Last Thursday, we learned that International Value Advisors (IVA) was closing its doors and returning their investors’ money after 13 years of bellwether Value investing reputation through their Worldwide fund (which includes US equities) and their International fund (which excludes US equities). Having spun out of First Eagle, the firm gained quick acceptance as a highly respected Value / Low Vol investor that looked to provide capital appreciation. But IVA didn’t give investors the Value exposure it promised.
Investors left, but only after years of poor returns
Promising expert Value stock picking and low risk, the firm delivered 3% – 4% outperformance when the benchmark was down. But the fund underperformed by 7% – 8% in the recent tech/growth markets. The fund also found itself in the bottom decile of performance rankings.
And even though Value stocks have posted good performance run in the past few months, a topic we covered on a recent podcast episode, it was not enough to stop the hemorrhage of investment outflows. Figure 1 shows steady redemptions starting in 2018 that brought the total firm AUM from more than $15B to under $3B today.
Figure 1: Assets Under Management for IVA from 2011 through the end of 2020. Source: Investment Metrics
Investors didn’t really get what they expected
We used our fund analysis suite – Market Insights, Peer Insights and Similyzer™ – to compare the IVA funds with several funds that most closely resemble their Value factor profile. We found 59 funds similar to the International Fund, which we compared with the MSCI ACWI ex-US, and we found 171 funds similar to the Worldwide Fund, which we compared with the MSCI ACWI in Figure 2, below.
Figure 2: Style Factor Skylines for the IVA International fund (top) and IVA Worldwide fund (bottom), both shown in the yellow box compared to the range of exposures for similar funds. Source: Investment Metrics’s Style Analytics.
Among Value sub-factors, both funds show a peer-outlier exposure only to Book-to-Price (Style Tilt™ scores of 2 or higher are significant) and benchmark-like exposure to Cash Flow Yield. We published a paper last year showing the benefits of using Free Cash Flow Yield rather than Book-to-Price to extract Value signals. Both funds provided typical, but certainly not deep, Value exposure that investors could get from a variety of other managers. Clearly, IVA didn’t give investors the Value exposure it promised.
Both funds show much lower exposure to Growth stocks, on several measures, than their peers and the benchmark. Furthermore, the Volatility measures for both funds, including market beta, are remarkably benchmark like (our factor analysis only takes into account securities held and does not adjust for cash). The funds’ low beta came from investing only about 2/3 to ¾ of the available capital while purposefully keeping the rest in cash. Such a risk management approach is remarkably effective at suppressing returns. Currently, both funds have over 35% allocated to cash.
The factor analysis above suggests that rather than describing these funds as Low-volatility Value, a more accurate description might be “anti-Growth” and “skittish deployment of capital” for annual fees of 120 basis points.
In the end, the pedigree and reputations of the fund managers did not keep the firm solvent long enough for their investors to enjoy the current rotation to Value. That is likely a bitter pill they will not soon forget.