IVA’s De Vaulx Wins After Cutting Losses: Riskless ReturnCharles Stein
Charles de Vaulx’s aversion to expensive stocks has led him to hold more than a quarter of his fund in cash because he deems prices to be too high.
That cautious strategy has helped cut losses during market declines, allowing de Vaulx’s $3.6 billion IVA International Fund to rank among the best international funds over the past three and five years, and produce the top return on a risk-adjusted basis over the past 12 months, according to the BLOOMBERG RISKLESS RETURN RANKING. It had about average absolute returns and the lowest volatility over all three time frames in a group of 114 funds with at least $1 billion.
De Vaulx, who worked with legendary value investor Jean-Marie Eveillard before managing his own fund, aims to deliver smooth results by investing in quality businesses selling for less than their worth and by holding cash and gold to protect against losses. Like value investors from Baupost Group LLC founder Seth Klarman to Berkshire Hathaway Inc.’s Warren Buffett, de Vaulx builds up cash when stocks are expensive.
“We believe in winning by not losing,” he said in a telephone interview from New York. “We would need to see markets fall 20 percent for us to put all our cash to work.”
De Vaulx, 52, spent 20 years at First Eagle Funds where he worked with Eveillard, whose First Eagle Global Fund avoided the collapse of Japanese equities in the late 1980s and the Internet stock bust that started in 2000. The fund gained 15 percent a year from 1979 through 2003, compared with 12 percent annually for the Standard & Poor’s 500 Index.
De Vaulx left First Eagle in 2007 and in May 2008 joined New York-based International Value Advisers LLC, where he serves as chief investment officer and portfolio manager. The firm manages $21 billion.
IVA International had a risk-adjusted return of 1.6 percent in the past year, best among 114 funds that excluded those specializing in emerging markets or small-capitalization stocks. It beat about 90 percent of international funds in risk-adjusted returns over three years and 97 percent over five years. In all three periods, it had the lowest volatility.
In the past five years, the fund had an absolute return of 63 percent, compared with an average of 57 percent for the group. The fund’s benchmark, the MSCI All Country World Index Excluding US Index, gained 54 percent in that same period.
Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of performance per unit of risk.
“The managers are very defensive and cautious,” Gregg Wolper, an analyst for Chicago-based Morningstar Inc., said in a telephone interview. “This fund is not for everyone.”
The managers’ approach causes the IVA International fund to trail the broader markets during rallies and outperform when stocks lose ground. In 2009, a year when rival funds gained an average of 35 percent, IVA International rose 19 percent to trail 98 percent of peers, according to data compiled by Bloomberg. In 2011, when the same funds lost an average of 12 percent, IVA International declined 2 percent to beat 92 of competitors.
Charles de Lardemelle, who also worked at First Eagle, co-manages the fund with de Vaulx. The two also run the $10.4 billion IVA Worldwide Fund, which invests in U.S. as well as international stocks.
The managers, in the fund’s most recent semiannual report, said that they try to preserve capital while still beating their benchmarks over five to 10 years.
“We realize that many investors cannot tolerate high volatility and appreciate that life’s bills do not always come at market tops,” they wrote.
De Vaulx aims to meet those twin goals by buying companies whose value is unappreciated by the market. The fund’s second-largest stock holding, Tokyo-based Astellas Pharma Inc., fits his definition.
The company, said de Vaulx, has a strong drug pipeline, and unlike many Japanese businesses, pays a dividend and buys back stock. He said it is cheaper than its drug industry rivals around the world for a single reason: because it is located in Japan, where two decades of slow growth have depressed valuations.
“If this stock traded in New York or Paris it would be 30 to 40 percent higher,” said de Vaulx. “No doubt about it.”
Astellas gained 16 percent this year and more than doubled over the past five years, according to data compiled by Bloomberg.
IVA International in the first quarter added to its holdings of Kangwon Land Inc., a South Korean casino and hotel operator. Kangwon’s casinos have a monopoly on gaming in Korea, said de Vaulx, and the company has been expanding its capacity. Kangwon, which de Vaulx considers more attractive than better-known Macau casino operators, gained 13 percent this year.
As stock prices worldwide rallied, de Vaulx couldn’t find stocks that meet his criteria. As result, he had 26 percent of his fund in cash as of June 30. Cash at Buffett’s Omaha, Nebraska-based Berkshire Hathaway rose above $50 billion at the end of June, the most ever at a quarter’s end, as he waits for a “fat pitch” opportunity to invest at attractive prices.
Cash limits losses in tumbling markets, said de Vaulx, and can be used to scoop up bargains when they appear.
Gold, which represented 3 percent of the fund’s portfolio as of June 30, is attractive because it often moves in the opposite direction from financial assets, said de Vaulx.
“Ideally we want it to zig, when stocks and bonds zag,” he said.
De Vaulx, who focuses mainly on individual securities, also pays attention to macroeconomic trends. His biggest worry at the moment is China, because it has experienced a large expansion in credit over the past few years.
De Vaulx said that going back to his days with Eveillard he has viewed similar explosions of credit as a warning sign of trouble to come.
“Eventually the bubble will burst,” he said.
De Vaulx’s concerns about China have prompted him to avoid most Chinese stocks as well as commodity producers that depend on Chinese growth. Chinese equities represented 3.1 percent of IVA International’s stock holdings as of June 30.
With the benefit of hindsight, de Vaulx concedes that the fund would have done better holding less cash. Still, he has no intention of plunging into stocks, most of which he considers fully priced at the moment.
“We are sitting tight waiting for the time when we can find bargains again,” he said.