Download A Successful Fund Manager Discusses His Techniques

How I managed my Portfolios
U.S. and Emerging Markets
Martin DeBovis, PhD
Feb. 13, 2008
Funds Managed
Managed a Large Cap Value Fund from 1991 through 1999, a
semi quant fund - $500 million
In 1994 I started up the Latin American component of an emerging
market fund
In 1996 I took on the responsibility of managing the East
European, Greek, Israeli, and Russian portfolios
Total Emerging Market assets $600 million
I always wanted to be a portfolio manager!!
Mandate – Large Cap & Low P/E
Investment Universe – 1,000 largest market cap stocks
Investment style - Value. Strategy was long only with a long
term investment horizon?
Primary screening tool - P/E – Price divided by trailing
operating earnings (Back test suggest that over the long
term low P/E stocks out perform high P/E stocks
Portfolio held 80 to100 stocks
Rebalance monthly – at the end of the month some stocks
may no longer be low P/E, fundamentals may have
changed, or there may be a stock I like better.
Formal benchmark - S&P500, Style benchmark - Russell
1000 Value
Portfolio Construction
Quantitative Tools – Quants use the following to form an equation
that forecast expected return (Alpha)
Valuation – P/E, Price/Book Value, Dividend Yield, and P/Cash Flow
absolute and relative to their sector.
Estimate data – What is the stock expected to earn in the next
quarter or fiscal year. Most Wall Street firms supply earnings
estimates.
Sentiment – are analyst raising or lowering their estimates?
Upward revision may indicate that a stock price is likely to rise.
Momentum – is the stock price rising or falling.
Portfolio Construction
Fundamental Tools
Avoid a value trap –a companies valuations are low because its
business model is flawed and not likely to perform well –
Polaroid, Xerox, GM
Analyst input – analyst at money management firms study
company fundamentals – Income, cash flow, and balance sheet
and build models to project company earnings. They can
provide information that is not captured by quantitative tools.
Does this stock make sense in the current economic environment
or market?
What I learned
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Be patient – If the underlying fundamental haven’t changed it
may take a while for a stock to start moving
Don’t fall in love with a stock. If you lose money on a stock
and the fundamentals have changed – don’t hold on to it,
expecting to get your money back. Accept the loss and move
on.
Valuation matters – don’t pay too much for a stocks with low
expected earnings growth
Investing is a lot of work and requires paying a lot of attention to
details
Understand your investments
Performance
My Portfolio vs S&P500 and Russell 1000 Value
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1990
1991
1992
1993
1994
My Portfolio
1995
S&P500
1996
1997
R1000V
1998
1999
How did I do?
Beat the Russell 1000 Value in 7/9 years
Cumulative
AVG
Return
Return
R1000V
Excess
Managed
S&P500
Return
RETURN
1991
38.94%
30.47%
24.60%
14.34%
1992
20.75%
7.62%
13.80%
6.95%
1993
12.66%
10.08%
18.10%
-5.44%
1994
0.46%
1.32%
-2.00%
2.46%
1995
45.80%
37.61%
38.40%
7.40%
1996
24.58%
22.96%
21.60%
2.98%
1997
37.91%
33.36%
35.20%
2.71%
1998
3.34%
28.58%
15.60%
-12.26%
1999
12.21%
21.04%
7.40%
4.81%
451.00%
450.00%
363.60%
2.66%
23.78%
23.75%
19.19%
4.53%
Emerging Markets

Managing an EM portfolio is a much more complex process

Funds run as separate country portfolios which required dealing with
country specific benchmarks and managing 12 separate portfolios

Followed a value investment strategy – value does not always work

Markets can be extremely volatile but present tremendous investment
opportunity as the developing countries grow their economies

A safer way to invest in EM is to invest in companies that derive
earnings from the developing economies such as Coca Cola and GE

More later