Cory Martin is Chief Executive officer/Executive Director/Equity Portfolio Manager of Barrow Hanley which he joined in 1999. In 2017 he was named Barrow Hanley’s Executive Director and in 2019 he was named Chief Executive Officer and is responsible for the day-to-day management of the firm. Mr. Martin is a member of the CFA Society in Dallas-Fort Worth. He graduated from Baylor University.
Russ Alan Prince: Can you tell us about Barrow Hanley and the firm’s basic investment philosophy?
Cory Martin: Barrow Hanley’s investment philosophy is to buy good companies that are down for reasons that we can identify and believe to be temporary. When we say: “good,” what do we mean? Well, we want companies that have reasonable rates of profitability, such as return on equity, competitive earnings per share growth rates, good track records, and good return on invested capital.
We’re also looking for companies that have quality management teams in place and earnings per share certainly in line with their industries, but also the broader market. In a nutshell, we’re looking for good companies that have, stumbled―but we don't want to pay a high price for them. We want to buy companies that are “value” today, not in five years’ time.
Prince: How is Barrow Hanley unique in its equity selection process? What are the key differentiators in your approach?
Martine: Barrow Hanley is extremely disciplined in our approach to capital allocation. We build asymmetrical, positively skewed portfolios through bottom-up, fundamental analysis, and are very disciplined in monitoring each name, measuring our return on invested capital since inception and where we are with performance relative to its price target. If we are approaching the price target and have a good return on invested capital, we’re going to redeploy that asset into a new name with a much higher upside or into an existing name that hasn’t reached its price target, but its investment thesis remains intact. We don’t allow ourselves to get attached to our successes; we maintain our investment discipline, and it’s kept us in the game year over year while providing our investors a smoother ride during up and down market cycles.
As for key differentiators, first and foremost, we’re buying good companies that are down for reasons we can identify and understand. Companies that have historically had competitive profitability, return on invested capital, and earnings per share. So, we’re buying companies with lower valuations but competitive profitability rates. Combining these two things―cheapness and above-market profitability―is going to lead to alpha. That’s different from some deep value managers who are buying much more distressed companies with balance sheet leverage and other issues, hoping for a turnaround.
Second, we build portfolios comprised of both cyclical and defensive names. Our goal as a pure value manager is to avoid the boom or bust cycles between defensive and cyclical names that plague many other value managers. And lastly, we spend an enormous amount of time analyzing the downside risk of every single name we consider and ultimately hold ―almost like an insurance company. We evaluate the risks and stress test every single name against the worst possible scenario, such as the Global Financial Crisis. We ask ourselves if the company has the balance sheet to withstand the risk and whether we are paying the appropriate price for the level of risk we are taking on; then we consider what position size is appropriate taking all of this into account. That’s very different from a lot of value managers out there.
Prince: Where are you seeing the greatest opportunities in the market today? Why is it important to be active now?
Martine: I believe the biggest opportunities right now are in value stocks. We’re coming off a period of record performance spreads between growth and value stocks―the tide is now turning with value significantly outperforming growth this year. We’re experiencing rising inflation, rising interest rates, supply chain issues, and significant geopolitical events that also all point to a regime change from growth to value―which we have not seen since the tech bubble burst of 2000 and the Global Financial Crisis of 2008. And when you look for investment opportunities, you have to look at valuations, and value-priced stocks are currently selling at a deep discount to growth stocks.
But stock selection is key―and that is where active management can add alpha while helping smooth the ride during rocky markets and downturns. As active value investors, we have found pockets of opportunity in companies battling inflationary cost pressures and supply chain disruptions as well as those benefitting from geopolitical uncertainties.
As we move forward through 2022, we are in the early stages of vetting opportunities within cyclical parts of the market as the worries over recession increase. But again, as active value investors, we maintain our disciplined process that is focused on uncovering strong businesses where we believe the earnings power is intact and with pricing power and strong balance sheets to protect on the downside.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.