No such thing as a ‘must own’ company
Speaking to financial advisers at a recent Pan-Tribal lunch, Danton Goei of Davis Advisors, shared his investment insights – including his belief that there’s no such thing as a ‘must own’ company.
Danton Goei, analyst and portfolio manager of the Pan-Tribal Global Equity Fund explained that valuation is one of three key determinants that underpin Davis Advisor’s (Davis) investment philosophy.
“Investors can get caught up in the hype perpetuated by companies and markets,” said Goei.
“It’s important to look beyond the headline numbers; while the P/E is fine, there are two things wrong with it…the P and the E.” Goei gave the example of car manufacturer General Motors in 2008, when it had US$58.4 billion in underfunded pension and healthcare entitlements; however, this liability was not reflected in its price or earnings numbers.
“The share price generally does not include debt, underfunded pensions or healthcare entitlements,” said Goei. “It’s important to make these key adjustments to a company’s financials to get a true picture of a business. In 2008, GM was really owned by retirees and its employees rather than shareholders.”
Likewise, the analysts at Davis adjust the E, the earnings numbers reported by companies, for a range of factors.
By way of example, Goei explained that there are two types of accounting practices used. The standard practice generally expenses items as costs are incurred, and books profits as they are made. The alternative is program accounting, where expected sales over a specific time are estimated, together with expected costs and, from there, the average profit the company will book each year is calculated – even for year one.
“Program accounting represents a long-term view – but how can an organisation really know how many sales they will make and at what cost?” said Goei.
“There can be quite a difference in reported profitability, depending on the accounting methodology adopted.”
Valuation is not the only important consideration for Davis; their investment approach also looks for quality businesses with a durable competitive advantage, as well as quality management with a track record of sound capital allocation.
The Pan-Tribal Global Equity Fund, managed by Davis Advisors, currently invests in 51 companies across 13 countries. While regional factors are an important input into stock selection, the strategy that underpins the Pan-Tribal Global Equity Fund is a fundamentals-based, unconstrained approach, with bottom-up research conducted in-house. The portfolio holdings represent high conviction ideas from a universe of global investment opportunities.
Colin Woods, Pan-Tribal CEO commented, “I have been very pleased with the traction the Fund has in the market – it recently passed $30 million in funds under management.
“Both Lonsec and Zenith have upgraded the Fund’s rating in the past few months, and it is available through most of the major platforms.
“Importantly, the Fund is being supported by a growing number of key financial planning groups,” said Woods.