Christopher Richey, CFA, is the director of the mutual fund portfolio group for Brandes Investment Partners LP, a global value manager in Del Mar, Calif. The firm manages more than $60 billion in assets. MAQ spoke with Richey about managing risk in Brandes' separate account portfolios, both on a short-term and a long-term basis.
MAQ: Chris, what kinds of portfolios do you manage at Brandes?
CR: We are an equity shop only, and we've built our reputation as a disciplined value manager. We manage several asset classes within the value style. We believe there is a limit to how much you can manage and still stick to your principles, so we shut down our international product (emerging markets, mid- and small-cap and Europe-only portfolios) to new clients in '98, and we just closed the global product at the end of November. Our U.S. value remains open.
MAQ: How do you manage risk on a short-term basis in a value portfolio?
CR: We generally have a three- to five-year time horizon, so we technically don't manage for short-term risk. We view short-term volatility in any particular holding, especially if it goes down, as an opportunity to buy more. For instance, we started buying Raytheon a couple of years ago at around $42. It got all the way down to the low $20s, so we have an average basis around the mid- $20s, and now, it's trading around $35.
MAQ: So, you have a dollar-cost-averaging strategy of sorts?
CR: Well, we believe in the concept of intrinsic value-having some idea of the long-term value of a company based on a three- to five-year holding period. We insist on a substantial discount between our intrinsic value estimate and our buy price. That's one way we manage risk. Another way is by looking for cleaner balance sheets. Having too much leverage in a company produces a lot of short-term risk because bankers have a right to come in and grab the company if it doesn't pay the debt.
MAQ: What are your strategies for managing risk on a longer-term basis?
CR: What we do is derived solely from Ben Graham's work. We basically manage risk in four ways, including the two I just mentioned. So one, we try to think long-term about the company so we don't get distracted by short-term events. Second, we buy at a significant discount to the intrinsic value. Third, we look for a clean balance sheet and fourth, we spend more time analyzing a company's history than its future. By looking at 10 to 20 years of the company's history, we get a very good idea of how the stock might react to what we consider short-term events. The combination of all those things gives us comfort that we are managing the overall risk well. So when the price goes down below our buy price, we're getting offered what we believe is the same good quality at a lower and lower price.
MAQ: How do customize your portfolios for individual investors?