investing in the tradition of graham, buffett, klarman super · as for jean-marie’s remark that...

Investing In The Tradition of Graham, Buffett, Klarman

Year VII, Volume III

When asked how he became so THE SUPER- March 2014

successful, Buffett answered:

Top Ideas In This Report INVESTOR

“We read hundreds and hundreds of annual reports every year.” ISSUE

Cisco Systems ► MOI Signal Rank and Top Holdings of 60+ Investors (Nasdaq: CSCO) ……………….. 108

International Game Technology ► 20 Companies Profiled by The Manual of Ideas Research Team (NYSE: IGT) ……………………... 152

Oracle ► Proprietary Selection of Top Three Candidates for Investment (NYSE: ORCL) ………………….. 160 ► Exclusive Interview with Charles de Lardemelle of IVA Also Inside ► 10 Essential Screens for Value Investors

Editorial Commentary ……………… 4

Charles de Lardemelle Interview ….. 7 Superinvestor holdings analyzed include Allison Transmission (ALSN), 60+ Superinvestor Portfolios …….. 23 Anadarko Petroleum (APC), Atwood Oceanics (ATW), Boston 20 Superinvestor Holdings ……….. 88 Scientific (BSX), Cameron (CAM), Cisco Systems (CSCO), Coca-Cola (KO), Screening Superinvestor Stocks …. 168 Cooper Tire & Rubber (CTB), CVS Caremark (CVS), Dollar General (DG), 10 Essential Value Screens ……….178 EMC (EMC), Express Scripts (ESRX), Goldman Sachs (GS),

W.W. Grainger (GWW), HCA (HCA), Hewlett-Packard (HPQ), About The Manual of Ideas International Game (IGT), Micron (MU), Oracle (ORCL), and PepsiCo (PEP).

Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top Join us at the fully online Asian holdings of top fund managers. We Value Investing Summit 2014 also use a proprietary methodology to identify stocks that are not widely New Exclusive Videos in April! Use code MOISAVE to followed by institutional investors. get $100 off the early-bird rate.

Our research team has extensive in the MOI Members Area experience in industry and security Visit ValueConferences.com (log in at www.manualofideas.com analysis, equity valuation, and investment management. We bring a or email [email protected]) “buy side” mindset to the idea generation process, cutting across industries and market capitalization Charles de Lardemelle on Global Value Investing ranges in our search for compelling equity investment opportunities.

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Inside:

Exclusive Interview with

Charles de Lardemelle, Founding Partner,

International Value Advisers

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Watch a video recording of this interview in The Manual of Ideas Members Area at www.manualofideas.com/protected

“My father didn’t know what a margin call was, so when I

came back home that weekend I had to explain what that was. He did not

bail me out.”

Exclusive Interview with Charles de Lardemelle We recently had the pleasure of interviewing Charles de Lardemelle, a founding partner and portfolio manager at International Value Advisers, based in New York City. In the conversation, Chuck provides a wide-ranging perspective on his approach to global investment opportunities. Until 2007, Chuck was a senior vice president at Arnhold and S. Bleichroeder Advisers, and associate portfolio manager of the First Eagle Global, Overseas, and U.S. value funds as well as a variety of separate accounts and offshore funds. From 2005 to 2007, he was a director of research at ASB responsible for hiring, training and supervising a team of eight analysts. From 1996 to 2005, Chuck was a securities analyst for the First Eagle Funds and predecessors. As an analyst, he was responsible for covering a number of industries globally, including services, transportation, hotels, technology, and capital goods. (The following is an edited transcript of a video interview and may contain errors. The transcript has been lightly condensed for clarity and readability.) Oliver Mihaljevic, The Manual of Ideas: We are looking forward to learning from you about investing. We’re going to cover several topics – I’m really excited about them. Before we do so, please tell us a bit about what piqued your interest in investing and how did you get involved in it? Charles de Lardemelle: I started at an early age. I was always attracted by the stock market and so I bought my first stock when I was about twelve with Christmas money. And fast forward to business school (I went to a French business school). There was an investment club there that allowed you to basically play the stock market like a pro. So you would pick up the phone and you would be directly in touch with the French stock exchange at the time, which was still a physical trading floor, now it’s all dematerialized. I had to borrow, basically to pay for business school, and there was some leftover of about FFR 10,000, the equivalent of $2,000 at the time, in today’s terms, probably closer to $5,000, and I started dabbling in the stock market. And then I used leverage, and then I did options. I was about 20 years old at the time and I thought I was really going to make it. My father was very proud when he received a letter about six months later, and gathered my brothers around the dining table and told them “your brother got an internship at a well-known bank!” He opens up the letter and it’s a margin call. My father didn’t know what a margin call was, so when I came back home that weekend I had to explain what that was. He did not bail me out. In hindsight, it’s the best $5,000 I spent on my education. I had just lost money that I could not afford to lose and so I decided to take a year off business school, that’s 1994, and I did different internships in various parts of the financial markets.

The first one was at DLJ in Paris. The second one was in bond origination at Societe Generale in Paris. And the last one was in New York City, where I met Charles de Vaulx and Jean-Marie Eveillard, and Charles gave me Warren Buffett’s letters to shareholders. And I clearly remember that day, I went back into my dormitory and started reading the letters, and I just couldn’t let go, and I said, “this is it.”


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“…in Asia there are still plenty of opportunities which remind me a lot of what the

market was probably like for Jean-Marie [Eveillard] and Charles [de Vaulx] in the

1980s, in Europe.”

For the first time, I was exposed to a philosophy that resonated with me, that clearly lays out what the market is and that Mr. Market is here to serve you. And I said, “this is it, this is what I want to do.” Finally, I found my calling. And so I was lucky in the sense that I stumbled upon this early in my life. And so I went back to France to finish business school and started working straight away in 1996 for Jean-Marie Eveillard and Charles de Vaulx at what was at the time the SoGen Funds, which was part of Societe Generale. I worked for Jean-Marie and Charles as an analyst for the following ten years or so, then became Director of Research for a couple years, overseeing a team of ten people, before starting IVA with a number of former members of my team. MOI: You mentioned Jean-Marie Eveillard and your heritage from France. We don’t seem to find that many value investors in France or in Europe, and you’ve ended up in New York. Tell us a bit about what it takes to really pursue this. de Lardemelle: Jean-Marie Eveillard was one of the first investors to truly be a global value investor. A lot of investors claim they are value investors but it takes a number of attributes that are fairly rare in the investment world. It takes the ability to be patient, the ability to be contrarian, and it takes a lot of homework in understanding the intrinsic value of a whole business. A few people do it well outside the U.S. You have many more adjustments to make, usually, to numbers. There are many more joint ventures, peripheral assets, be they some hidden real estate or a stake in another business that’s not well-understood by Wall Street or the sell-side in general. What I would say, it’s become much more difficult over the years because of rising competition and more standardized accounting. Back in the 1980s and 1990s, there were still plenty of opportunities of that nature in Europe. You also had different accounting systems from one country to the other in Europe. With the euro and IFRS (International Financial Reporting Standards), all that disappeared. Also hedge funds have done a much better job of unearthing value in Europe, arbitraging the different valuations for the same businesses, U.S. versus Europe, and that phenomenon really took off beginning of this century. However, in Asia there are still plenty of opportunities which remind me a lot of what the market was probably like for Jean-Marie and Charles in the 1980s, in Europe. In that sense, it’s in Asia that you find the most discrepancies between value and market prices especially on smaller, more obscure companies. MOI: Being opportunistic in the sense that one looks globally for opportunities is certainly one of the differentiating factors of your firm. I’d be curious, Jean- Marie Eveillard has described value investing as a big tent, how do you see yourself within the spectrum of value investing approaches? de Lardemelle: Not only do we look at different geographies but we also look at different asset classes – bonds versus equities versus cash, and that’s atypical of the way Wall Street is organized, and that really helps us in understanding where there are bubbles brewing or finding opportunities sometimes outside equities that provide equity-like returns. As for Jean-Marie’s remark that value investing is a big tent, we are more attracted to the Buffett side of the tent, in other words, finding great businesses selling at reasonable prices rather than deep value situations or cash boxes (declining or challenged businesses selling below net cash with subpar




“[Great businesses] compound at/or faster than GDP naturally on the top line, where margins are

fairly stable or growing over time as the moat around the business grows, and most

importantly, where decent to excellent return on equity is protected through some sort

of barrier to entry.”

management) that you would find in Japan. We do invest in those deep value opportunities from time to time. Those investments tend to be smaller positions for us. Whereas, the higher quality businesses is really where we like to hunt and where we would be willing to take large positions. And indeed, if you look at the top 10 equity positions within the funds, you would find in an overwhelming majority, high quality businesses with good managements. MOI: We find that it’s always the most insightful thing to first make sure that we speak the same “language” and understand the definitions. When you say “great businesses,” what do you mean by that?

de Lardemelle: Businesses that compound at/or faster than GDP naturally on the top line, where margins are fairly stable or growing over time as the moat around the business grows, and most importantly, where decent to excellent return on equity is protected through some sort of barrier to entry. What differentiates us as well is that for many investors, especially in the U.S., they clearly insist on return on capital employed and return on equity. We understand that these metrics can be gamed. We understand that there are some businesses that show pedestrian return on equity or return on capital employed yet are good to excellent businesses. More important is to understand how that return on equity looks like five, ten years down the road, whether it’s likely to go up or down, and to try to adjust to really understand the true underlying returns. So sometimes you have to strip out the goodwill, sometimes you want to put all the goodwill back in to understand how money is being reinvested in the business or through acquisitions. It’s not enough that you have those characteristics. You also need decent management in terms of capital allocation to make it a truly good franchise. There are few businesses where you can see the top line growing at GDP plus over a long period of time. To me, those are the true growth stocks. True growth stocks are not the ones where you have a spurt of growth, where for a few years they’re going to grow 10%, 15% on the top line. True growth stocks are the ones that are able to compound at GDP plus over a number of decades. A good example of that would be Sodexo [Paris: SW] which we own in France. It’s a company that operates in catering and facilities management. Just to give you a sense of what’s misunderstood or had been misunderstood by markets, if you look at return on equity, it’s okay, but it’s somewhat pedestrian – mid teens. If you look at return on capital employed, you find the same thing. You really need to look under the hood to understand the financials. If you strip out the goodwill, you start to find interesting characteristics. In fact, their business requires no capital because in catering you get paid before you pay the suppliers of meat and food stuffs. Because Sodexo is pushing hard into facilities management, and because there is more and more outsourcing by companies of these services, the company has never experienced a situation since it has been listed in the 1980s of having negative organic sales growth. The reason why the return on equity looks pedestrian is because at some point in its development, late 1990s, Sodexo had to pay dearly and sometimes overpaid for large acquisitions. But really what matters is that now it’s growing organically and that organic growth requires no capital, and so you have infinite returns on your growth going forward.




“[Sodexo’s] business requires no capital because in catering you get paid before you pay

the suppliers of meat and food stuffs.”

As a consequence, if you look down the road 5, 10, 15 years, it’s likely that Sodexo’s return on equity will continue to grow because the goodwill is a fixed amount. And as I explained, there has never been a year where top line was negative. In a sense, that business model is the same as Dell. At Dell, you were assembling parts of a PC, you had no capital employed, and negative working capital requirements. When the PC market was growing, Dell enjoyed high multiples. In the case of Sodexo, the company does not assemble a PC – it assembles a food plate, but the financial model is essentially the same except that at Sodexo, we still see tremendous opportunities for growth over time. It slowed down somewhat in this recession but it’s still growing. Maturing markets in terms of outsourcing for food catering still provide heavy free cash flow, while the facilities management part of the business is growing double digits and is a huge, heavily fragmented and fast growing market. Now, unfortunately, the stock today is not cheap anymore. But it’s a good example of a great business that’s somewhat hidden if you just screen numbers. You have to really understand the financials to understand the potential of the company and how good the underlying businesses are. MOI: When it comes to adjusting the goodwill, one needs to make the judgment that this company has changed in the sense that where its acquisitions were a big part of the investment case in the past, it’s no longer the case going forward… de Lardemelle: That is absolutely correct. In the case of Sodexo, all the large acquisitions have been made so the industry has consolidated substantially on the catering side. Sodexo is still making some acquisitions, but on the facilities management side. The company made one in India a couple years ago. The more recent one, the larger one was in Brazil where it’s possible that they paid a very full price. But the acquisitions today are not large enough to substantially impact your returns in a negative way. The company is large enough that the acquisitions are add-ons; it’s very unlikely they would find a target large enough to really damage the shareholders. MOI: Would it be fair to conclude that looking at management and whether they are changing their stance towards acquisitions is a key factor to monitor in your investment case for Sodexo?

de Lardemelle: Absolutely. They’ve learned their lessons in the late 1990s. Now strategically, they didn’t have much of a choice at the time (the company needed to gain size to become a low cost producer through leveraging their purchases of raw materials) and management also made good use of a very high- priced stock at the time to make those acquisitions. And so over the full life of the company being listed in France, which they were listed in the late 1980s, they’ve done a superb job overall. MOI: You alluded to the valuation recently of Sodexo, I’m curious when one looks for these types of businesses under which circumstances have you found that such businesses afford a good valuation to the conservative value investor? What are your favorite sources of mispricings for these types of businesses? de Lardemelle: In the case of Sodexo, we first got involved at a previous shop around 2002. And remember, you had the growth bubble in the late 1990s, and as the bubble burst on the tech side in 2000, growth investors sought refuge in fast-growing service companies and Sodexo benefitted from that. The company stumbled at that time in the U.K. and started losing money there. And as a consequence, growth investors just fled the stock and destroyed it. And




“I have found over my career as an investor that the best

ideas often do not screen very well. Basically, you are spotting something that

doesn’t show in the numbers yet and will show over time.”

we looked at the situation in the U.K. and what management was saying at the time: “we need to rebuild the whole business in the U.K. from the ground up.” Now, there were plenty of examples over the history of Sodexo of entering new markets where the company would lose money for a year or two and then become profitable. So we were fairly confident that the U.K. problems were not going to turn into a complete disaster, a never ending black hole. And then also scrubbing the numbers, we found out that the core business, if you stripped out the goodwill was extremely profitable. We got involved at IVA during the 2009 crisis. Obviously, the stock re-rated substantially since then but the 2008-2009 crises afforded us an entry price that was attractive. At today’s price, we’ve reduced the size of the position substantially. But I used this as an example of how sometimes you need to dig into the numbers to truly understand the franchise value of the stock. I would argue that the genius of Buffett when he bought Burlington Northern was similar in the sense that if you looked at Burlington Northern at the time and if you read Charlie Munger’s comments as well, he explains that for the longest time both Buffett and Munger hated the railroad business. And indeed, I remember Jean-Marie asking me to look at Burlington Northern in the mid to late 1990s soon after I joined SoGen. And I was struck by the low returns, by the fact that the railroads were unable to raise prices. What both Buffett and Munger saw was the ability, after consolidation of that business, to raise prices and they also understood the return on incremental capital i.e. you add a rail car to the train, that incremental return is phenomenal. And it’s important to understand in any business more than what the stated return on equity is, what the incremental return might be in the future. But the key turn for the railroad industry was pricing power and that happened around 2000, 2002. Suddenly, you see the price per rail car going up, the ability to pass through a few surcharges to clients. And my hat to Buffett for seeing that turn and taking advantage of it. MOI: When we think about idea generation, a lot of value investors will refer to screens, and we know that certain types of ratios have been found to perform well over time. You mentioned this example where understanding the industry change has really led to a great idea. How often is that a source of your idea generation — identifying industry or company-specific change?

de Lardemelle: I have found over my career as an investor that the best ideas often do not screen very well. Basically, you are spotting something that doesn’t show in the numbers yet and will show over time. That happens from time to time, those tend to be larger positions or we would build them over time. But unfortunately, we don’t find enough of those. These situations are few and far between, require judgment and a vision. Those inflection points, however, can be sources of great gains or losses in any industry. MOI: Moving on to another geography where you found plenty of opportunity in the past — Japan. There, of course, the numbers do scream at you. How did you approach Japan? What was the mindset given the approach you have just described? It seems to me you wouldn’t have gone for the cheapest stocks there, quantitatively speaking? Give us a sense of how you approach that particular opportunity set?




“In our top ten holdings, you’ll see Astellas Pharma [Tokyo: 4503]. Astellas is a

pharmaceutical company that does not screen well at all.”

de Lardemelle: Obviously, there are tremendous issues with Japan. Having said that, recently the whole market was selling below tangible book, today 1.3x book, return on equity of corporate Japan today is in the 8% to 9% range. It’s not an easy market in the sense that, at least in Europe and in the U.S., when we determine intrinsic value, we look at transactions in the industry, and sooner or later transactions will happen, if the gap between price and value becomes too wide, especially in the U.S. where investors will act. In Japan, that catalyst is missing. We’ve done cash boxes in Japan (poor or declining businesses selling below net cash, with managements unwilling to act) – those are not the ones that have worked the best. But we’ve also found, and those were the larger positions, good businesses where again, the characteristics were hidden in a number of cases. In our top ten holdings, you’ll see Astellas Pharma [Tokyo: 4503]. Astellas is a pharmaceutical company that does not screen well at all. If you look back a number of years ago, you had two products accounting for about 75% of EBIT, and those were going off-patent. So until recently, if you looked at the history of the company, you saw declining revenues and declining EBIT. Astellas had a number of characteristics that are unusual for Japanese companies. First, it was a merger of two companies and they were talking a lot about EVA, which is a fancy word to describe return on equity or return on capital employed. They had proven an ability to allocate capital properly, buying back stock. They’ve bought back and cancelled more than 20% of their shares outstanding in the last 10 years or so. Paying a nice dividend, conservative balance sheet, an ability to pass on acquisitions when the bidding got too heated, and they made one, OSI in the U.S., a few years ago which we thought was a decent acquisition. What was hidden through those declining revenues and declining earnings was the strength in the pipeline. It’s starting to show through and so now Astellas has turned a corner in the sense that the two products are only a quarter or so of profits today and the other three quarters are now growing. Also, some of the profitability was hidden by the fact that in Japan you continued to depreciate goodwill. And so you had to look deep into the footnotes in order to be able to restate the numbers for the OSI acquisition – add back the goodwill amortization to your EBIT (earnings before interests and taxes). And next year or the year after that, Astellas is moving to IFRS accounting standards, so the true operating margins will show up. Now, for the foreseeable years, revenues are going to grow, earnings before interest, taxes, depreciation, and amortization (EBITDA) is going to grow, and you’re still paying only about 8x adjusted EBIT for that company. We believe that a company of similar quality, with a pipeline of that quality, the liquidity that Astellas offers with a market cap in excess of $25 billion, would trade at 12x to 15x EBIT in the U.S. or in Europe. So that’s another example of something that doesn’t screen well if you did not adjust some numbers or make the effort of understanding what was going on behind the numbers. MOI: You mentioned the pipeline is a key part of your investment case with this company. How did you get comfortable with assessing a pipeline? It’s not typically that value investors would find it easy to pass judgment on a pipeline.




“I’ll give you two or three examples of industrial

companies that at first glance you would think are cyclical, unattractive businesses. One

is Miura, a company that manufactures industrial gas

boilers.”

de Lardemelle: In the case of Astellas, at the time we bought into the position we believed we were paying very little, if anything, for the pipeline, which is the way we like to do it. We also noticed that when Astellas bought OSI, they paid a very full price on the existing product, there was only one, and basically paid zero for the pipeline. And so we thought the acquisition was sound because in the best case scenario, some of those drugs which were being developed for cancer would pan out. Our analyst and Partner, Thibaut Pizenberg, had noticed that the pipeline was unusually large and therefore provided more options than was usually the case. I believe that in the $1 billion to $5 billion market cap [range] in Japan, there are probably tremendous opportunities still despite the run-up. There is very little research available, so you have to do your homework. I’ll give you two or three examples of industrial companies that at first glance you would think are cyclical, unattractive businesses. One is Miura [Tokyo: 6005], a company that manufactures industrial gas boilers. They have a technology that’s unique in the world. Miura has a very high share in Japan of about 36% of industrial boilers. Because these are gas-fired boilers, they pollute a lot less, have a cost advantage, and the shale gas revolution may help Miura to become even more competitive in the US. . Today, unfortunately, Miura only exports about 14% of their revenues. You would think the industrial boiler business would be cyclical, somewhat of a boom and bust kind of business, and when you scrub the numbers what you find out is that the vast majority, 90% plus of operating earnings actually come from maintenance of existing boilers. Miura sells the boilers with a three-year maintenance contract and the renewal rate on those contracts is very, very high, so that, in fact, the company enjoys a very steady stream of earnings. And what’s characterized as an industrial company is really a steady service recurring type of income. And those recurring streams, in most markets, tend to be very richly valued.

Miura hasn’t been discovered by investors. The company doesn’t screen well because of a single-digit return on equity unfortunately. That is the biggest negative about the company: all the cash on the balance sheet heavily depresses the returns. Management bought back some shares at the trough. Miura does pay a dividend but also tends to pay its suppliers very, very quickly. And so in any capitalist country, you’d have much higher payables, a lot less cash on the balance sheet, management would probably pay larger dividends to shareholders. We’re willing to be patient because the technology is very unique. Over time, we believe the company will do a lot more business outside of Japan and it’ll eventually get discovered. It’s a nice compounder, it’s one that we’re happy to keep and watch it grow over the years. We also own Secom [Tokyo: 9735] and Azbil [Tokyo: 6845], which are again two companies classified as industrials but share the same characteristics of very steady profits due to a recurring stream of income. In the case of Secom, because it’s a larger cap, it’s been discovered, and it’s close to our assessment of intrinsic value today. Secom is the ADT [ADT] of Japan except the company offers security services mostly for corporations, (bank branches and retail stores for instance) where the client pays a subscription fee to have its premises monitored for security remotely.




“Charles [de Vaulx] and I look at, where in the world do we find too much credit

growth? When you have too much credit growth, watch out. That was really the red

lights we saw in 2008, and so we had no financials at the

time in the portfolios.”

What’s unique about Secom versus an ADT is that, here in the U.S., if the alarm goes off at your home, the cops are going to show up. In Japan, you have to dispatch your own car, so Secom is dispatching its car. That creates a huge barrier to entry because if you don’t have a network of depots around the country that allows the car to show up fairly quickly on the premises then what’s the point of having a security system? The barrier to entry in that business in Japan is much, much higher than it would be here in the U.S. or elsewhere. Unfortunately, in Secom’s case as well, capital allocation has not been great. The company invested in a number of other businesses. They’ve stopped that a while back. Again, that one has moved up a lot but it’s similar to Miura in the sense that it’s misunderstood, misclassified as an industrial. It’s not. Azbil is the same story. It was partly owned by Honeywell [HON], and Honeywell got out in the late 1990s. Azbil manufactures HVAC systems, building automation systems with an 80% market share of large commercial buildings in Japan, and makes most of its money servicing these systems. Again, that’s one that is completely misunderstood. It’s too small, it hasn’t been discovered yet. It’s less than $2 billion market cap. In the case of Miura, you’re paying, according to our estimate, about 7.5x EBIT. In the case of Azbil, you’re paying 8.5x, whereas Secom is closer to 12x. You see how the larger company Secom has been discovered. We’ve made nice money on it. And there are other companies that remain completely unknown, and undiscovered, and I suspect there are many more opportunities like that in Japan, despite the run-up in the stock market. MOI: Thank you very much for sharing these undiscovered companies here with us today. I’d be curious in the case of Miura, and one finds many companies in Japan that have these large cash balances that depresses the return on equity, do you expect as a result of the changes in Japanese economic policies by the government or have you seen any evidence so far that Japanese CEOs’ mindset regarding cash has shifted as the economic environment is potentially shifting from deflation to inflation? de Lardemelle: Not yet. The Japanese situation from a macro standpoint is difficult. We don’t invest according to macro but we use macro as a risk control, Charles and I, not the analysts. Charles and I look at, where in the world do we find too much credit growth? When you have too much credit growth, watch out. That was really the red lights we saw in 2008, and so we had no financials at the time in the portfolios. In Japan, greed doesn’t seem to be having any effect. I don’t see evidence of leveraged buyouts, and I don’t see the market opening up to foreigners to conduct such LBOs. Boards do not use options to reward management. Having said that, Abe, the Prime Minister, is trying to generate inflation with the central bank’s help. If you go from deflation to mild inflation in Japan, all equities would rerate substantially in our opinion. There are no signs as of today that Abenomics are working. Equities have reacted anticipating that it’s going to work at some point. Short term, what you want to look at to gauge whether Abenomics is working or not, is wage growth in Japan. If you see wage growth, that’s a sign that Abenomics is working and that is going to translate into some lasting inflation. So far, we haven’t seen any wage growth. But that’s the short-term metric you want to look at.




“…in 1981 the Japanese population as a whole was

saving about 15% of income. Today, they save about 3%, akin to what we see here in

the U.S. And it’s not a shift in behavior. It is just due to

demographics.”

Longer term, Japan may have a tremendous problem with government debt. Government debt to GDP is 220% or so. Longer term, the red flag to us would be a lasting current account deficit. Until now, Japan still enjoyed a current account surplus. This is changing, and Japan recently recorded a small current account deficit. A current account surplus meant that Japan was self-financing. Until recently, there were enough savings in Japan to absorb the borrowing needs of the central government. There are trends that do not look good. For instance, in 1981 the Japanese population as a whole was saving about 15% of income. Today, they save about 3%, akin to what we see here in the U.S. And it’s not a shift in behavior. It is just due to demographics. Demographics in Japan are such that when you retire, you become a de-saver because your income falls substantially and you start dipping into your savings. And given the mix in the population, and that mix isn’t getting any better, total savings by the population has fallen substantially. It’s been offset so far by corporations saving a lot, investing less than depreciation.

There is a path to success in Abenomics, and it goes through Japanese corporations becoming a lot more profitable because that’s the only way that you’re going to find the additional savings necessary to keep Japan in a current account surplus. My guess is the central government understands this and that somehow, somewhere, they are going to push down the road for more mergers so that corporate profitability goes up in Japan. It is striking when you look at the number of companies in Japan, how profitable they are at the gross profit level. Examples would be, we talked about pharmaceutical companies, there are a number of pharmaceutical companies in Japan with one or two products, with very high gross profit margins, and somewhat depressed EBIT margins. And in any other country, you would consolidate those so you transform your high gross profit margin into a high EBIT margin as well which is not the case today in Japan. Basically your sales force pushes six products instead of two. In cosmetics, we own Kose [Tokyo: 4922] in Japan. L’Oreal [Paris: OR FP] CEO once told me, “my favorite two weeks in the year is when I go to Japan. It’s the most sophisticated market when it comes to cosmetics.” If you look at the Kose gross margin, it’s 75% —very similar to Procter & Gamble or L’Oreal. When you look at the EBIT margin for Kose – mid-single digits, 8% sometimes, whereas L’Oreal and Procter & Gamble with 75% gross profit margins achieve 15%-20% EBIT margins. The issue in Japan it seems to me is way too much competition, way too many product launches. Gross profits at Kose are all eaten up in SG&A, advertising and promotion, and therefore, you have a need for consolidation. It tells me that to get to higher profitability in Japan, it would not be that difficult. Both industries (pharma and cosmetics) at the gross profit level are already extremely profitable. You need to get to size. You need to combine a few of these companies. Now, greed hasn’t worked. Is it possible that the government will push for these mergers because they understand that they need higher profitability so you have higher savings and the ability to finance the Japanese current account deficit? Is it possible? I don’t know. What I would say is today, you’re not paying anything for that possibility today.




“L’Oreal CEO once told me, ‘my favorite two weeks in the year is when I go to Japan. It’s the most sophisticated market when it comes to

cosmetics.’”

Just to give you a sense, profits to GDP in Japan are about 3%. In the U.S., it’s about 10%. In between, you have Europe at 6%, 7%. Obviously, if you have a little bit of inflation and mergers and acquisitions in Japan, and better use of balance sheets, then the Japanese market is still cheap. But if nothing happens in terms of capital allocation, the easy money has already been made in Japan. We don’t bet on turns like that at IVA. What we do is we try to unearth the Azbil’s and the Miura’s of the world and so I don’t have to bet on that at all to make a return. If change happens in Japan, it’s icing on the cake. What we do though is understand the risks and understand that if nothing happens, and if Japan goes into a lasting current account deficit, we have to be very careful about what we’ve done on our hedging of the yen. And I would contend that if QE blows up in the world somewhere, the most likely candidate within the next five plus years would be Japan. And so we understand what the yellow or red flags are, and we monitor them. And right now, we don’t have to worry too much because we don’t have a large current account deficit in Japan and Japanese foreign exchange reserves are huge anyway in comparison to the size of the current account deficit. But we believe we understand the risks. MOI: You mentioned credit growth as an important factor to understand. How do you adjust your approach to account for the fact that in the developed world governments seem to have resorted to money printing as a solution to almost any ill? de Lardemelle: It’s a very tough question because there is no recent precedent in financial history for what we’re going through today. In the 1800s, in the U.S., you had a number of real, very severe deflationary busts that have been documented. 1814 was the first one, but there are at least five during the 1800s where basically a number of banks went under, you had instances of sharp and massive contractions in money supply. And as a consequence, GDP falling 5%, 10%, 20% – very sharp drops followed by very sharp recoveries. And during the 1800s actually, growth was very uneven but was strong. What happened in 1929 was that a bust of that nature happened when there was a tremendous amount of debt which was not the case in the 1800s. And as a consequence, there was a negative spiral that is well-documented and that Bernanke had studied, and we had something very similar to 1929 happen in 2008. In hindsight, Bernanke reacted well with QE1 in trying to stabilize the whole system. Now, it seems that the Federal Reserve is in a situation where it would like to see total debt to GDP come down. The Fed is trying to get GDP up, and wants nominal GDP up. And to get nominal GDP up, they would like CPI inflation. And they have printed a tremendous amount of money, and all they’re getting is asset inflation, no CPI inflation. I believe that’s why the Fed is targeting unemployment, because they think if we get to 6.5%, 6%, perhaps there’ll be wage tension. If you have wage tension, it would, just like in Japan, be the best way to get lasting inflation. I’m not sure if we will get broad based wage tension at 6%, 6.5% unemployment. What I would tell you though, if they manage to get wage tension it’s probably very negative for equities in the U.S. (contrary to Japan) because if you have the share of labor going up as a percentage of GDP then profits to GDP will probably come down in the U.S.




“A good rough metric of valuations might be market

capitalization to GDP, sort of a price-to-sales ratio. Market

cap is the total value of corporate America and GDP is production in America, so

you get a price-to-sales ratio.”

We understand today that we are in a very different world, very unusual world. It’s either the holy grail of central banking – they are able to deal with their own failures, the central bankers having let the debt to GDP move to levels that in hindsight were too high. Or financial history will show that they are not able to deal with these excesses well and they lose control. I don’t know whether that’s going to be one or the other. A good rough metric of valuations might be market capitalization to GDP, sort of a price-to-sales ratio. Market cap is the total value of corporate America and GDP is production in America, so you get a price-to-sales ratio. On that ratio you’re 125%, that’s very high even by recent historical standards. It’s very close to what you had in 2007. It’s lower than the level reached in 2000.

Valuations tell me that it’s time to be cautious. Then you also have a very lax high yield bond market that tells me be careful. You have flows back into equity products, including ETFs that tell me you’re closer to the end than the beginning of the bull market. And all of these combined add up to yellow flags. How do we try to protect our investors’ capital? We’ve reduced our exposure to equities, not because of a macro call but because we’re closer to intrinsic values. And I wouldn’t say that the U.S. economy is depressed anymore. In Europe, that’s where we struggle the most because there’s been a double dip.

In theory, we should have a lot more invested in Europe given where we stand in the economic cycle over there. In practice, it’s a very different economic situation than a typical recession, and there are too many political questions for us, and we don’t know how to handicap political questions. Our expertise is in valuing businesses and the background in Europe remains deflationary and that’s very negative for the value of businesses. On top of everything else, in Europe you have misleading indices in the sense that banks, telecom, and utilities are down substantially since 2007, and were big parts of the benchmarks; conversely, European high quality stocks have gone past their 2007 highs, and so that makes the stock-picking more difficult and leads to indices being, in my opinion, somewhat misleading. As for protection, we’ve reduced our exposure to equities. We have a lot of cash on the books and we have a little bit of gold, 3%. MOI: Where are you seeing value in the U.S. today? de Lardemelle: Unfortunately, we find less and less opportunity. But I’ll mention maybe one or two. One is DeVry Education [DV]. As you know, for- profit education in the U.S has gone through a very, very tough time. For two reasons – the first reason is that the government is regulating the industry, and it’s a good thing. Obviously, in the past, if you exaggerate a little bit, you were rounding up a number of people who were not necessarily qualified for the education they were going to receive, the schools got government funding and then you usually had a large number of drop-outs coming out of for-profit schools. There were a number of shady practices, marketing practices in the industry. The Obama Administration has reformed that, has cracked down, and basically now schools have to monitor the default rates of their cohorts, so anybody that comes out within three years, if your default rates go over 25% for a class then you can lose your Federal funding and you basically go out of business.




“…if you look segment by segment, there is within

DeVry a gold nugget, and that’s the medical schools.

The medical schools segment has suffered none of the

issues I’ve just mentioned.”

You have that part which has forced a number of for-profit education companies to shrink their top line, to enforce better selection of their students. On top of that, you had a cycle. It’s an interesting business because it tends to grow substantially when the economy slows down, because people go back to school or stay in school longer. Obviously, after the 2008, 2009 recession, you had a boom in enrollments. Right now, you have two factors – you have regulation, as I mentioned, and second, we are at a point in the economic cycle where unemployment is falling, i.e. less people are going back to school. What’s different about DeVry? Simply that if you look segment by segment, there is within DeVry a gold nugget, and that’s the medical schools. The medical schools segment has suffered none of the issues I’ve just mentioned. The medical and veterinary schools managed by DeVry continue to enroll more and more students. They continue to grow the number of campuses. They continue to be very profitable. And the default rates are sub 1%, in other words, you go to a nursing school or veterinary school at DeVry, you come out with your diploma, you find a job. Now, one – few people do a sum-of-the-parts. Second, when the Street scrubs a little bit and does agree to do a sum-of the-parts usually what they do is they apply an Apollo, which is their large competitor, type of multiple, low price to earnings (P/E) multiple, low enterprise value (EV) to revenues multiple to their stream of income, and we totally disagree. We think that segment of the business is worth 11x, 12x, 13x EBIT given the characteristics, the returns, and the growth of that business. That alone is worth $25 per share to $30 per share in our opinion. The stock is $35, there is a very clean balance sheet, net cash, and that division is only half of revenues. The other half is about breakeven. It’s the DeVry business schools, basically, and that eventually will come back, that is being right-sized, there is not much visibility on that. I’m not sure what the size eventually will be, but I’m fairly confident that it’s an easy business to restructure. You just have to size your capacity according to your students and then the business becomes profitable. Basically, I see the downside as being limited. The stock is about $35. And the upside as being substantial and DeVry is a very misunderstood company today. MOI: When it comes to the for-profit education opportunity in the U.S., you’re not adopting a basket approach as some investors are advocating. You are specifically picking out this company for the reason you’ve explained. de Lardemelle: That is correct. Yes. I’m not passing judgment on the rest. We’re taking a hard look but we haven’t come to a conclusion yet. And if we do come to a conclusion, it would be a much riskier proposition than DeVry in the sense that there is tremendous uncertainty as to where does the industry resize? What is the ultimate size of this industry? I would also point out that pre-reform, those stocks, for the most part, were very profitable but sometimes trading at low multiples because in the mind of investors, in some of these companies, there were some shady practices going on. I would argue that once it’s been sized properly, given the reform, that potentially the multiples would be higher in terms of P/E than they were in the recent past. But we shall see. The big negative for education, in my opinion, is that it’s lost its pricing power. For decades tuition at public and private schools and universities went up faster than inflation. That’s not the case anymore. With




“For the sell-side, if you can’t find comparables, it’s worth

zero. It’s very odd.”

stagnant wages, the return on investment of higher education becomes a serious question. MOI: Help us understand why a sum-of-the-parts in the case of DeVry is appropriate conceptually when one thinks about the potential regulatory risk. Can regulation taint the whole company irrespective of how one might look at it conceptually? de Lardemelle: For an Apollo, yes. Not in the case of DeVry, in our opinion. In the case of DeVry, why the sum-of-the-parts really matters is that within DeVry you have that segment that is very unique on medical schools and the government has no reason to crackdown on that at all given the very, very low default rates that segment shows. It’s a case where within a huge storm in the industry, you have this misunderstood island of peace and prosperity basically, and that’s being ignored by Mr. Market. When the sell side takes a look at this, (and it’s typical actually on the sell side, and usually a source of great potential profits), they have no comparables so they use the wrong ones. That has happened to us many times, more so where you find a great business in the U.S. and it gets recognized in the U.S., and in Europe and in Asia, it’s a misunderstood business, it’s misclassified. That’s very much the case where sell-side analysts find no comparables, so they can’t value the business. For the sell-side, if you can’t find comparables, it’s worth zero. It’s very odd. It’s the way it’s done. Whereas, we at IVA have the ability to look at a business on a standalone basis and say that’s the type of multiple we think this business is worth given the characteristics, returns, barriers to entry, growth, plus or minus GDP, it’s capital intensity– in these types of situations we can come up with our own multiple without having to have comparables. MOI: It reflects the absolute approach as an investor versus a relative approach. de Lardemelle: Absolutely. That’s right. MOI: What’s your view on the mortgage real estate investment trust (REIT) preferreds? What does the market miss there? de Lardemelle: We built a position in agency mortgage REIT preferreds. We own, amongst others, the Annaly [NLY] preferreds. This is not an endorsement of the preferred market as a whole or the equity of these REITs. We find very few opportunities in the U.S. today. Many investors are looking for income and maybe making mistakes in doing so. Within the preferred market, the sub-segment of mortgage REIT preferreds is misunderstood. What’s misunderstood is the credit quality of these preferreds.

Agency mortgage REITs buy mortgages that are implicitly guaranteed by the U.S. government. On the asset side, they own an asset that is really money-good, whatever happens. On the liability side, they borrow short to lend long — they borrow at low rates, they lend long, and they make the difference. It means that you have a lot of interest rate risk for these companies. If the curve shifts, if long term interest rates rise and you’re not well-protected through swaps, you have all kinds of issues that could hit the equity. But in our opinion, not to an extent where the equity would get wiped out, far from it. I wouldn’t recommend the equities of these companies because, given where interest rates are today, long term interest rates may be more likely to go up over time than down perhaps, and so that would hurt the equity more than the




“Within the preferred market, the sub-segment of mortgage

REIT preferreds is misunderstood. What’s

misunderstood is the credit quality of these preferreds.”

preferreds of these vehicles in our opinion. The preferreds have been yielding 8.5%, which is more than equity-like returns at today’s level, in our opinion. These are perpetual preferreds, which is not necessarily attractive. But there are cumulative preferreds as well, which is unusual for financial companies, which mean that if they skip a coupon, before the company can pay another dividend, they would have to pay back all the coupons they skipped, which is very unusual for financial preferreds. The duration is about 11 to 13 years, which means that if interest rates go up by a point on the long end of the curve, you lose roughly 11% to 13%, offset in large part by your coupons over a year. In equities, you would lose at least as much we believe. I don’t anticipate necessarily that the long term rates would go up substantially and the spreads today are very wide for those preferreds because people are afraid of interest rates moving up. We believe that a substantial part of that interest rate move is already reflected in the price of these preferreds.

If you see interest rates going up a point on the long end of the curve, probably the spread of these preferreds contracts a little bit and so you don’t see that type of loss on your preferreds. Be mindful of the fact that the risk you have with these preferreds is interest rate risk, much more so than credit risk. We believe these preferred shares of agency mortgage REITs are a decent credit. You are protected against a call until 2017. If it’s deflation between now and then, which we don’t anticipate either, but if it’s the case then you would get par, you would get your yield to call which is much higher than 8.5% because those preferreds today trade below par value. You’re well-protected against deflation until 2017. Once you’ve reached that call date, it becomes a much less attractive investment. It’s a sad state of affairs when we are forced to look at such instruments and when we think that 8.5% is very competitive with equities, but these are the cards dealt by Mr. Market today. We understand we don’t have to sit at the table, and that’s why we have so much cash in our portfolios today To put things in perspective as well, today you have some CCC-rated paper that yields 6.5%, not all of them, but some do. These agency mortgage REIT preferreds offer a credit that I believe is much, much better than a triple C credit. There are also questions about whether those mortgage REITS will continue to exist with mortgage reform in the U.S. And the beauty of this instrument is that if these companies are unwound, they have to call your preferreds and, in this situation, you do actually make more than that 8.5% current yield. It’s a somewhat attractive investment especially for people who are looking for income. For people who are looking for income, it’s one of the very few instruments that are worth a look in our opinion. MOI: But again, it’s not an endorsement of the entire preferreds market. You have to look one company at a time... de Lardemelle: Correct. I would say today most mortgage REIT preferreds are attractive as long as they dabble in what is called agency mortgages, which means that the mortgages are guaranteed by the U.S. government. There are other mortgage REITs that do commercial real estate or residential real estate and those, I’m not passing judgment. MOI: When it comes to these elusive concepts of patience, judgment, and some of the behavioral traits of successful investors, how have you evolved over time? How have you managed to improve on those elusive attributes?




“Just try to have a conversation on politics with anybody. People tend to be very sure and stuck in their

ways, and they have difficulties listening to other

people’s points of view. That’s how people are wired and that’s why so few people can change their minds once

they buy or sell a stock.”

de Lardemelle: That’s an excellent question. For most value investors, they start looking for cheap and they evolve towards quality, the same way Munger pushed Buffett towards quality. And as a young analyst, it’s easier to look for cheap and it’s much more elusive to define quality than to truly find it, unearth it, and get a sense of what truly is a quality business. That’s where experience took me. We’ve gone through the example of Sodexo but there are many others in the portfolio. We still own Mastercard [MA] even though it’s not cheap anymore. We’ve reduced the position but it’s another example of a great business. It takes experience. Through reading Buffett and through learning from Jean-Marie and others, you can accelerate that learning curve, basically. But that’s where I have gravitated over time – it’s towards quality, and that’s where you need the experience. One of the greatest lessons I learned from Jean-Marie was one – humility, and two – the ability to listen. He had an unbelievable ability to listen and to change his mind. And in that sense, Jean-Marie was truly unique. It’s striking how people are not wired for value investing. Most do not deal well with emotions when it comes to financial matters. Some tend to try to chase things that have gone up. Just try to have a conversation on politics with anybody. People tend to be very sure and stuck in their ways, and they have difficulties listening to other people’s points of view. That’s how people are wired and that’s why so few people can change their minds once they buy or sell a stock. And we do a very good job at IVA of trying to determine the worst case scenarios, what could go wrong, and get conditioned for what could go wrong early on. MOI: Give us a sense of the work environment you foster at IVA to enable you to think patiently, be disciplined, and apply proper judgment. How do you spend your day to day differently perhaps than others? de Lardemelle: What is extremely important is obviously our team of analysts – we have ten of them. And we have put in place over the last year and half a very stringent training program as well to make sure that our new recruits are well trained; we found out that MBA graduates, in general, don’t always fully understand accounting, and especially when dealing with accounting outside the U.S. And so we make sure they get that part, which is a technical part, and I would say the easy part. We make sure that they don’t get distracted. They spend their time, all day long, reading reports, reading footnotes, building those models themselves, no Capital IQ, no shortcut.

What we want to see is over time their ability to develop, to boil things down to what really matters the most, and that’s also something I learned from Jean- Marie. He was able to listen for an hour and then boil things down to the two or three key metrics or points that would truly matter over time. It doesn’t mean that you don’t have to look at other things, you do. But you do to determine that they are not the relevant metrics and to push them away and say these are the two or three things that really matter in this business. We try to make it so that they can spend most of their time doing just that – reading reports. We don’t insist that they should meet with management. We like when management comes to New York, but we found that you learn a lot




“Buffett mentioned to always go back to the source of

information – read the 10-Ks, they provide a sense of

history and less noise than sell-side reports. Try to

understand the business, look at transactions. Scrub the

numbers.”

more through the filings and through the numbers as to what management has done right and wrong. I’ve yet to see, especially in the U.S., management show up and tell me, “we screwed up five years ago on that acquisition and we did this wrong and we did that wrong.” The pitfalls, the issues, the blemishes, you’re only going to find them by yourself, by scrubbing the books, by doing the homework. We try as much as possible to foster that culture at IVA. I try to leave as much time as possible to discuss names and ideas with my analysts, that’s the most important part of my job as a portfolio manager.

MOI: There’s a lot of noise out there, lots of approaches, what advice do you have for investors? When you think back to when you were in your twenties getting interested in the industry, what would you have done differently? de Lardemelle: I was always attracted by reading and the data, so not much different. I just turn off the TV. Buffett mentioned to always go back to the source of information – read the 10-Ks, they provide a sense of history and less noise than sell-side reports. Try to understand the business, look at transactions. Scrub the numbers. We may want to use different metrics than the sell side. We may want to scrub the numbers and adjust the EV (oftentimes not well-done by the Street but it’s almost always well-done in transactions) where if you have pension liabilities, minority interests, or real estate that’s non-core, all of that usually gets adjusted when you have a transaction. Few people take the time to scrub these numbers and understand them. As Buffett mentioned many times, you can do Value Line page by page, starting page one or you can do 10-Ks. What I find the most rewarding in my job is that I get to learn every day. If I go home and I haven’t learned anything new that day, then it’s a day that’s been wasted. MOI: When you think back to the early part of your career in France, and now with the career that you’ve had, what has changed when you observe investors, whether it’s in Europe or Asia? What’s the state of value investing around the world? Do you think that in Europe value investing is not as pervasive as in the U.S. because of certain factors, or is just the definition of it different? de Lardemelle: I don’t think the definition is different. Buffett is now well- known worldwide, which was not the case when I started my career at all. And his wisdom is available to anybody who wants to look up his shareholders letters on the internet. What I have seen is a lot more competition in Europe, in many cases because of hedge funds. There is clearly a value community in Europe. It tends to be smaller. They are not in the mainstream perhaps, but there are value investors in Switzerland, there are value investors in France, there are value investors in the U.K., and they understand value investing, and they practice value investing well. In Asia, I have yet to find a real mainstream of value investors. Those markets are less developed and they may be ten, twenty years behind. But eventually, [they] will catch up. Competition outside the U.S. is much fiercer today than twenty years ago. MOI: Chuck, thank you very much for your time and insights.


Important Information Concerning the Attached The Manual of Ideas – March 2014 Reprint This reprinted article should not be construed as an offer to sell or a solicitation of an offer to buy securities or any product mentioned in this article. This article does not constitute investment advice and should not be viewed as a recommendation to adopt any investment strategy. All data in this article was provided by The Manual of Ideas and has not been independently verified by IVA. As of December 31, 2014, the IVA Worldwide Fund’s top 10 holdings were: Berkshire Hathaway, Inc. Class A, Class B (3.6%); Wendel 4.375%, 4.875%, 6.75% (3.5%); Gold bullion (3.4%); Astellas Pharma, Inc. (3.3%); SIGB (Singapore Government) 2.375%, 2.875%, 3.75% (3.2%); Nestle SA (3.2%); News Corporation Class A, Class B (2.4%); Cimarex Energy Co. (2.2%); Oracle Corp. (2.0%); DeVry Education Group, Inc. (1.8%). As of December 31, 2014, the IVA International Fund’s top 10 holdings were: SIGB (Singapore Government) 2.375%, 2.875%, 3.75% (4.7%); Gold bullion (3.9%); Nestle SA (3.6%); Astellas Pharma, Inc. (3.3%); Wendel 4.375%, 4.875%, 6.75% (3.0%); News Corporation Class A, Class B (2.8%); Genting Malaysia Berhad (2.1%); Samsung Electronics Co., Ltd. (2.1%); Hongkong & Shanghai Hotels Ltd. (1.9%); Toho Co., Ltd. (1.8%). The views expressed in this document reflect those of the portfolio manager only through the end of the period as stated on the cover and do not necessarily represent the views of IVA or any other person in the IVA organization. Any such views are subject to change at any time based upon market or other conditions and IVA disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for an IVA fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any IVA fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager or IVA. References to specific company securities should not be construed as recommendations or investment advice. There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates. Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value. An investor should read and consider the fund’s investment objectives, risks, charges and expenses carefully before investing. This and other important information are detailed in our prospectus and summary prospectus, which can be obtained by calling 1-866-941-4482 or visiting www.ivafunds.com. The IVA Funds are offered by IVA Funds Distributors, LLC. A basis point equals 0.01%. Various yields discussed within the article do not represent the Fund’s yield. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Price to earnings (P/E) ratio is the valuation of a company’s current share price relative to company earnings. EBIT (earnings before interest and taxes) is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EV (enterprise value) /EBITA (earnings before interest, taxes and amortization) is a valuation method often used to compare returns between equivalent companies on a risk-adjusted basis. Return on equity (ROE) measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The IVA Funds are closed to new investors.

This disclosure page must accompany The Manual of Ideas – March 2014 article reprint.

http://www.ivafunds.com/

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