“Value investing is logical”
Value investing is the embodiment of what ACATIS has been practising successfully since 1994 – and for which it has been rewarded with good, consistent performance and numerous awards. Meet Dr. Hendrik Leber, Managing Partner of ACATIS Investment, who explains why the investment boutique continues to focus on value and why AI (artificial intelligence) combined with value investing, and ESG, are here to stay.
Dr. Hendrik Leber, Managing Partner of ACATIS Investment
ACATIS at a glance
- Asset Manager since 1994 based on the value investing philosophy
- ACATIS searches for undervalued stocks using a systematic and data-based process
- The ACATIS value approach is consistently implemented and developed into the 21st century with a view to the future: Its funds achieve outperformance over the long run and go beyond passive approaches
- ACATIS offers value-equity funds, value-balanced funds, value sustainability funds and value-bond funds, and since October 2016 artificial intelligence driven equity funds
- Assets under management: 12.1 bn. EUR (as of July 31, 2021)
Dr. Hendrik Leber is a man of many talents and interests, and an engaging storyteller, too. He has been working as an independent asset manager since 1994 with ACATIS Investment KVG mbH, which he founded. The firm specializes in value investing based on the system of Graham & Dodd and Warren Buffett, who believe that value investing will outperform passive or trend-oriented investment in the long term.
His eight years in academia saw him study Finance, Accounting, Banking and Securities Markets at universities in his native Germany, in Switzerland and in the US. Dr. Leber holds an MBA from Syracuse University and a Doctorate from Hochschule St. Gallen and has also studied at the Universität des Saarlandes in Saarbrücken and the University of California at Berkeley.
Prior to joining ACATIS, Dr. Leber worked at McKinsey & Company and subsequently Metzler Consulting KG. He began managing funds for ACATIS in 1997 and is presently a partner in the firm.
During our most pleasant interview, Dr. Leber confessed that he was not a value investing believer from the start, as he explained it himself.
- Why value investing?
Many years ago, in the pre-email days, Dr. Leber wrote a letter to Warren Buffett asking him to send him his annual report. Having received 20 years of annual reports, Dr. Leber spent an entire summer reading all of these and concluded: “Warren Buffett is right, and I’m wrong.” This is how Dr. Leber got used to the idea of value investing. “Look at the intrinsic value of a company, not at the stock market price.” Rather, it is key to find the fundamental value of the share based on key indicators and therefore invest in companies that are traded at a low price (below their actual value) on the stock exchange. An approach created by Benjamin Graham, 1894 – 1976, who conducted scientific research on value investing and successfully applied the method as an investor.
Fast forward. At some point in time, Dr. Leber concluded that Warren Buffett had become stuck in his thinking process after missing out the opportunities in high-growth technology stocks, as Buffett himself admitted. “The world had changed, it is either, ‘Lead, follow or get out of the way’ and I said to myself four years ago, I have to find my own way of thinking and make my own definition of value investing in the modern world.” For Dr. Leber this meant that he had to extend his value investor mindset and integrate new ideas in order not to miss out on high-tech investment ideas such as Microsoft or Google / Alphabet like Warren Buffett did. Proven business models which worked well for decades and recorded steady growth were under attack from new platform businesses.
Dr. Leber: “My thinking was right at the time, but the political reality was quite different.” He had to find a way to get to the heart of what value investing really was. “It’s about future cashflow, intellectual property, about the brand, and we had to find our own style and valuation metrics.”
One of the insights that Dr. Leber embraced is called the “Lollapalooza” effect, as coined by investor Charlie Munger (born in 1924), which now plays an important role at ACATIS. The “Lollapalooza” phenomenon is a concept that several smaller scale factors of human biases, tendencies and/or actions, when acting together, can lead towards a certain (and often very significant) outcome. The basis of the Lollapalooza Effect is that humans have many inherent biases and tendencies that can sway human behaviour. ACATIS is interested in companies that benefit from this so-called “Lollapalooza” effect; they can in fact become global market leaders.
Another insight that Dr. Leber embraced was the Penman model that ACATIS has been using for the last 15 years, named after Stephen Penman’s theory and book called “Accounting for Value”. The book recasts “value” versus “growth” investing and explains such curiosities as why earnings-to-price
and book-to-price ratios predict stock returns. The book’s approach showed that valuation and accounting are quite similar: valuation is actually a matter of accounting for value. Dr. Leber: “Penman’s thinking has been guiding us.” Penman said information can help investors steer away from value traps. Information is the goal; it reduces uncertainty and risk.
Dr. Leber: “Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” We view this as fuzzy thinking. In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. Typically, value investing connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield.”
- Where does AI come in in ACATIS’ value investing approach?
ACATIS has been working on artificial intelligence (AI) and its use in portfolio management for several years. In 2017, ACATIS launched the world’s first mutual fund whose stock selection and portfolio construction process are entirely controlled by artificial intelligence. Another fund followed in 2017 and a third in 2018.
At ACATIS, artificial intelligence is also used autonomously in some funds, such as the ACATIS AI BUZZ US Equities. This fund evaluates data from various online sources and makes it usable with the help of artificial intelligence: A sentiment – i.e. a mood picture – is formed from the data for several hundred individual stocks. The shares with the best mood are bought from the pool of individual stocks.
Dr. Leber: “The plan is also to use AI more extensively in the stock selection process.” The human factor contribution remains relevant when it comes to sector allocations, Dr. Leber also noted. “We’re now adding text data into the model which includes transcripts from analysts’ meetings, as well as responses from management which allows us to see moods swing over time and this will be integrated into the model as well.”
- Last but certainly not least, how important is ESG for ACATIS?
Dr. Leber underlines that sustainability has been an important aspect for ACATIS for decades and its sustainability approach also integrates the Sustainable Developments Goals (SDGs) of the United Nations. ACATIS has been successfully offering funds in the area of sustainable investments for many years. The criteria used in sustainability funds were developed together with investors by Swiss-based ACATIS Fair Value Investment AG, which advises ACATIS in the sustainability field. Dr. Leber: “We’re not impact fund investors but we use the ESG and SDG tools in our investing methodology.”
ACATIS (founded in Frankfurt in 1994) is a specialized value manager in asset management. An investment style that is based on the “genuine“ value of companies and markets, ACATIS believes, will out-perform a passive or trend-oriented investment policy in the long term. Whilst wider price fluctuations may occur with this style, value investing is successful in the long term, due to the fact it is geared towards the value and not the price of companies. Over the long-term, value investing has out-performed other approaches. Take for example ACATIS’ flagship global equity fund (ACATIS Aktien Global), which has returned 914% since inception vs. 500 % MSCI World (as of July 31, 2021).
This information provided by Fund Seminar is wholly indicative, for discussion purposes only and does not represent an offer or invitation, investment advice or any kind of financial service.