listeningin APRIL 8, 2011 Old School Values · Chuck, Buffett, Walter Mintzat Cumberland Partners,...

Michael van Biema, the former ColumbiaUniversity finance professor and founder, manag-ing partner and CIO of fund of funds group vanBiema Value Partners, was a successful young techentrepreneur and investor when he had a road toDamascus experience and embraced Graham andDodd-style value investing. It was something of acase of being in the right place at the right time.Mike was a newbie on the Columbia finance fac-ulty when Mario Gabelli brought one of his leg-endary value investing teachers back to campus totry to rekindle the faculty’s interest in the disci-pline, whose star had been eclipsed in academia,albeit not in the real world, by the EfficientMarket Theory. One lecture and Mike washooked, going on to become one of the school’sleading proponents of value investing. That was the 1990s. By 2004, he was ready forsomething new. Mining the vast mother lode ofvalue investing connections he’d accumulated atColumbia, Mike started van Biema ValuePartners with a star-studded advisory board oflegendary investors and an ambitious and clevertwist on both value investing and the funds busi-ness. Value investors with relatively small portfo-lios, he knew well, tend to generate the biggestexcess returns. Yet they’re off limits to many insti-tutional investors, who either don’t know theyexist or simply can’t invest enough in them tomove their performance needles. Mike’s solution:Collect the best small value investors his world-class connections can unearth into funds of funds,and make their pooled talents available to invest-ment behemoths. So far, it’s worked just like thetextbooks predict. Mike’s flagship Van BiemaValue Fund essentially tracked the broad marketaverages — until the credit crisis hit. Since then, it’sbeaten them handily. And his Asia fund, fortu-

itously launched at the end of 2008, has taken offlike a firecracker gaining better than 50% sinceinception. I dropped by Mike’s Manhattan office a coupleof weeks ago to learn more about what he’s upto. Listen in. KMW

As a first-time visitor to your offices, I can’thelp myself. I just have to observe that youraddress, at 57th and 5th, doesn’t exactlyscream “value investing”.Michael van Biema: You’re not the first, byany stretch. But your reaction is quite reason-able — I react that way every day when I walkpast the grand piano in the lobby. It doesn’treally look like a lair of value investors.Actually, Chuck Royce, who runs the Royce

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Funds, is one of the august members of myboard of advisors and his offices are upstairs.We initially officed with him over on SixthAvenue, where he was for many, many years, inwhat was distinctly a B-grade building.

Rather famously so, as I recall. Right. The offices were very grade-B and theelevators were pretty slow and horrible and soon and so forth. But Chuck finally decided toupgrade his offices and moved over here. Wemoved over here with him, still as squatters inhis offices. Then, fortuitously for both of us,both of our firms expanded and we had to findour own space. Thisoffice suite happenedto be available at thatpoint, and it hadalready been built out,so I decided just tomove downstairs. It infact is a value proposi-tion because we actual-ly rented it at prettymuch the market low.

So you bought — orrather, leased — low?That’s right. Whenyou’re a good valueinvestor there are twothings you always haveto consider, value andprice. Hopefully, Iwon’t need to do it atany point soon, but Icould easily get out ofthe lease or sublet thisspace to somebody at amuch higher rate thanwe have to pay. Fromthat perspective, this prime real estate is a value.

What can I say? I’m envious. But beforewe dive too deeply into your approach tovalue investing, there’s something else Ihave to ask. How is it than someone whostarted out as a technology entrepreneurended up becoming one of ColumbiaUniversity’s most prominent preachers ofthe value investing creed?Well, my background certainly is eclectic. Mywife likes to say that as soon as I become com-petent in any profession, I change fields.

That’s what a good spouse does. Keeps

you grounded. Right. Anyway, that’s her read on the situation,which is probably not entirely inaccurate. Butmy involvement in technology was when I wasvery young. I started a couple of companies.Some of them were what I would characterizeas moderately successful. One of them, we soldto AT&T (T) and I made what I thought at the timewas a huge amount of money. In retrospect, com-pared to what’s going on these days, it was a verymodest amount of money. Nevertheless, it wascertainly a lot for a young guy.

So you started investing?Actually, I had alwaysbeen interested infinance and the mar-kets. And I always hadbeen an active person-al investor — mainlyinvesting in techstocks, since that waswhat I knew. I was rea-sonably successful at itas a young man.

Yet still you con-verted from growthto value? How didthat happen? Well, I ended up goingback to Columbia —and the reason I wentback to Columbia wasreally that I got mar-ried. We were about tohave our first child anda very good friend ofmine, a guy by thename of StanleyKlion, who had been

one of the senior guys at KPMG, called me upand said, “Listen, the greatest mistake I madein my life was that I was so fixated on my careerthat I didn’t take the opportunity to spend anytime with my kids when they were young.” Hepointed out to me that if I accepted an opportu-nity I had to go back to Columbia to teach for awhile, I’d have a much easier schedule. I wasrunning a consulting company at that point andStanley had been in charge of KPMG’s consult-ing business. It sounded like good advice, so Ifollowed it and went back to Columbia. Theyinitially offered me a job teaching management,but I wanted to teach finance and managed toconvince them to let me teach finance. Right


“The thing that really appeals

to true value investorsis that rule No. 1 is

Don’t lose money, andrule No. 2 is

Don’t forget rule No. 1.If you’ve made somemoney in your life,

that’s very importantto you. You don’treally need to get

that much richer to be a happy human being.”

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around that time, MarioGabelli, of the GabelliFunds — and another ofour august advisors —was trying to restartthe value investingprogram at Columbia,which had pretty muchfallen by the wayside inacademia as a result ofthe popularity of theEfficient Market Theory.Interestingly, in the1980s, value investingwas not, as far as Iknow anyway, taughtas a discipline any-where. It certainlywasn’t taught in theUnited States at thatpoint. Mario actuallygave the school somemoney in the early1990s to bring back hisformer professor,Roger Murray, to givesome lectures to thefaculty about value investing.

And you attended?Exactly. That’s how I initially learned aboutvalue investing. I immediately got interested init. Sort of had one of those ah-ha moments andsaid, “This really makes a lot of sense.” AsWarren Buffett says, either you get it in the firstfive minutes or you never get it. Value investingimmediately appealed to me. It made sense thatthis was a wonderful way to maintain yourwealth, first and foremost; it was very downsiderisk-focused. But then it also had a long historyof not only maintaining wealth but growing it ata very attractive rate. But the key thing — and Ithink the thing that really appeals to true valueinvestors — is that rule No. 1 is Don’t losemoney, and rule No. 2 is Don’t forget rule No.1. If you’ve made some money in your life,that’s very important to you. You don’t reallyneed to get that much richer to be a happyhuman being.

Wow. Now there’s a contrary opinion. Butyou really can’t overstate how out-of-fashion value investing was when youarrived at Columbia. Not in Wall Street,necessarily, where there were a lot ofhighly successful value investors — Mario,

Chuck, Buffett, Walter Mintz at CumberlandPartners, John Neff at Vanguard’s Windsor Fund,Mike Price at Mutual Shares, Walter Schloss, etc.But in academia, it was anathema.Yes, well academicians love things that can bedescribed in elegant mathematical formulas.Having grown up as a quasi-mathematician andcertainly as a tech-focused guy — my undergrad-uate degree at Princeton was in electrical engi-neering and applied math — I can certainlythink in numbers, although I don’t considermyself a great mathematician.

I guarantee you’re better than me — and awhole lot of investors, though. Well, my wife’s father was actually chairman ofthe Columbia math department. He alwaysused to tease me that I was clearly an engineerand not a mathematician. His idea was that ifyou failed at becoming a mathematician, youfirst became a statistician and then if you reallyfailed at mathematics, you became an engineer.So I don’t have any pretense of being a realmathematician. Nevertheless, I certainlyunderstood the math behind a basic financetheory. It is reasonably elegant stuff, but it’sunfortunately based on a bunch of assumptions,which — if you’ve actually spent any time in thereal world — can’t possibly be true.


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Now it’s my turn to say, “Exactly”.So the Efficient Market Theory is just that — atheory. And it was always doomed to failure bythose assumptions. Not to mention that theexistence of all the great value investors wasalways sort of the great evidence that theCapital Asset Pricing Model (CAPM) doesn’twork in reality. People spent significantamounts of their academic careers trying toexplain away people like Warren Buffett — andyou just can’t do it. In any case, it was great thatMario brought value investing back atColumbia. As you probably know, it went frombeing basically one course with a small follow-ing at Columbia to now being a major part ofthe Business School curriculum and a big partof the program. Bruce Greenwald, who was mysenior colleague up there, has really turned itinto a huge success.

It’s now something of an industry.For the school, yes. There are a lot of greatvalue investors, obviously, working in this gen-eral area. The fact that the school can draw onthem to teach classes and so on makes it all themore successful. It was very powerful that wecould get real practitioners to go up and lecturethe students and so forth. In any case, when Iwent back to Columbia, I decided that valueinvesting was really a very intelligent way toinvest my own money. So I started doing thatand stuck with it — even though I went througha difficult period because that was in the early

’90s and then, of course, we went into the techbubble. For a while there I felt like an idiot,frankly. But over time I was proven correct. Ourvalue discipline worked ultimately. Of course,even many of the great value investors, likeJean-Marie Eveillard, of First Eagle Funds, alsosuffered through that same period. Theywatched their funds and assets under manage-ment dwindle during the tech bubble.

If I only had a dime for every time I wastold, “They just don’t get it”. But that cli-mate made it a real feat for them to hangon to assets under management. So whatmade you decide to leave your comfyperch at Columbia and dive into the fray? While I was at Columbia, I seeded, along withMario Gabelli and Bruce Greenwald, one smallmanager, a former Columbia MBA student, instarting up a microcap hedge fund that workedout very well — both for the former student andalso for us as his seed investors —and that gaveme the idea.

Let me guess, that was the HummingbirdValue Fund?Yes. That experience gave me the idea of creat-ing a business centered around investing with“undiscovered” small, existing and emergingdeep value managers. The question waswhether we would try to run it as a seed type offund or as just as a straight fund-of-funds.When I sat down with the members of theboard, we decided that there were too manypotential conflicts of interest involved in doingthe seed business. The seed fund business waspotentially attractive, certainly, but only if youwanted to grow your managers to be quitelarge. One of our basic tenets was that there’s ahuge advantage to having a collection of reallysmall managers. It would have been counterin-tuitive, or really a conflict with our own philos-ophy, if we went into the seeding business. Sowe decided to just do the straight fund-of-funds.

Your board roster reads like a Who’s Whoof value investors. Talk about a triumph ofnetworking. It is a real advantage. Our board of advisors,which is comprised of experienced, enormouslysuccessful value investors, isn’t just windowdressing. They act as a “brain trust” and assistus greatly in sourcing and evaluating prospec-tive managers. Each and every one of our man-agers goes before a panel of our advisors to bevetted before any investments are made. And


Value Outperforms In The U.S.

believe me, those aren’t just pro forma inter-views. So my Columbia connection certainlyhas helped. Then again, value investing is anunusual segment of finance in that it is verynetwork-based. There is a strong sense of com-munity. All of the great value investors knowwho all the other great value investors are —because periodically they end up in the samestocks with them. They typically do watch thelist of a company’s shareholders to see if thereare a lot of similar minds on the list. It is reas-suring, typically, when you’re buying some-thing and see that other value investors alsothink it is interesting.

Probably even more reassuring than see-ing that mainstream investors thinkyou’re certifiable to buy it. True. With that said, however, one of the inter-esting characteristics of value managers — andthis is something Buffett pointed out in his arti-cle, “The Superinvestors of Graham-and-Doddsville,” [published in the fall, 1984 issueof Columbia’s Hermes magazine] is that valueguys actually show very low correlations. So —even though they may look to see if they’re co-invested with certain people in a given situa-tion — overall, in terms of their portfolios, theytend not to share a lot of positions with oneanother. It’s more that they occasionally willpick up a position in common, rather than thatthey typically have very similar portfolios,which they don’t. Our funds have demonstratedover time very low actual positional overlapsbetween managers. And that, of course, is whatyou want because if you hire 15 or 20 smallmanagers and they are all buying pretty muchthe same stocks, you haven’t really accom-plished much of anything for your clients.

Why do you see little overlap, do you fig-ure? They all inhabit the same universe —Right. But the fact these guys tend to be verycontrary and quite original thinkers means thatthey’re not swimming with any herd, so tospeak. Besides, while our managers are all deepvalue investors, they employ a whole range ofinvestment styles and strategies. Typically, theyhave strong conviction on their own ideas.Nonetheless they also obviously do notice whenthey’re in a particular position in the companyof somebody else whom they respect as a goodvalue investor.

So how long ago did you start van BiemaValue Partners?

We started the company in 2004. That’s when Ileft Columbia.

No more lecturing for you?I do occasional lectures but I don’t “teach”. Ireally feel that if you’re managing people’smoney in this business, it should be a full-timecommitment. The exception would be if you’redoing research that is obviously for the benefitof your investors. But value investing is reason-ably straightforward and obviously there’s not alot of research that I would say still needs to bedone. We understand why value investingworks; that’s not the problem. The problem isfinding people who are actually capable ofdoing it.

Sticking with the discipline, you mean?Right. It’s very easy to state what valueinvestors — good value investors — do. But it’sreally a profession that requires unusual charac-ter elements — and not that many people havethe set of characteristics you need to carry itout successfully.

Most of the good value investors I knoware characters of one kind or another,that’s for sure.I’m sure. One of the reasons that my job is funto do is that the people that we invest with arevery eclectic; some people would call them —somewhat eccentric. But the reason that they


Value Outperforms In Global Markets

find interesting, niche-y little value invest-ments is because they have slightly differentways of looking at the world. Therefore, theydon’t end up in the same set of investments thata lot of the rest of the industry frequently herdsinto. There have been a lot of studies now thatshow there’s very high correlation among thelarger hedge funds. They’re basically all buyinginto the same positions — quite frequently.

The quants and mega-funds, you mean?Right. By contrast, our guys are buying stuffthat really is pretty far off the general travelmap, so to speak. There are two types of “under

the radar” managers we typically invest with,basically. The experienced ones have a passionfor investing and solid track records. Butthey’ve remained “under the radar” becausethey don’t generally enjoy marketing or want tobuild an empire, so they have relatively smalllevels of assets under management. The others,whom we call “apprentices,” tend to beyounger but very talented money managers.Typically, they have trained under a highlyregarded master of value investing and are justbeginning to run money on their own.

Let’s focus on your funds-of-funds. Howdid you settle on that structure? Multiplelayers of fees don’t exactly scream “valueinvesting” to me, either. That’s a good observation, as well.

I concede it has to hold considerableattraction for management, though.Right. What happened was that we sat down —“we” being myself and the board —

Which must have been some meeting, con-sidering who you’ve assembled on yourboard. You’ve already mentioned MarioGabelli and Chuck Royce, so you’d betterdrop the others’ names, too —Our board of advisors now officially consists ofCharles Brandes, founder of Brandes InvestmentPartners, Peter Guy, co-founder, JANA Consultingand Warakirri Asset Management (Australia), AlanKahn, former president and CEO, Kahn Brothers& Co., Teng Ngiek Lian, founder, Target AssetManagement (Singapore), and V-Nee Yeh, co-founder, Value Partners Ltd. (Hong Kong), aswell as Chuck. Unfortunately, another long-time board member, Peter Cundill, the founderof Canada’s The Cundill Group, recently passedaway. But we frequently benefit, too, frominformal counsel from a number of the othergreat value investors I befriended while teach-ing at Columbia. Anyway, when we got togeth-er, I basically said that I wanted to leaveColumbia — because I wanted to go back towork for a living again. I told them I saw twothings that I could do: One was to start my ownfund and the other was to implement this small-manager deep-value fund-of-funds idea I hadcome up with. The board pretty much unani-mously was against me doing my own fund.

Really? Why was that?Well, it was really that the board was very muchin favor of me pursuing the small-manager deep


Representative van Biema Managers

Value Outperforms Even In Emerging Markets

Data as of 9/30/2010

value fund of funds idea. And you can attributemany possible reasons to it. I actually thinkmost of them thought the small manager fund-of-funds idea was interesting and different,whereas there already were lots of good valuefunds out there.

I can’t see that group exactly shrinkingfrom the prospect of more competition —No. That would be an extraordinarily flatteringinterpretation of why they didn’t want me to domy own fund. The guys who were sitting aroundthat table are some of the great value investorsof all time. I don’t think they were overly con-cerned about the prospect of me competingwith them. But they did think this idea — thatyou could manage a bigger pool of assets by dis-tributing that pool to a bunch of small deepvalue managers — was interesting and different.They’ve all been through the process wherebythey’ve grown successful investment manage-ment businesses. And, as I always say, thebiggest problem in our profession is that suc-cess begets size — and size begets mediocrity.

That seems to be a law of nature.And that’s what makes this idea so compelling.Which is that you could actually have great per-formance and — hopefully, as long as you didn’tget too carried away — you could continue tokeep the size of each individual manager quitesmall. Therefore, you weren’t going to run intothe problem of shrinking your investable uni-verse quite so quickly — or even, hopefully, youwouldn’t shrink it very significantly at all.Anyway, since we all thought it was a fun, inter-esting idea, we started our first fund of fundsmore or less as a little social experiment amongourselves. We pooled about $35 million of ourown money and just went out and hired a bunchof managers.

You found good managers just like that?Well, I got our first list of prospective managersfrom the members of the advisory board, so itwas very easy to “discover” good managers inthe U.S., initially.

Not surprisingly. They all must haveknown somebody who had worked forthem or who they had invested in, whomthey could recommend. Right. That initial list included probably 100names or maybe a little more. But a lot of thosenames — actually, more than half — ran funds thatalready had been hard closed. I actually was

enthused by that fact,because it demonstratedthat the sort of man-agers we look for are dis-ciplined and that theydo close their funds atrelatively low asset lev-els — which is one of thethings that we think isso attractive about thisidea.

You mean you wantmanagers focused onperformance, notasset-gathering?Exactly. One of thethings we ask our man-agers is what do youwant to be rememberedfor; what do you wantto accomplish in yourbusiness? The onlyacceptable answer, as far as we’re concerned, issomething that says that they want to have agreat long-term performance record.Collecting assets and becoming large is obvi-ously a negative from that perspective. Whenyou look at some of the guys who have spun outof some of the great value shops, it’s actuallyquite consistent that they typically close theirfunds at what most people would consider verymodest asset levels. That’s because they want tobe able to grow for 20 – 30 years, and com-pound that growth at good rates of return.

What else do you and your board askprospective managers?Well, our four key questions are: What do youown?; Why is it cheap?; What is the marketmissing? and What is the catalyst? More broad-ly, we’re looking for a passion and commitmentto value investing, strong risk-adjusted returns,a strong buy/sell discipline and a sturdy opera-tional infrastructure, the ability to exploit valueopportunities in a wide range of market envi-ronments, and a manager with meaningful per-sonal “skin in the game,” plus, of course,unquestioned integrity. My thought, essentially,was that finding those kinds of managers andcombining them in this fund of funds would be aninteresting and a fun thing to do — and that itwould offer nice, excess returns to our investors.

Even after your two layers of fees?That gets us back to the first part of your ques-


- Studies have demonstrated that smaller managers

tend to outperform their larger peers.- Small managers are typically more nimble and are

able to exploit compelling opportunities without size con-straints.

Small Is Beautiful

Source: PerTrac Financial Solutions. Small funs are defined as those with assets of up to $100million, mid-sized $100 million-$500 million, large over $500 million. Study period rangedfrom January 1996 through December 2009.


tion — and it’s actually a question I asked theboard at that first meeting, when we decided todo this. “All this sounds great,” I said, “buthow am I going to make a living doing it? As avalue investor, I don’t really approve of the con-cept of having two layers of fees.” The boardbasically said — and it was really Mario who wasthe most vocal and proactive on this — “Listen,Mike, you’re doing something for people thatthey can’t do for themselves. It’s going to gen-erate really good returns if it works the way wethink it’s going to work. Institutions really can’taccess these managers. These managers are toosmall, individually, for institutions to try to investwith them. So you’re providing them with access,diversification, and good returns. And youdeserve to get paid for that.” Perhaps self-serv-ingly, that argument resonated with me.

It sounds like vintage Mario. And the rest of the board agreed. Fortunatelyfor us, we have found at least a few large institu-tions out there who seem to agree as well. Weinvest in a very, very attractive niche and it isimpossible for larger institutions to really playin this niche. They can’t be running around theworld, the way we are, finding and vetting man-agers that can put only $10 or $20 million towork in a shot.

As their consultants would be quick to tellthem, that wouldn’t move their perfor-mance needles. Right. Exactly. I can take $100 or $200 millionfrom a large pension fund and I can distribute itacross my manager set and it makes for a nice –as one would say these days — “high alpha diver-sifying investment” for them. The other thingsthat clearly have been important in the firm’shistory are the prominence of the board and thefact that we’ve done a pretty good job in termsof running the fund, doing the operational duediligence and so on. We’ve developed a goodreputation in the industry. Still, people invari-ably ask me, “What have you changed post-Madoff, in the way you’re running your fund-of-funds?” I can truthfully answer, “Nothing,”because we have always done it the right way.We do our homework. We look at each manag-er’s positions; we know what they are doing.Internally, we are experts in this particularinvestment niche.

You do regular portfolio-level analysis ofall of your managers’ funds?Yes. We have pretty much full transparency into

all of our managers’ portfolios. We review thoseportfolios, at a minimum, quarterly. More typi-cally, on a monthly basis — and if somethinglooks funny, we call up the manager and askwhat’s going on.

What? You don’t rely on annual reportsfrom storefront no-name accounting firmslocated in tiny upstate hamlets?No, my operational due diligence team is twoguys whose offices are right next door to mine.One of them, our CFO, Sam Klier, was the cor-porate controller of the hedge fund and fund-of-funds business at Bear Stearns AssetManagement. He’s seen a lot of “stuff”.

He’s seen everything, I’d venture. Yes. Sam was one of the last employees at Bear,because they wanted him to help clean up themess that was left over. Here, he functions verymuch as a forensic accountant and I’m verypleased with that. It’s not infrequent that a fundmanager will call me up and complain that Samis literally crawling up an orifice and he is tiredof it! To me, that’s the best news I can have,because that’s what I want Sam to be doing. Theother guy is Steve Bondi, our chief operatingofficer, who came to us after nearly 10 yearswith Asset Alliance Corp., and before that, heactually spent 18 years with Gabelli. He wasMario’s second CFO; started when Mario had$400 million under management and left whenMario went public at $20-some-odd billion.Steve was also, during his tenure there, thepresident of Gabelli Securities, the parent com-pany of Mario’s alternatives business. So, wehave two guys who are very experienced in fundmanagement. It’s my philosophy — which issomething else I learned from Chuck Royce —that you never want to hire people who don’thave a lot of experience, particularly if you are asmall firm. You’re much better off paying up forguys who have been there, done it many times.First of all, as a small firm, one mistake can putyou out of business. In addition, we want every-body who touches our fund managers in anyway shape or form to be a very experienced per-son. I think a lot of other funds of funds havegotten themselves into trouble because they’verelied some of my former students — freshlyminted MBAs — to go out and do some of theirinitial selection and vetting of managers. Nowlet me be clear: There’s nothing wrong with theintelligence of those young MBAs. But they justhaven’t seen the things that the guys who workfor me have seen. What is interesting, in my

experience, is that the inexperienced folks inthis business invariably bond with sort of theworst possible investment risks. This happensremarkably consistently, and I think it’sbecause they’re drawn to the younger, hotshotsexy managers out there.

They are seduced by the fast track? Exactly. They don’t realize that driving a speed-ing Ferrari down Route 1 is not cool; it’s poten-tially life-threatening. I remember when I was atechnology guy; one of the companies that Ididn’t invest in, fortunately, was a companythat was called Apollo Computer.

I remember Apollo Computer.Actually no, Apollo is a different story. I shouldhave said Eagle Computer, that’s the one whoseIPO I was lucky I didn’t invest in. Apollo wasfounded by a guy by the name of WilliamPoduska, a very, very smart guy. But EagleComputer was founded by this poor guy, DennisBarnhart, who on the day of his IPO back in1983 was killed when his Ferrari literally droveoff of a highway in California. Left a wife andthree children and the underwriters actuallyhad to cancel the IPO. It was a real disaster; avery sad story.

Quite a cautionary tale, even if it didn’ttake much wind out of that first tech bub-ble. In any event, you said a lot of thefunds your board initially recommended toyou, weren’t interested in taking in anynew money from you?Right. Maybe out of the first 100, only 40 or sowere still open and available to us, and we madeno effort to pursue the others. It’s always beenmy philosophy in life — not that you necessarilywant to follow the path of least resistance — butthat you don’t want to bang your head against awall too hard, particularly when you’re startinga new business. So, to the managers who werehard closed, we just said, “Fine, if you decide toopen, let us know.” We had plenty of talentavailable to us elsewhere. And, as we’ve been inbusiness longer now, we actually have seensome managers who weren’t interested initially,come back to us. There was one guy, for exam-ple, in Hong Kong, who I wanted to give moneyto because I thought he was a terrific manager —and we did quite a lot of due diligence on himand his fund. But he was closed to new investorsfor three years. Nonetheless, every time I wentto Hong Kong, I’d go see him. We would havelunch and talk about the market in Hong Kong

and so on. And every time, at the end of theconversation, I’d say, “Are you sure you don’twant to take a little money from me?” Healways said, “No,” and after a while, he said,“Don’t even ask, Mike. I’m never going toopen; you’re never going to give me any money.I enjoy having lunch with you, so we can contin-ue to have lunch — particularly since you arepaying and I’m a value guy — but we’re just notopen.” I would reply, “That’s okay. At somepoint, somebody will pull some money fromyou, you’ll have a hole and you’ll think of me.”So what happened? 2008 came along and one ofhis family office investors pulled $15 millionout of his fund, which was really tiny, becausehe had closed it at under $100 million.

That is awfully small —Yes, but we do have some other managers likethat. They’re very disciplined. In Asia, youdon’t need that much money to live. If you’rerunning an office with two or three people andyou’ve got $100 million under managementand you’ve got 20% compounded annualreturns, you’re not doing badly. In any case,that manager called me up in the middle of thecredit crisis and said “Listen, I remember youtold me at our multiple lunches that an oppor-tunity would come for you to put some moneyin my fund — and I’m calling you now. But I per-fectly understand if you pass on the opportunitybecause I really doubt that you’re going to stepup to the plate, given the current situation anduncertainty.” I said, “Wrong again! I do havefunds to allocate.” We quickly brought himbefore our board to be vetted, completed ourdue diligence and wired him the $15 million.He is one of our best managers and has beencompounding at an outrageous rate of returnsince we gave him the money. As a matter offact, we have so much money with him now —because of his compounding and because we’vegiven him more money — that I actually had tostop giving him new money because we have alimit of 15% of assets in any single fund. I’mactually a little frustrated that our fund of fundshas not grown fast enough, in terms of assetsunder management, to match his compoundgrowth. It’s always annoying when you’ve got agreat manager and you can’t invest as muchwith him as you would like.

But remember what you said about sizebreeding mediocrity?Exactly. That’s why we have the 15% limit, tokeep me from getting carried away with myself.


One complaint I hear over and over fromsmaller managers is that institutional —and particularly fund of fund — money ishot money that evaporates when theyneed it most. Behaves exactly the oppo-site of the way you did with your friend inHong Kong. Value types, in particular, tendto be very wary of it. Right, well, that’s one of the ways we’ve man-aged, over time now, to differentiate ourselves.Our managers view us as good long-term realvalue investors. Certainly, the ones in the U.S.didn’t take much convincing. They took one lookat our board and said, “Okay, these guys mustknow what they’re doing because they wouldn’tget these people to join the board if they didn’t.”But in Asia, initially, the great U.S. valueinvestors on our board were just much less well-known. Many of the money managers we wantedto invest with had never heard of them. So we hadto actually establish proof of concept, or whateveryou want to call it, that we were going to givethese people money and let them run it. And nowwe’ve added three prominent value investorsbased in the Far East to our board.

Just how patient are you prepared to bewith your managers?I always tell my fund managers, “Listen, if Igive you money I’m not going to pull it for poorperformance for at least three years. I may pullthe money if it turns out that you have badmorals, or regulatory issues, or if I see signifi-cant personnel or strategy changes or styledrift. But, from a performance perspective, weare committed to you for three years becausegood value managers can easily have severeunderperformance for an extended period oftime.” In other words, we’ve demonstrated tothese guys that we do stick around and that weare patient. They appreciate that from aninvestor. Because of that and also because wehave gotten larger over time, we’ve been ableto, in many cases, get better deals from some ofour managers in terms of fees. That makes mefeel better in terms of the double layers of feesinherent in the fund of funds structure; we’rebasically now wholesale buyers of these smallermanagers’ services. Not only are we wholesalebuyers, we’re high-quality buyers, so they’reeffectively selling to the Wal-Mart of this busi-ness, and have to give us something of a discount.

Sweet. Does that help on the other side ofyour business, enticing institutions toinvest through your funds of funds?

The fund-of-funds sale to institutions is certain-ly not an easy sale, post 2008. It was much easi-er pre-2008, pre-Madoff, and so on. That said,given the fact that we have survived, that we’vegrown the firm continuously over time, andthat we do have a good quality image, it’s cer-tainly been less of a challenge for us than it hasbeen for some of our competitors. I am verypleased that we have never really shrunk as abusiness despite going through what was proba-bly — or hopefully was — one of the most diffi-cult periods in investment history. I think whatwe’re offering people has some real merit to itand has real appeal. But clearly, people stillhave to get over the stigma that Madoffattached to funds of funds. In particular, niche,specific area, funds of funds, such as ours,which are very different than what people typi-cally think of when they hear “fund of funds”,actually have a very valid purpose, even forsophisticated institutional investors.

Which is?We have a high level of expertise in our oneparticular niche, value investing. It would bevery hard for even a major institution to puttogether a staff as expert as ours in this oneniche. They just can’t afford to do it. It doesn’tmake sense from a business model point ofview. As I try to point out to people, if you havea high level of expertise in an otherwise inac-cessible investment niche and you can offer aninstitution a good — reasonable — return thatalso diversifies their portfolio, a fund of fundslike ours makes a lot of basic sense. But youhave to think about the fund of funds conceptin an objective way, as opposed to in the moresubjective or emotional the way that many peo-ple have been thinking, post-’08.

Is the fact that trading these days is domi-nated by short-term and black box quantstrategies making it more difficult for youto sell institutions on something as long-term and patient as value investing?Well, most of the investors interested in whatwe do have a bias against black box types ofinvesting. And there are plenty of thoseinvestors out there,still. A lot of people, cor-rectly I think, view quant strategies as very dif-ficult to monitor, to control, to assess the riskof. So there’s a big group of institutions thatreally stays away from quant investing. Thoseinstitutions certainly are potential clients forus. As I see it, that there are two segments ofthe investing world out there. There’s one seg-


ment that believes, in order to make excessreturns, the investment process has to be really,really complicated. And hard to understand.We don’t tend to deal with those guys. Theother segment of the world realizes that actual-ly you can do some very, very simple stuff andoutperform — just because you’re an originalthinker and not doing what everybody else isdoing. That’s really our home niche. I’ve beenin both camps in terms of my investing historyand what I always tell people is that quantinvesting is intellectually challenging and fun,if you have that sort of mind. The problem isthat it’s a gerbil-on-a-wheel type of approach.You always have to be running faster than thenext guy, if you’re going to earn excess returns— and there are lots of gerbils out there that youcan hire.

I can imagine quite a few quants takingumbrage at being compared to gerbils. I don’t know, I’ve always had a soft spot for ger-bils. My first business was raising gerbils, whichis actually a terrific business because they defi-nitely procreate quickly! Unfortunately, I wasput out of business by my pet cat who decidedone day to open all the gerbil cages. My motherdidn’t think it amusing to come home and dis-cover a couple of hundred gerbils runningaround the apartment! But it was very prof-itable. The economics of that business wereprobably the best I’ve ever run into. I remem-ber buying my first gerbil couple for $14, whichI thought was an outrageous amount of money,at Lampston’s and then breeding them away.

I’d say you had a very indulgent mother!Well, I was an only child. But my point was thatit’s very difficult to maintain your edge overtime, if you’re a quant. Remarkably, a few firmshave managed to do it, but it’s really very hardwork. In a sense, it is much easier to do what wedo and what our managers are doing. You justhave to have the right outlook on the world. Ifyou have that, making money is still work, butyou don’t have to continuously reinvent your-self, which is what you have to do if you’re onthe quant side. A good value investor basicallyhas one skill set, which is being a contrarianthinker and then he just has to find examples ofwhere the world has gotten the story wrong.

And have the fortitude to wait for it towake up! Do you find it at all ironic thatfor all their complexity and sophistication,most quant models seem to hinge in some

way on the Efficient Market Theory, whichas you said is deeply flawed? The way I would prefer to say it is that marketsare definitely inefficient part of the time andthere’s no question about it. No matter howefficient a given market is, there still are signif-icant inefficiencies. If you’re talking about U.S.and European markets, which are the mostwell-developed and most efficient markets, a lotof people would contend that their inefficien-cies are very rare. But as 2008 yet again demon-strated, there actually are plenty of inefficien-cies, and sometimes there are huge inefficien-cies, even in comparatively very efficient well-developed markets. Those inefficiencies createhuge opportunities for people who think aboutinefficiencies. The reality is, if you reallybelieve in CAPM, then you are saying that avast percentage of the money managementindustry should go away.

Absolutely. But that’s no way to winfriends and influence people in Wall Street. Because if that’s true, people are being paidoutrageous amounts of money to create whateffectively are indexed funds for their clients,right? We believe, on the contrary, that therereally are some great inefficiencies out there. Ifyou are clever, you can take advantage of themand you can produce significantly increasedreturns as a result.

Of course, events like 2008’s don’t hap-pen very often, thankfully. Which is why, on the one hand, having man-agers of small funds is important in the moredeveloped markets. It is true that over time, theinefficiencies in well-developed markets dotend to get — in the typical case — smaller andsmaller. But if you’re only putting smallamounts of money to work with each manager,there are always going to be some niches ofinefficiency for your managers to exploit. Onthe other hand, if you’re trying to put largeamounts of money to work in a value strategyyou need a 2008 — and 2008’s don’t come alongall the time. Then again, in the less-developedmarkets like those in Asia, you again need toput small amounts of money to work — simplybecause the markets are small. You just can’tput huge amounts of money to work in a marketlike Indonesia or Malaysia because otherwiseyou’ll end up with an index fund. You’re notdoing your clients any favors if you’re trying toput billions of dollars to work in a market wherethe total market cap is a few billion dollars.


And where the locals specialize in takingadvantage of the —— naive foreigners. We always try to be ahead ofthe curve, so it’s a big warning sign for us whena market starts to get “attractive”.

You started your domestic fund of fundsin 2004, but your international ones areof newer vintage, aren’t they? Yes, we added the van Biema Global Value Fundin 2006 and then we enjoyed a bit of propitioustiming in adding the Asia fund, van Biema AsiaValue Fund, in August of 2008.

Propitious, in August of ’08?Well, that was actually when one of our largeexisting clients seeded our Asia fund. But thedeal that we make with our clients is that we getthe discretion to draw down the money thatthey give us over a period of time, as appropri-ate. So even though the fund was seeded inAugust of 2008, which potentially would havebeen a terrible time to put money into the mar-kets, we actually didn’t put most of the moneyinto the Asian markets until January of 2009.We let it sit there for a while.

Was that luck, or good timing?Our timing was a combination of two things. Ialways used to tell my students that you needthree things to really be successful in life: Youneed good timing, good luck and good looks.We had two out of the three. I’ll let you guesswhich two. But things worked out nicely for ourAsia fund of funds. We don’t claim to be macroinvestors because we are value investors andmacro strategies are sort of contrary to our dis-cipline. But we do claim to try to be reasonablyintelligent about when we put money into mar-kets and we try not to put it in at the absolutehighs — we try to put it in at the absolute lows, ifwe can do that. Not that we think we’re going toget our timing absolutely right, obviously.

How are your assets under managementallocated across your funds now?The majority of the money is in the U.S. andAsia funds; they are our two big funds of funds,at roughly $350 million, each. Our global fundis quite a bit smaller.

Where are you most anxious to add man-agers so that you can invest more assets?In other words, where do you see the bestopportunities now?In Asia. We think that our model has worked real-

ly well in Asia because there are many fewer valuemanagers in Asia — value investing, as a strategyis not as well-known in Asia as it is here. Asia isvery much a growth-focused market, for all theobvious reasons.

It’s also focused on gambling — specula-tion. And developing markets are, by defi-nition, less-than-efficient, as you said. Right, right. That creates huge opportunitiesfor us because there are goodly numbers ofAsian companies that are good companies,strong-franchise businesses, well-managedbusinesses — but that just happen to be growingsomewhat more slowly than the target levels ofgrowth that most people are looking for in Asia,for one reason or another. I mean, how manytimes have you interviewed an Asian investorand heard the first few words out of his mouthbe something like, “And the great thing aboutmy portfolio is that everything is growing at20% per year, at least”?

I’ve lost count.I’ll bet. There are some great companies in Asiathat are growing at 8% to 15% annual rates. Butbecause they have these sub-par growth rates —or, rather, what are considered sub-par growthrates — the markets really punish them. Theyare generally neglected and disdained byinvestors. I frequently say that value investorsdo what I call “Statue of Liberty investing”. Inother words, give us your poor, your forgotten,your unloved. That’s what we’re looking for —and in Asia there are a lot of great companiesthat fit that description. We can buy companiesin Asia at three to six times free cash flow thathave dividend yields of 6% or more. So we’re get-ting paid to wait around for the companies torevalue. And, eventually these companies dorevalue.

Why, in markets so fixated on growth?You’re not banking on that changing any-time soon, are you?No, but these are good companies operating insuch a high-growth environment that thegrowth catches up to them in some way orother. They’ll come out with a new product thatwill be exciting or they’ll move into a new mar-ket. I’ll give one example. We invested in acompany that maintains the conveyor belts atairports. The only problem was that the compa-ny is located in Singapore. At the time weinvested in it, it maintained the conveyor sys-tem in the Singapore Airport. That was not a


high-growth market because there’s only going tobe one airport in Singapore for the rest of time, asfar as I know. But it was an attractive company. Itdid a great job maintaining its one little conveyorbelt system there and it threw off a lot of free cashflow. It was very profitable because it was basical-ly a monopoly business in Singapore. Still,nobody paid much attention to it because it wasnot a high-growth, sexy Asian type of business.

So what changed?Finally, they ended up getting one little contractto maintain another airport conveyor belt — inWestern China — and all of a sudden, investorsdecided they were going to be the maintenancecompany for the next 25 or 50 new airports thatwere going to be built in China. Goldman Sachspicked up coverage of the company; the compa-ny’s P/E went from 5 to 15 to 25 to 30. We, ofcourse, were long gone by the time it hit 30, butmy point is that this is not an atypical story forour fund managers. These little gems are outthere, if you have the patience to buy them andthen just sit around and wait. But you’re gettingpaid to wait, so it’s not so bad to wait. The oppor-tunities in the area are great.

Are the fund managers you depend on tosniff out those kinds of stocks locals, whocan navigate Asian markets much moreeasily than someone operating from here?Yes, all of our Asian managers are in fact peoplewho have either grown up in Asia — are Asian — orthey are U.S. or (mainly) British ex-pats whomoved over there years ago and worked for someof the big ex-pat brokerage houses before settingup their own little funds. They are very pluggedin. We don’t invest with the people who invest inAsia from London or New York or L.A. We don’tthink that is an attractive way to do it. Besides,those firms — because they have to have infra-structures both here and in Asia, typically tend tohave much larger amounts of capital under man-agement. Therefore, it’s harder for them to investin the types of smaller cap companies we findreally attractive.

A lot of Asian markets are notable for theirvolatility. Doesn’t that make it more difficultfor your managers to hold for the long term,as value investors are supposed to do? It’s interesting that people develop these invest-ment phobias — and any list of current marketphobias certainly has to include volatility. Peoplehate volatility. But the reality is —

You need it to make a buck.Exactly. The reality of the situation — in the Asianmarkets in particular — is that volatility is yourfriend. There are some great companies overthere and without the volatility you would neverbe able to buy them at a cheap price. The volatili-ty actually creates the opportunities in many ofthese countries. Take India, which frequently canbe highly valued for long periods of time, butthen hits a bump in the road. That’s when you getthe opportunity to buy some of India’s great larg-er companies at attractive valuations. Let me beclear. We don’t buy only small cap companies. Wewill also buy some of the larger cap Asian compa-nies when volatility creates great opportunities.You’re usually not going to get those things reallycheap, but occasionally they will come down inprice enough to become a good value investment.

How has your fund of fund arrangementworked for your managers? Have you hadmuch turnover?We have had relatively low turnover. At the fundof funds level, we basically practice value invest-ing with people, as opposed to with equities. Wetry to pick portfolio managers who we think arereally good and, hopefully, we’re right at least adecent percentage of the time. For us, typicalturnover is one manager per year per fund, whichis not a lot.

Is that mostly because of good news — as instellar performance makes them too big, orbad news — as in lagging performance? A combination, really. Our most frequent reasonfor turning over a manager is that we find some-body who we think is even better. We are alwayslooking at what our current portfolio is and ask-ing, does anyone else do something that’s similarto a manager we already have — and do we thinkthat they’re even better at it? But we also do occa-sionally turn over a manager if he gets too big, inour view, to deliver the type of returns that we’relooking for. Size is always a consideration.

I know this is a question value investorshate, but what’s your take on the marketoutlook? How do you see the rest of theyear playing out?The reason we hate this question is because noreal value investor believes that he has a goodanswer to it.

I know, you can’t forecast the market—My answer is that is one of our fundamentalbeliefs and we try to stick to it . What I think


makes many of the guys who are on my board sosuccessful is that, in spite of the fact that they’vehad highly successful long-term careers in thisprofession, they maintain strong levels of mod-esty. We tend to believe that as soon as you thinkthat you have the market figured out, it will proveyou wrong.

It’s often a very humbling business.Plus, these days the other thing I’ll say is thatgovernments — ours and others — have theirhands so involved in the overall economies of theworld that if macro was nearly impossible to dobefore, if anything, it’s even more impossible todo now. Not only do you have to sort through themacro fundamentals going on in the world, buton top of that you have to figure out this overlay,where governments are playing lots of gameswith us. If you think you can predict what politi-cians are going to decide to do, more power toyou. I don’t really have a clue.

You mentioned that your value managers’portfolios don’t tend to contain overlappingpositions. But in looking across them, canyou detect any themes? Yes, they’re being extremely cautious. In terms ofvaluations, they are trying only to buy things thatare really, really cheap because there is so muchflux out there in the system as a whole. In thepast, when they might have felt that they hadsomething of a handle on the status of the econo-my — that the economy was good or the economywas improving or even that the economy was bador getting worse — they might have made differ-ent sets of investments. Now, they’re really justtrying to buy things that they feel are fundamen-tally so mispriced that — no matter what happenson the macro basis — they’re still going to do pret-ty well. But that does reduce the opportunitiesthey are finding. So we have higher levels of cashin the portfolio than we typically have had atmany times in the past — with the exception ofthe end of 2007. That’s clearly an indication themanagers are having trouble finding stuff thatthey feel comfortable buying.

Your fund managers are holding more cashthan they have at any time, except at thepeak of the credit bubble? How close to thatpeak are they?I’d rather not get into specific numbers. But theyare moving in that direction.

I’m guessing that as good value managers,they held a lot of cash back in late ’07. Yes, they had high levels of cash at the end of2007. And in moving in that direction now, theyare being very, very cautious, which is not at allunreasonable. One thing I will say is that, in gen-eral, corporate America is in pretty good shape. Ifthe economy were to turn up significantly — orturn positive, period — American corporationswould be very well-positioned to take advantageof that. They have done a very good job in termsof cost cutting and improving their productivityand so on. The big question is if and when theAmerican economy will really turn around.When we continue to have these little exogenousshocks, as we’ve been having recently, it makes iteven more impossible than usual to predict any-thing.

Isn’t that always the story of the market? Right, the future is only clear to weathermen.

And their batting average isn’t acceptableeven to investors! Yet there are lots of folksarguing here that stocks are cheap. There certainly are, as always, some stocks thatare cheap. But is the market generally cheap? Welook at the Graham and Dodd P/E Index or whatnow has come to be called the Shiller CyclicallyAdjusted Price Earnings ratio, or CAPE, andaccording to that, stocks are not in general cheap.

Nor are they cheap based on Tobin’s q-ratio,as Andrew Smithers likes to point out—Well, I prefer to measure valuation in terms ofaverage historical P/Es over the cycle, ratherthan the replacement cost of assets. But eitherway, stocks in general are not cheap here.

Thanks, Michael.


Weeden & Co. LP’s

Research DisclosuresIn keeping with Weeden & Co. LP’sreputation for absolute integrity in itsdealings with its institutional clients,w@w believes that its own reputationfor independence and integrity areessential to its mission. Our readersmust be able to assume that we haveno hidden agendas; that our facts arethoroughly researched and fairly pre-sented and that when published ouranalyses reflect our best judgments,not vested pocketbook interests ofour sources, colleagues or ourselves;w@w’s mission is strictly research.

This material is based on data fromsources we consider to be accurateand reliable, but it is not guaranteedas to accuracy and does not purportto be complete. Opinions and projec-tions found in this report reflecteither our opinion (or that of thenamed analyst interviewed) as of thereport date and are subject to changewithout notice. When an unaffiliatedinterviewee’s opinions and projec-tions are reported, Weeden & Co. isrelying on the accuracy and com-pleteness of that individual/firm’sown research disclosures andassumes no liability for same, beyondreprinting them in an adjacent box.This report is neither intended norshould it be construed as an offer tosell or solicitation or basis for anycontract, for the purchase of anysecurity or financial product. Nor hasany determination been made thatany particular security is suitable forany client. Nothing contained hereinis intended to be, nor should it beconsidered, investment advice. Thisreport does not provide sufficientinformation upon which to base aninvestment decision. You are advisedto consult with your broker or otherfinancial advisors or professionals asappropriate to verify pricing andother information. Weeden & Co. LP ,its affiliates, directors, officers andassociates do not assume any liabili-ty for losses that may result from thereliance by any person upon any suchinformation or opinions. Past perfor-mance of securities or any financialinstruments is not indicative of futureperformance. From time to time, thisfirm, its affiliates, and/or its individ-ual officers and/or members of theirfamilies may have a position in thesubject securities which may be con-sistent with or contrary to the rec-ommendations contained herein; andmay make purchases and/or sales ofthose securities in the open marketor otherwise. Weeden & Co. LP is amember of FINRA, Nasdaq, and SIPC.

W@W Interviewee Research Disclosure: Michael van Biema is the founder and managing principal of van Biema Value Partners, LLC. This interview was initiated by Welling@Weeden and con-tains the current opinions of the interviewee but not necessarily those of van Biema Partners, LP. Such opinions are subject to change without notice. This interview and all information andopinions discussed herein is being distributed for informational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategyor investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed and van Biema takes no responsibility for errors or omis-sions. The investment objective of the van Biema funds is to achieve long term appreciation on an absolute return basis while limiting downside risk and volatility. The capital of the funds isinvested in investment vehicles that invest primarily in equity securities and other financial instruments. Investment managers retained by the funds are expected to follow a value investingphilosophy and may utilize a range of investment styles and strategies. The investment manager believes that its approach may enable the funds to achieve its risk and return objectives. Thereis no guarantee those objectives will be achieved and investment in the funds may result in the complete loss of invested capital. In addition, forecasts, estimates and certain information con-tained herein are based upon proprietary research and should not be interpreted as investment advice, or as an offer or solicitation for the purchase or sale of any financial instrument. Anyoffering of the van Biema funds can only be made via a confidential offering memorandum and only in those jurisdictions where permitted by law. No part of this interview may be reproducedin any form, or referred to in any other publication, without express written permission of Welling@Weeden. Past performance is no guarantee of future results. For further information, pleasecontact van Biema Value Partners, at 212 308 5902 or see www.vbvaluepartners.com

listeningin APRIL 8, 2011 Old School Values · Chuck, Buffett, Walter Mintzat Cumberland Partners,...

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