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Fishing deep for value

Jeroen Bos tells Leonora Walters why a US-style deep-value investment strategy is very simple but works brilliantly
October 1, 2012

US investors enjoy the benefits of a strategy known as deep-value investing, which focuses on undervalued companies with the potential to return to profitability. In the UK such funds are thin on the ground, so the launch of an onshore version of Church House Investment Management's Deep Value Investments Fund makes an interesting addition to fund offerings on this side of the Atlantic.

Fund manager Jeroen Bos says: "In the current market environment, value investing works well as the strategy is less focused on expected earnings, and more geared towards buying assets at a discount.

"Using the disciplined approach of only buying shares when they can be purchased at a discount to their balance sheet values, you are protecting yourself from paying too much at the outset, leaving a margin of safety and the capacity for significant investment growth. The opportunities we are identifying in undervalued companies from a long-term growth perspective are compelling and they provide a good platform on which to put in place a specialist deep-value investment strategy."

Mr Bos, who has been managing Church House's offshore Deep Value fund for nine years, looks for overlooked and forgotten companies with a strong balance sheet and manageable debt-to-equity ratio. "I want high intrinsic value - that is a deep discount to the valuation - and a company that has traded at higher levels previously," he says. "I also want low debt. I look for hidden assets and a catalyst - for example, management working to turn things around or a product long in delivery. I buy undervalued companies for a long-term reward, hence I have a very low turnover."

He then talks to the company's managers to see what the problems are. As many are loss-making when he buys them, he stays in touch to keep an eye on them. "Companies I invest in have to be shareholder friendly and speak to us," he says. "I only invest where I get full access to their books which I and three colleagues examine."

At the moment he just invests in the UK but he is in the process of adding two US shares to the portfolio, selected according to the same criteria. When the fund size reaches around £50m (currently it's £7m) he will widen his search even further to include more overseas shares.

Mr Bos tends to buy small and mid caps because this is where you tend to get steep falls allowing him to buy at moments of distress. "I invest in highly cyclical companies going through a trough in their earnings and I have to understand if they will ever come back again," he adds. "The names I invest in are mostly not well known. I love irrational sellers and don't follow the herd - when it's cheap I'll buy it. I don't look at broker research but which stocks have hit new lows - that is where I fish."

Typically, he doesn't buy a share all in one go; he buys it in phases on the way down. An example of a share he has invested in is FTSE Fledgling listed currency manager Record.

"Record's interim statement in December 2011 showed a net working capital of 13p per share and market capitalisation fell to £22m," he says. "But Record had a strong balance sheet with 9p a share cash, was profitable and debt free, and I purchased it at 10p in April this year. June 2012 final results showed continued profitability and a dividend that equated to a yield of 15 per cent. Management also indicated that the dividend would be maintained in 2012 and the share price has appreciated considerably."

 

Jeroen Bos CV

Jeroen Bos has managed the Church House Deep Value strategy since December 2003, before which he worked for Seilern Investment Management. He was a broker at Panmure Gordon between 1989 and 1999. He has worked in London's financial markets since 1984 and his influences include Canadian value investor Peter Cundill, and US investors Walter Schloss and Benjamin Graham.

He has a diploma in Economics from Sussex University and is a member of the Chartered Institute for Securities & Investment.

 

At the end of September, Record was trading at around 17.5p a share. Mr Bos thinks the price could easily go back to £1. "It has no debt, it's scaleable and it is unusual so it is hard to compare - that's my advantage," he says.

When selecting a share Mr Bos seeks minimal business risk - he doesn't like what he describes as untested companies, preferring companies that have been established for a number of years, such as recent acquisition Gleeson which specialises in urban housing regeneration and strategic land trading, which "knows how to deal with recessions". This was bought at around 80p and now trades at around 131p.

"People see share price volatility as a risk but I don't see it as that," says. "I am more interested in a stable NAV at a discount to the share price, even if the latter is jumping around."

Things of course don't always work out, examples being wholesale jeweller and manufacturer Abbeycrest and hedge fund manager RAB Capital which he bought at around 13p but got taken off the stock market at around 10p, although he describes this loss as "containable". "One of my first questions to a company is are you going private, because this is not what I want," he says.

Different?

He insists that the fund is different to other special situations funds and recovery funds that follow contrarian investing styles. "Special situations can mean a lot of things," he says. "Deep value is looking for what is really cheap on an asset basis. I only buy at a discount to NAV - if it's at a premium I won't buy it. I'm always in cheap stocks on a balance sheet basis. I stick to the rules of value investing and base my assessment on the numbers the balance sheet shows me. If the figures don't show what I want to see I'm not interested.

"Everyone looks at the earnings but I don't - the earnings are peanuts on some of the shares I buy and on an earnings basis I shouldn't buy them. When I look at a balance sheet I take the current net assets, subtract creditors longer than one year and any other outstanding charges, and I divide this 'clean' figure by the share outstanding. If this per-share figure stands at a premium to the market price, then this is a stock to investigate further. It sounds very simple but it works brilliantly."

For further details visit www.church-house.co.uk

 

We seek to interview the fund managers we think will interest you the most, but if there is someone you would like interviewed, send your suggestions to leonora.walters@ft.com.