Andrew Massie, a next-generation member of the investment team that the late Peter Cundill built, co-manages the oldest and most famous Cundill mandate. Following in the footsteps of his mentor, Massie searches globally for hated, unloved or out-of-favour stocks.
"It's definitely deep value," he says. "Peter really drummed it into us. We try to find companies that are trading at least at a 40% discount to what we estimate the fair value would be, so we look for the 60-cent dollar."
Massie, a senior vice-president, investment management at Mackenzie Cundill Investment Management Ltd., began managing the $5.6-billion Mackenzie Cundill Value in August 2004. In November 2010, David Tiley became co-manager of the global equity fund, after the departure of portfolio manager and former Cundill team leader Jim Thompson.
The Cundill investment philosophy is grounded in the classic Ben Graham value approach to investing, with a global perspective. Key valuation methods include evaluating the earnings potential of a company, and looking at the stock price versus projected future value over three years to make sure that management is actually creating value. Debt to equity is always an important metric for the Cundill team. "We tend to be debt-averse as value investors," says Massie, "but a little bit isn't a bad thing."
Mackenzie Cundill Value generally holds 25 to 40 stocks, with market capitalizations above $5 billion. The cash levels will fluctuate, depending on buying opportunities. Foreign-currency exposure may be hedged, if the managers decide it makes sense to do so.
When it comes to portfolio turnover, the managers will on average have a holding period of roughly three years. "You can see a big skew in 2008 and early 2009," says Massie, "with a very rapid switch out of Japan to the States, but longer term, we should settle down to about one third (turnover) a year."
Among the fund's top holdings, the computer maker Dell Inc. DELL
and the software giant Microsoft Corp. MSFT
-- both of which were formerly high-flying growth stocks -- are prime examples of value plays.
The investment case for either stock isn't readily apparent, Massie acknowledges. "If you look at Dell and Microsoft on a hard price-to-book basis," he says, "you would never own either one of them."
What Massie finds appealing about Dell is that it is "morphing" into a higher-margin service company, and is more than just a low-margin hardware provider. "That is something we think the markets aren't truly appreciating," he adds. "We were really happy to buy Dell averaged down at $8 a share."
As for Microsoft, Massie notes that the company generates an awful lot of free cash flow and has had positive earnings for the last 40 quarters. "It is a company that is not appreciated," he says, "but definitely in terms of net asset value they do hit the sweet spot."
The energy sector also showed up on the radar screen from a bottom-up perspective. The Cundill team bought BP PLC's U.S.-listed ADR BP
in June 2010 in the wake of the massive oil spill from an offshore BP drilling rig in the Gulf of Mexico. "Each investment has a unique catalyst beyond the commodity," Massie says, referring to the disaster-driven plunge in BP stock.
Massie, 47, credits his father, fund manager Tony Massie, for introducing him to value investing. In 1984, the younger Massie started working with Peter Cundill in client services at the then small independent fund company. Massie was quickly promoted to the mutual-fund accounting department and was soon running the department.
In 1992, Cundill asked Massie to join him on the investment side. In 2001, Massie was promoted to associate portfolio manager and began managing some of the pension accounts.
After years of failing health, Cundill sold his Vancouver-based money-management firm Cundill Investment Research Ltd. in 2006 to Mackenzie Financial Corp. That year, he also stepped down from the firm. Even so, Massie and his colleagues continued to share ideas and stock picks with Cundill until his death in January of this year.
Under Massie's tenure, Mackenzie Cundill Value Series A has a five-year annualized return of 0.9% compared to the median 0.2% in the Global Equity category, as of May 31. Over the two-year period, the fund returned an annualized 15.6% versus the median 13%. "In early 2009, it was like shooting fish in a barrel as value investors," says Massie, "but we are definitely not in that sort of environment anymore."
Massie says it is tougher to find deep-value stocks than it was a year ago, and there's been a shift in where they can be found. "In the States we're not finding a heck of a lot," he says, "but we are finding a lot of interesting stocks and an awful lot of 70 to 75-cent dollars in Europe at this point. If we watch the space, we will have the opportunity to invest there. It's just patience waiting for price."