers, and I'd much rather be on the performer's side,” Brandes says. He refers to himself not as chief executive, but as one of five managing partners, and deflects recognition for the firm's success from himself, saying it's a result of the hard work of the other partners. “I do get my 2 cents in, but I wouldn't take credit for what's happened in the last two years,” he says.

There are about a dozen portfolios that carry the Brandes label and other products on which they subadvise. But all hew to the value investing philosophy. Indeed, as value investors go, Brandes and his colleagues are pretty doctrinaire. Brandes, like Ben Graham, whom Brandes knew personally, believes that when you buy a stock, you are buying a piece of the company.

Brandes and his eponymous firm take the long view, prepared to hold on for at least three to five years. That's how long the investing public may overlook a stock's real value. So, it matters less what the market thinks of the current climate than whether a company is trading below its intrinsic value or not. Brandes says people often buy on the basis of fad, greed and fear. “Markets are not always efficient or rational,” he says. “We absolutely will not get caught up in the herd.” And like Graham and Dodd, Brandes talks about a margin of safety, the amount that a company's current assets is undervalued by the public.

When Brandes first met Graham, “It really was like a light bulb went off,” Brandes says, “and it's never burnt out.”

Not surprisingly, the dot com craze was a blip on the manager's radar, one that he ignored. “We were sitting around here, shaking our heads. I was saying this is the craziest thing I've ever seen from the standpoint of irrationality,” Brandes says. “There was no temptation to do any of it. From a basic fundamental stance, it made no sense whatsoever.”

Staying away from buying panics isn't always easy. But the firm has consistently followed its charter. “We are quite clear with our investment style, even in periods of time where value was out of style,” Brandes says. And that has hurt him at times. “In the first 10 years, we didn't have a lot of money under management. ‘Value investing’ wasn't very popular,” he says.

Things started changing, though, in the mid-‘80s and gradually, the business began to increase — for a couple reasons.

“First of all, we had developed a long-term track record. Second, we decided to expand the firm, in terms of marketing, in '84 and '85,” Brandes says. “Third, we had experience in non-U.S. equities at a time when there was a big push in this country for diversification.”

He says the nature of the investment business dictates that there will always be investors influenced by the short term, but that won't influence him. “In my opinion, whenever someone is trying to forecast the market, or are not thinking three to five years out, they are market speculators and not true investors,” he says.

Of course, no investment is immune from risk, and neither is any style. Bill Rocco, senior analyst for Morningstar, says Brandes often will have 15 percent to 20 percent of its international products' total assets in emerging markets, rather than the typical 8 percent to 10 percent most of its competitors do. Rocco follows Brandes' Institutional International Equity fund and two similar funds on which it subadvises, one for Nations Funds and the other for ING Pilgrim Investments.

“The more emerging markets you're in, the greater the risk, but since Brandes goes for value, it mitigates the extra risk of exposure,” he says. According to Morningstar, Brandes' top five holdings in its Institutional International Equity portfolio are Diageo, British American Tobacco, Tokio Marine and Fire Insurance, Japan Tobacco and Mitsubishi Heavy Industries.

“They're good. Foreign funds, in general, have disappointed,” Rocco says, but the Brandes fund he watches consistently beat 95 percent of its peers in performance. Even in 1998, when growth was big, Rocco says, Brandes was never below the middle of the pack. “Generally, Brandes has just done well.”

Brandes Beats the Benchmarks

Portfolio Name Performance through Dec. 31
1 year 3 years 5 years
Brandes International Equity -14.15% 10.73% 13.86%
benchmark: MSCI EAFE -21.44% -5.05% 0.89%
Global Equity -0.66% 14.04% 16.53%
benchmark: MSCI World -16.82% -3.37% 16.53%
U.S. Value Equity 16.09% 10.86% 13.00%
benchmark: Russell 1000 Value -5.59% 2.74% 11.13%
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