Tuesday, October 16, 2007

Pzena Investment Management's IPO presentation

Good presentation regarding how Pzena Investment Management built its AUM from $3billion to $30billion.

Important take home messages:

  1. To be a successful investment firm, one has to deliver long-term superior results through constant, repeatable process that clients could understand.
  2. The first step towards finding potential investments is using its own proprietary screening method. For every industry, Pzena's team would rank all the companies into five quintiles. The way they do it is by using its current earning and extrapolate naively into the next few years what its earning should be. Then, they would concentrate on finding potential investments on the top quintile.
  3. Three most important questions they ask themselves regarding potential investments are:
    a) Is this company any good? b) Are the problems temporary? c) Will its earning rebound back to normal?
  4. Pzena and his teams will only invest in companies that answer "Yes" to all those questions.
  5. Thought process: Think like a business owner rather than a stock picker.
  6. Pzena team thinks like a business owner and imagine that they are like private equity, buying the whole business and thinking what the companies will earn in future.
  7. One example that Richard Pzena used was Boeing. Post 9/11, Boeing stock took a hit, dropped from the $70s to the $20s. Through Pzena's own proprietary stock screen, it showed up on the top quintile.
  8. The conclusion that they made on Boeing was it is a superior company with only one competitor, it has very sticky customers as they would use the same company to service their planes to keep their costs down, it has defense business that is doing well and thus provides downside protection and they believed that its business should rebound in a few years.
  9. Boeing is definitely a wonderful business, clouded by temporary problems and will have higher normalised earnings in future.
  10. Investment decision: A team approach.
  11. For every portfolio, there are 3 co-portfolio managers and everyone of them would have to unanimously say "Yes" before a stock is added into the portfolio.
  12. Buying an selling strategy: Rigid and discipline; Pay no attention to portfolio managers' intuition.
  13. They would only buy companies ("Yes to all 3 important questions") that are ranked on the top quintile and sell when the prices approach the middle quintile. Period.
  14. Portfolio diversification: Concentrated portfolio with 25 to 30 stocks.
  15. Clients education: Pzena team spends good amount of time educating clients what they are doing and discourage clients who might be upset or nervous if the funds are not doing well in the next 1, 2, 3 or 4 quarters.
  16. This will results in highly educated and sticky clients.
  17. In summary: Pzena team uses old fashion, holy grail approach of investing: Buying good businesses, which are available at low prices caused by temporary problems with high likelihood that earnings will rebound in future.

To watch this excellent presentation, please visit: Retail Road Show

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