7 lessons from a global value manager

By Morningstar |  02-03-17 | 
 
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Patience, and sticking to your discipline.

These are among the lessons that Don Reed, former president, CEO and portfolio manager with Toronto-based Franklin Templeton Investments Corporation, learned over a 46-year investment career. He was personally recruited by the late Sir John Templeton and joined what was then called Templeton, Galbraith and Hansberger Ltd. in September 1989.

In an interview with Diana Cawfield, a Morningstar Canada contributor, on the occasion of his January 31 retirement, Reed reflected on what investors need to know about value investing.

Sticking with a value discipline can be painful at times.

Reed recalls that during the technology-driven bull market of the late 1990s, the Templeton group of managers with which he worked didn't own any technology stocks. Quite simply, the companies didn't meet their valuation criteria. In sticking to their discipline, the managers had to put up with disparaging comments like: "Look at those guys at Templeton, boy have they lost it. They don't even own those tech stocks.'' The ensuing market crash vindicated value-style managers such as Reed and his colleagues.

With some stocks, patience and long-term investing can go hand in hand.

"The turnover in the Templeton International Stock fund last year was 16%," says Reed. "We didn't have stocks that we wanted to sell in order to buy others that we thought could do better."

Among the fund's long-term holdings is China Mobile Ltd, the largest cellular-service provider in the world, which the fund first bought in 2001. The company has more than 800,000 subscribers, Reed notes, and China's population is more than 1.3 billion. "There's phenomenal growth in the usage of data," says Reed, "and China is way behind in the use of data compared to the U.S. If the company grows to double what it is right now, and it will," shareholders will be rewarded.

An otherwise excellent company may not represent good value.

Many years ago, when Sir John Templeton was addressing a group in New York, somebody asked him why his portfolio didn't own Quaker Oats Co., acquired in 2001 by PepsiCo. Inc. As Reed recalls, Sir John answered by saying: "Every morning when I get up, I have my oat bran and it's Quaker Oats, and everybody knows what a great company it is. But it's overvalued, too expensive, so I won't buy it.''

On-the-ground research is essential.

The first time that Reed visited Hong Kong, he met with Mark Mobius who sent Reed out in the field with two analysts to visit with companies. During those visits, Reed gained valuable insights and experienced the local culture. Along with talking to the management of a company, Reed says it's just as important to talk to the clients of the company, the suppliers and the people on the shop floor.

The vast amount of available information is a mixed blessing.

"Even for analysts," Reed says, "it's kind of information overload. Yes, you need that information. However, there's still a judgment call that has to be made. That hasn't changed."

Investing globally reduces your risks.

Canada has its own world-class companies in some sectors, such as financial services. "During the financial crisis, the best banks in the world were Canadian banks," says Reed, noting that these banks didn't participate much in the subprime market that afflicted some U.S. lenders during the 2008 financial crisis.

But with Canada representing only about 5% of the global market, Reed is a strong believer in the benefits that Canadians can obtain by broadening their investment horizons. Investing only in the Canadian market and its heavy weightings in natural-resources sectors "is not a safe way to invest," says Reed, "unless you have the stomach for volatility. The volatility of oil is phenomenal."

If you lose once, don't lose twice.

"I think 2008," says Reed, "kind of destroyed the confidence of a lot of investors. We put out a piece at that time, Don't Lose Twice, and that advice still holds. You've lost money on the downside, so don't sell out there. Use this as an opportunity to average (purchases) into mutual funds. If you sell your position, you've lost the upside opportunity."

This post initially appeared on Morningstar Canada.

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