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What Type of Investor is Your Value Fund Manager?

Jeff Miller

The Great Existential Question (no, not "what is the meaning of life?"—that's easy): What Type of Investor is Your Value Fund Manager?

So you think all value managers are the same? In theory, you're right, just like all steaks are the same (Kobe and chuck are both beef), all cars are the same (a Ferrari and a Hyundai will both get you to your destination) and all planes are the same (I'll take the Boeing over the Tupolev, thanks). All value investors are also the same, since we all want to buy stocks that are cheap.

In reality, just as in other aspects of life, the answer is more complex. In value investing, there are generally three types of investors: deep value, relative value, and opportunistic value. Deep value managers focus on liquidation or asset plays—what they can get for selling off the pieces of a company. In our view, this type of investing is quite risky, as it relies on a few concentrated bets in what are usually fairly poorly operating businesses (if they weren't poor businesses, they wouldn't be in their situations in the first place). Relative value investors look at the price of stocks versus a benchmark and try to buy companies that are cheaper than their peers, usually without regard to the overall level of prices (hence the "relative").

The Calamos Value Strategy is different. The Calamos Value Team utilizes an opportunistic value approach, looking for strong operating businesses that are temporarily undervalued by the market. We focus on the operations of the business: how it makes it money, its defensible barriers to entry and proprietary technologies, and the near-term outlook for those cash flows.

When we find companies that meet our fundamental operating criteria, we wait until the market gives us the opportunity to buy them for a low price to those free cash flows. Some great operating businesses never get cheap enough for us to buy them. Those are like the $300 beef tartare at Nobu. It looks amazing, and I'm sure it tastes amazing as well, but as a cheap-at-heart value manager who still uses a Blackberry, there's no way I am going to order it unless it's on sale. But if I stumble upon an amazing French bistro serving the most amazing charcuterie plate with foie gras, rare sliced strip steak and yes, some steak tartare, all for $14, as I did during a rainstorm on a quiet Sunday in Greenwich Village a few years ago, you can bet I'm going to order it not just once, but every chance I get, along with some mussels and more steak. Oh, and the house red for $6 a glass—it's a great value as well.

What would a deep value manager do if they stumbled across this bistro? Would they splurge on a great meal at a reasonable price? Or would they pass, and instead, if the restaurant were to go out of business, try to buy the tables and chairs cheaply and resell them at a higher price to another aspiring restaurateur? A deep value manager is most likely to wait for the going-out-of-business sale, skipping the bargain to be had inside. An opportunistic value manager is likely to be inside eating an awesome dinner and would continue to do so every week until the restaurant gets discovered, becomes the new "it" place, and raises its prices. I'd keep going for a little while to soak in the limelight of being a regular at this newly discovered gem, but eventually it would get too expensive my price-conscious nature; and anyway, I'd find myself being elbowed out by the growth managers looking for the proprietor to open her second and third locations.

However, if the food quality and service started to deteriorate, the opportunistic value manager would quickly move to another place; our focus is on quality for a good price. If things got really bad and the place started offering frequent specials and discounts, then you'd see the deep value managers popping in for a bite or two, hoping for some adequate nutrition at a bargain price. But in those situations, the cheap eats would come with the higher possibility of food poisoning. Some things just aren't worth the risk.

(In case you read this far only to find out what the meaning of life is, it is really quite simple: a healthy family, a life rich in time not just money, and chocolate croissants, strong coffee, and the weekend edition of the Financial Times on a quiet Sunday morning. That's it. The rest is just noise.)

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

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