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Valuation in a Risk-Free World
CFA Society New York’s hosted Valuation in a Risk-Free World on September 25th, 2017
Welcoming Comments: Mr. Michael Oliver Weinberg, CFA, Chief Investment Officer, Protégé Partners
Presentation: Ms. Catherine Legraw, CFA, Portfolio Strategist, GMO
Fireside Chat Panelists: Pelham Smithers and Whitney George
Mr. Pelham Smithers, Managing Director; Pelham Smithers Associates
Mr. Whitney George, Portfolio Manager, Sprott Asset Management USA
Presentation: Ms. Jill Carey Hall, US Equity Strategist, Bank of America Merrill Lynch
Presentation: Mr. Vadim Zlotnikov, Chief Market Strategies, Alliance Bernstein
Fordham University Presentation: Mr. James Kelly, Director – Gabelli Center for Global Investment Analysis
Closing Remarks: Mr. Elliott Trexler, Chief Investment Officer, Global Return Asset Management, LLC
As the moderator and organizer, Mr. Weinberg kicked off the event with the key theme: “We’re in the 9th year of bull market partly supported by the easy monetary policy.” Throughout the rest of the presentations and discussions, it literally centered on this very theme.
Ms. Catherine LeGraw gave the first presentation of the day. Most of her comments related to the fundamentals for stocks are great. Prices have risen beyond their fair valuation. Bond yields are low and has quite a dismal outlook and there are valuation risks. Given her research, the recommendation she provided is to long emerging equities and short US large-cap equities.
Both Mr. Pelham Smithers and Mr. Whitney George each gave a brief presentation. Pelham’s core thesis for his presentation is that stocks are expensive & have been for some time. Depending on your holding period, this can be a problem. The current low volatility implies strong near term support but volatility is unstable and unpredictable. While Whitney’s presentation is on Gold investment thesis – default or debase.
Pelham’s view on Asia is that there is ample liquidity and in general the group is very cheap while Whitney thinks that it would be fun for stock pickers again when there is a shakeout in the market. He normally looks for high quality companies that can perform in different cycles, with focus on valuation metric such as cap rate, earnings yield of the business. Some of talks that Mr. George discussed were Apple, Western Digital & Benjamin Franklin Resources. Most of these businesses are of high quality, generate significant amount of cash flow and buying back it’s stocks.
Ms. Jill Carey Hall gave the following presentation. The crust of her presentation centered on the fact that most valuation metrics are trading at a premium. While it is at full valuation and by no means is overly rich.
The last formal presentation of the day was by Mr. Vadim Zlotnikov. He mentioned that mean-reversion has to happen, but the issue is timing and no one knows definitively when this would happen. The way Mr. Zlotnikov thinks about valuation in low interest rate environment are that the drivers of low rates are more important than “discount effect”. Simplistic assumption of mean reversion based on historical relationships could lead to a portfolio of “value traps”. There is a need to explicitly assign higher terminal ROEs to companies with defensible franchises, low net debt / asset lite. His key conclusion is, “In general, reflation is the biggest contrarian trade. Make sure to diversify that exposure in value portfolios.”
As one of the event’s main sponsors Fordham University, Mr. James Kelly gave an overview of Fordham University Gabelli Center for Global Security Analysis. The school has come a long way in building the Value Investing program. Now, both the undergraduate and graduate level courses are available to students. The Gabelli Center for Global Security Analysis has truly fulfilled a need for students who intends to make get an education in Value Investing.
In closing, Mathias Strohfeld, CFA provided some brief remarks, which concluded a day with fact-filled presentations and intellectual discussions on the topic of Valuations in a Risk-Free World.