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IVA's de Vaulx: Gold Still Seems Underowned

Despite gold's sharp increase in price compared with past valuations, owning the commodity is not a mainstream trend yet, says IVA's Charles de Vaulx.

Liana Madura, 09/16/2011

Charles de Vaulx is a partner, portfolio manager, and chief investment Officer at International Value Advisers. He shared Morningstar's "International Stock Manager of the Year" Award in 2001 with his co-manager and was runner up for the same award in 2006.

Looking at IVA Worldwide IVWAX, he recently spoke with us on how he effectively navigates the market's extreme volatility, his thoughts on how the eurozone debt crisis will affect overseas investments, and where to put cash to work when investing in today's market. He also comments on the prospects for gold and looks at some top picks in the consumer discretionary and consumer staples sectors.

1. You try to mitigate risk by trying to anticipate what you could potentially go wrong in the marketplace, but given the market's extreme volatility and uncertainty, how are you able to do this effectively?
We do not actually anticipate in the sense of forecasting, nor do we think about the market place in the sense of guessing where markets may go, up or down. We are not forecasters, and we do not engage into market psychology. What we do is think a lot about what can go wrong at a specific company level. (Is the business changing for the worse? Is management likely to allocate capital properly? How would the business likely fare in a recession?) We then compute not only base-case intrinsic values for those companies but also worst-case intrinsic values.

We also insist on owning mostly well-capitalized businesses to gain additional safety and sometimes go higher in the capital structure (such as investing in preferred stocks or corporate bonds) if the equity seems too risky. We also think about the big picture, monitoring in particular areas of the world where credit might have been too loose. We think of volatility as our friend, as it is easier to buy low and sell high when things move up and down like a yo-yo.

At the portfolio level, we are able to reduce volatility through an ownership of mostly good businesses that are well-capitalized, using high-yield bonds at times, using gold which sometimes acts as a hedge (that is, it moves in an opposite way than most stocks and/or bonds). We also hold cash at times which helps buffer the volatility, and our flexible foreign exchange hedging policy can also help mitigate volatility.

We are mindful of correlations in the portfolio. For instance, owning commodity-related stocks might not offer much diversification if held alongside Chinese stocks; both are probably quite joined at the hip and would go down if China were to experience a hard landing.

2. Europe continues to remain the second-largest regional allocation in the fund. In what way do you think the eurozone debt crisis will affect the portfolio's investment in this area?
Europe does remain the second-largest regional allocation in IVA Worldwide, after the United States. The European debt crisis has an impact but only a modest one. One, we do not own any banks in Europe, except for a substantially overcapitalized regional bank in Switzerland which has virtually no exposure outside its country. European banks remain thinly or even undercapitalized and as a result, unsafe. We also own no holdings in Greece, Spain, Portugal, and Ireland, and just small holdings in Italy. What is intriguing about Europe is that there are many companies that are very global in scope (Total TOT, the oil company, Nestle NSRGY, the food company, and Sodexo SW, the food-catering company, but also much smaller companies, such as France-based Robertet RBT, which has significant sales in the U.S., and so many others).

Finally, because we also own so many euro-centric names (such as Vivendi VIV, the telecommunications company, or GDF Suez GDFZY, the electric and gas utility) we have been for quite a while 50% hedged on the euro in IVA Worldwide, which, incidentally, has hurt the performance a little year to date as the euro is up against the U.S. dollar.PAGEBREAK

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