Greg Carlson: Hi, I'm Greg Carlson. I'm a fund analyst with Morningstar.
I'm joined today by Cliff Hoover. He is a former manager of several Allianz NFJ value funds. He's been with David Dreman's firm for four years, and he's recently become the sole chief investment officer of that firm, in a sense stepping into David Dreman's shoes. David is a longtime value investor. We should mention that David is still at the firm and playing a very significant role, but I think it would be interesting today to talk to Cliff about how that transition is going and talk about a couple of other issues as well.
Cliff, thanks very much for joining us.
Cliff Hoover: Thanks Greg. Thanks a lot.
Carlson: David is known for very distinctive style, a low P/E, very contrarian style.
You practiced essentially the same philosophy at Allianz NFJ. However, there is a twist, right, because David ran very concentrated portfolios and still does. However, you ran more diversified portfolios.
Hoover: Well, that's historically – I do equal-weight portfolios. I like that 50 stock, 2% weight, for example, portfolio. We do equate our small-cap and mid-cap portfolios today.
Just a little nuance, from the original concentrated portfolios, I think going forward you'll see, David and I have discussed it, and I think we'll see portfolios that are still going to have very good upside, just like we've always expected and seen from Dreman, but equal weighting will take some of the volatility, dampen some of the volatility along the way. I think it's kind of the best of both worlds.
I think the products we have today are, I'll call it, good all-weather fighters. They do well. For example, coming out of the bear market, our funds did very well, but we also are going to protect capital in the down markets and have more capital to compound when you come out of those bumpy markets. So all in all, it's a very good solid process, and it should produce a good risk-adjusted returns over time.
Carlson: One thing we talked about earlier, I was little bit concerned with going to a more diversified approach, not necessarily, I thought, get the upside that you would with the more concentrated portfolio with some big positions that David has run, but in '09 at least, that was not the case, right, you put up some pretty big returns in a couple of the funds?Read Full Transcript
Hoover: We did. The international value product, for example, we're up about 59%, one of the top, I think, the top category fund in the universe. So we did have a big year in '09. We came off the bear-market bottom in a big way. We were not frozen.
All across the firm each product had significant '09. I think it shows you that good old contrarian, low P/E style that's true to its style, whether it's 1999 and the Internet bubble or it's coming out of this bear market, you're going to see the guys who are very pure and very value oriented come out with big returns, which we did last year.
Carlson: Now, obviously, yes, Dreman is not known necessarily for its foreign investing expertise, at least in the past. Can you talk a little bit more about that, how you believe you can continue to succeed on that front without necessarily building out a big team of foreign experts?
Hoover: Well, good question. We've known for years and years that low P/E works very well outside the U.S. We've done studies country-by-country, for example, and low P/E seems to work very well. Quite frankly, we think the international markets are little more inefficient than the U.S. market, and so it really fits well with our style.
We think the process is as robust as our U.S. product. We have good research from around the world. We have good research platforms. We have all the information we need. Whether you're looking at a Royal Dutch/Shell or you're looking at that at Chevron, we have the same exact research coverage globally.
So this is a globally-oriented portfolio, which we have great research into and at this Dreman International Value product, really is just a complement and just a new portfolio but using the old Dreman tools and process, which we think will be and has been historically been a very good place to be.
Carlson: One last thing we talked about, how you're continuing to maintain that contrarian approach. I know we talked about one recent purchase that sort of exemplified that penchant for going for companies that have been hit hard by "headline risk" as some would call it?
Hoover: Yes, it was – you as might expect a contrarian, a Dreman contrarian portfolio manager would be looking at BP in June after all the hysteria and the market overreaction, but we think fundamentals trump hypotheticals. We had a lot of hypotheticals in that Gulf spill, but when we looked at it, we realized that the market was assuming about a $115 billion future liability. After all of our work, analysis, and examining other spills through history, our number, our calculated number is about $30 billion for that future liability, which shows you the great margin of safety underneath that stock. We think it was a buy, and we think the stock's going to go back to the $70-plus level. We think BP is going to reinstate dividend early next year, and again just a great Dreman low P/E overreacted-to type purchase, which you've seen from us over the years, just a very typical Dreman-type stock.
Carlson: Quick aside, just to emphasize that David Dreman continues to be part of the investment process, correct?
Hoover: Yes, David and obviously he's Chairman, and I mentioned earlier we still work shoulder-to-shoulder together and he's very important on the team. And really from a practical perspective, this title change from co-CIO to CIO doesn't mean much from practical perspective. We have an investment team that works shoulder-to-shoulder with each other, and our goal everyday is to find those 50-cent dollars, and that's all we care about. We don't really obviously care about the title structure too much. You show me a 50-cent dollar, and it makes me happy.
Carlson: Listen, thanks very much for your time today, Cliff.
Hoover: Greg, thanks a lot.