Manager Spotlight: Pzena Investment Management

Length 3:47

Richard S. Pzena, Chairman, CEO and Co-Chief Investment Officer, Pzena Investment Management

“The firm is 22 years old. We started with really one objective, which was to build classic value portfolios, portfolios of deeply undervalued securities that are out of favour.”

Identifying value

“What we do is very simple. We identify these companies, which is the easy part and the hard part is to make a judgment. Are these good businesses? Are the problems temporary and not permanent? And is it rational to believe that the earnings will rebound back to their historic norms? And then hold them. So are all we do really is try and answer those three basic questions. Is the business any good? Are the problems temporary? And is it rational to believe that the earnings will rebound?”

Seeking value across the world

“The firm is broadly exposed geographically so we can we can uncover value pretty much everywhere in the world. So, we offer various flavors of what we do from a U.S. only portfolio to global international emerging markets and European. And we can take any one of those universes and rank companies in order from cheapest to most expensive, on the basis of their current price to what their normal earnings should be. So, I think one of the strengths of our organization is that the same process and the same investment team can be applied to different geographic universes or different market cap size universes to build a portfolio in that very systematic fashion.”

Systematic investment process

“So, what's important to know about our process is, one, that it's very systematic. So we have a we have a clear financial metric, in our case, it’s price compared to the normal earnings power of the business. But over the course of time on average what's the earnings power? And we want to buy at a low price relative to that normal earnings, so that's a systematic process. And the second most important point is that you need an intensive research effort to be able to distinguish what's temporary from what's permanent. And I guess finally, it's building concentrated portfolios of what are the most deeply undervalued securities in the market.”

Investors attracted to overvalued stocks ?

“Some investors have a gambler's instinct. They like to go for the high flying stocks because they think they're going to make a killing. They systematically overpay for those stocks. And so if you avoid them you win. And that's what the data shows. If I was going to build a portfolio taking the S&P 500 and I could either buy the 10 largest companies or I can buy the whole universe, going back 90 years, if you tested this data, you would find you would substantially underperform the market by buying the 10 largest companies. And because everybody wants to own them there's a systematic bias towards overvaluation which shows up dramatically in the data.”