Bloomberg Wealth: Sarah Ketterer

To be a value investor is to pay less than the business is ultimately worth. I have learned so much. I think I've made every mistake there is. Learned on the job in the last 23 years. As long as clients are always a lodestar then decisions become easy. Sarah Ketterer buys stocks for a living but she has no interest in buying NVIDIA. No because the so much growth is already embedded in the valuation. That's because Ketterer is a so-called value investor. Her 50 billion dollar firm Causeway Capital Management focuses on researching stocks with prices lower than their intrinsic worth. To be a value investor is to pay less than the business is ultimately worth. And we give every company about two years to show us what it can be worth. And then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today the stock is likely undervalued. Ketterer comes from a long line of Californians. Her father John Hodgkiss was a commissioner of the 1984 Los Angeles Olympics. He was also a well-known value investor and had his own firm Hodgkiss and Wiley. After getting her undergraduate degree at Stanford and her MBA at Dartmouth Ketterer did a brief stint in investment banking in New York City before moving back to the West Coast and joining the family business had started a database business. So I rang up my father and his business partner George Wiley and said do you need any data. And I'm not sure they did but they were very kind and said we'll bring it out here to Los Angeles and we'll talk. That's where she met Harry Hartford with whom she would go on to found Causeway in 2001. They had seven and a half million dollars when they opened their doors. Today their 100 person staff manages 50 billion dollars in assets. Timing is everything. And we launched Causeway after the telecommunications media and technology bubble burst. So this was 2001 and value investing was coming back. The style was coming back into favor. And Ketterer doesn't seem to be slowing down any time soon. I'd like my legacy to be even greater employment. I want to employ more people who are in as I talked about that great career trajectory. I'd like to have more clients who say we really appreciate the service you're providing us. Explain to me what makes Causeway so distinctive. Why is it different than other money management firms. There's from our beginning in 2001 believed in the combined combination of fundamental and quantitative investing. And there are two different ways of doing investment research in the in the world of long only equities. But you put the two together and you get something that's better than just that narrow sort of very discretionary subjective viewpoint and then something better than the statistical absolutely. What do you call that. Is it called quant value or value quant. That's who I'm talking to. To the quants I say it's quantum mental to the fundamental people. I say it's fundamental and quant. So you're what's known in the business as a long only fund. Right. We are long only. And you're known as a value investor. What does it mean to be a value investor. That is the hundred million dollar question because everybody defines it differently. We define it as for portfolios where we use a fundamental approach. So that's the analysis of financial statements interviews of company management the assessment of the industry to be a value investor is to pay less than the business is ultimately worth. And we give every company about two years to show us what it can be worth. And then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today. The stock is likely undervalued. Now the late Charlie Munger said that he changed Warren Buffett's views on value investing. Initially value investing in Warren Buffett's view was buying something really cheap even if the company wasn't great but it's cheap. And Munger said no buy good companies even it's a little more expensive as long as it's not overly expensive. And Warren Buffett allegedly began to do that. So what do you do. Do you buy really not great companies but they're cheap. Or do you buy good companies a little more expensive and call that value investing. Those two in late Charlie Munger could simplify the most complicated of situations. But in a way it's neither. They may be in good businesses and they have very few competitors and maybe you know in oligopolies or they they may be in an industry that's rapidly growing. There could be reasons why you call them good. But something may stop that. They may have a lawsuit levied on them or they may have a scandal or they may have a poor CEO who does a poor job of executing. And then they become bad. And that's when we like them. So if they're if they're good in most well most markets they'll be priced for good. So suppose somebody came to you and said I have a good stock it's growing a lot. It's called NVIDIA. And is that a value investment. You think that's a good value investment. No because the so much growth is already embedded in the valuation. So if NVIDIA is in the building part of the technology site cycle then there's the delivery part. And then there's finally this where we put it all together and end. AI is ever present in that last segment. Enterprises businesses will need to use A.I. and they have no idea how to. Many of them. So you could go out and find for example in info technology so or technology services companies this Accenture or Capgemini or some of the Leviathan's. But as you move down the market cap spectrum like Cognizant or Fujitsu in Japan or concentrics or Genpact these companies are going to be advising their enterprise clients on how to do deal with this. Once all the infrastructure is built once enterprises have moved everything they have to the cloud and they're ready to go. So there's value in this whole concept. The theme that's driving NVIDIA has unearthed a whole raft of stocks that nobody cares about today but they will in the future. So you do some international investing and emerging market investment. So it seems like it's an oxymoron to say I'm a value investor in emerging markets because emerging markets are very volatile. So explain how you can be a value investor in an emerging market. I didn't want to add. We also manage money globally. So we have global equities. But I think investing in a number of areas could be an oxymoron that emerging markets the single largest country in the emerging market index is China. And it has gone from being a powerhouse of growth to slowing considerably. The Chinese property market is weak dragging the economy. The population is aging which is also creating cost. So emerging markets is a blend of fast growing India and slower growing China. But there's always value. And we approach emerging markets with a quantitative investment research style. And that allows us to use both value and some growth as well as other factors to identify outperforming stocks. The theory of emerging market investing is that the rate of return will be higher because there's less competition. Prices are lower etc. But that theory has not been proven yet has it. In other words the rate of return risk adjusted for emerging markets investment is not that much better than developed market is it. Again talking about a broad index. I totally agree with you. It hasn't been better. It had its run in the early part of the 2000s and right through the global financial crisis. But ever since we became much more financially accommodative in the developed world and central bank balance sheets expanded and financial conditions became very loose. Emerging markets then had their own issues. I think that China really crested in 2021 which was the leading market in emerging markets and now is a is suffering under the cloud of potential overregulation and communist party rule. So today when you're making investments you've got about 130 people in your firm. Something like that. OK. So do they come to you for every decision. Do you have to say yes by this stock or not buy this stock or do you have a delegation of approach where you don't have to approve every every investment. We have a very dispersed decision making and that was deliberate. When my co-founder Harry Hartford and I set up Causeway just in our minds long before we actually launched the firm we didn't want to have a star system. We didn't want our investment results to depend on any one or two people no matter what the strategy was because there's too much business risk doing that. It's risky for clients and it's risky for the firm itself. I suppose I say I've heard about your company. I'd like to give it a chance. What kind of rate of return would I expect I could get. I mean you're doing emerging market and international and also domestic long only equity investments. Is that a 7 percent rate of return business. 9 percent 10 percent 12 percent. What do you think it is in an era of 4 or 5 percent inflation. Yeah. Well I think the 4 to 5 percent inflation might be more emerging markets. Otherwise we're all in serious trouble in the developed world. But let's just take a 4 to 5 percent 10 year government bond yield and or maybe four might be more reasonable and add an equity risk premium so that the premium is the for taking the risk of buying long only stocks publicly traded equities. How much more should the investor be paid. That's probably three or four percentage maybe four percentage points more. So maybe out of public equities anywhere in the world if the if the risk free rate is somewhere around 4 you'd expect 8 maybe 9 percent per year from your equities. But that's just the index. And you pay us as the active manager to do better than that. Well let me ask you about that. There's a theory that you can't beat the markets. So some people have propagated the idea that the best thing to do with your money if you're going to be in equities is buy an index fund. Tiny little fee and you are the market. Whatever the S&P 500 is or the Dow or whatever the Dow is you're going to be that your theory is that you can beat the markets. And have you been able to beat the markets for the years that you've started the company. It's about 20 years ago. Yeah it's been 23 years and we don't beat our indices. So international has an international market index emerging has an emerging index. Global has the global index and we don't beat it every year. I don't think we could given our investment style isn't isn't in favor every year. But we beat it over market cycles. Markets rise and fall. We call a full market cycle. We outperform these benchmarks. So as I look at opportunities now that might be available for a long only investor in the United States and or around the world what are some of the opportunities generically that you think are attractive not necessarily companies but opportunities generically. The entire non-U.S. region has been second class citizen versus the extraordinary U.S. market. And think about non-U.S. developed as a value stock that income just on average from stocks listed in Europe and even parts of Japan. The not just the dividend income but the buybacks far exceed that of the U.S. So there I just can't tell you when I just keep moving to the U.S. market and get concentrated in few stocks that leads to a great opportunity for investors to find mismanagement or situations where companies just need a nudge from institutional investors like Causeway to get them to improve their outcomes. We went out and found external capital because I couldn't get any money out of my family. None not even a penny. So that was another good luck. You're on your own kid. Let's talk about the beginning of your life and then how you came to start Causeway. So where were you born. Pasadena California. OK. And your father is a very famous investor. He was a very famous value investor. That's fair. It's fair. And he started some companies that were well-known in the investment world. So did he say I want my little girl to grow up to be an investor. No I went into undergraduate as a pre-med. So I had no idea that finance was in my future. And what happened to my technology or chemistry. No I didn't. It wasn't just spinning out of organic chemistry. It was taking economics. Yeah I had the most extraordinary professor Michael Boskin who at the time was the one he became the head of Council of Economic Advisers. Exactly. Exactly. And that was a clock like this is for me. So you told your father you're not going to medical school. You're going to be an investor. He said what. He he said just finish college please and then we'll talk. But I had I went I went into banking and that turned out at least from my perspective to be a poor fit for my skill set to transactional. And I was really interested in something where I could dive in and spend a lot of time thinking about underlying companies. So if you graduated from Stanford did you do some investment banking for a while. I did corporate finance for two years at a firm called Dean Witter in winter long gone hard to find. And then you go to business school afterwards. I did. And you went to talk at Dartmouth. Well I mean it's a great school. It's a wonderful school. Dartmouth is wonderful but it's a long way from California. So how come you went all the way east. I only applied to East Coast graduate schools because I needed to get out of California. Just part of the California is wonderful but it can be a little insular. And there was so much more to learn. When you graduated did you say I'm going back to California. What did you do then. No I took my first job here in New York City for another firm that doesn't exist any longer. Bankers Trust Company. So when did you say I'm going to start my own firm. I'm not going to some of these other people. I started a database business recognizing that I was using I had some non-U.S. transactions I was working on and the data was scarce. It was hard to get information on non-U.S. companies that was as good as you could find for the U.S. So I left and founded one and then I needed I needed customers. So I rang up my father and his business partner George Wiley and said do you need any data. And I'm not sure they did but they were very kind and said we'll bring it out here to Los Angeles and we'll talk. Well your father started a firm with his partner Hotchkiss and Wiley. The father was John Hotchkiss. Yes. And then he ultimately sold that firm to Merrill Lynch Merrill Lynch. And then were you at the firm when he sold it. I was. And then he said well now the firm is sold. You can stay or you can go. What did he say. He said good luck. He was on an earn out so he was being paid over time over the next several years for his ownership stake. And I went on an employment contract. But when my employment contract ended that Merrill nobody renewed it. So knowing that I was a free bird I started to plan this idea of causeway. That was the that was the where did the name causeway come from. My business partner Harry Hartford he's Irish and it comes from the Giants causeway which is this 50 million year old array of basalt columns in Northern Ireland that leads out to the outer. He was your partner. My partner Harry Hartford. He came from the Bank of Ireland. I met him on the phone in 1994. And it was like a wicked storm. I mean the weather was so bad where he lived in Dublin. And I still like it in Los Angeles. So you started the firm with any money. How much money did you have to get started. We had all what Harry and I had saved. Our C.O.O. who remains our C.O.O. today. Gracie Familia another woman in leadership at Causeway. She pitched in. We went out and found external capital because I couldn't get any money out of my family. None not even a penny. So that was another good luck. You're on your own kid. And she went out. How much money did you have when you started. Open the doors. We opened with seven and seven and a half million dollars seven million dollars. OK. We had 24 people and we lost money for three years. So we had external capital who took 20 percent of the business and they were anxious. And now you have 50 billion. Yes. So how did you go from seven and a half million to 50 billion. Was it. You must have a good rate of return. So what what enabled you to grow firm. Largely the we had just built an incredible team. It's always about the people especially in asset management. So you would go out and raise the money. Was that part of your job to raise the money. Initially it was. I took a lot of red eyes. I had three young kids at home and I was on airplanes constantly. So you're raising the money and you're telling people your track record is good. And then were you surprised it went sort of much like this in terms of raising money. You've got a fair amount of money. Fifty billion under management is not bad. Timing is everything. And we launched causeway after the telecommunications media and technology bubble burst. So this was 2001 and value investing was coming back. The style was coming back into favor. So we had the wind at our backs. We had so many clients who were under indexed to value and wanted value and were interested in non-U.S. now. No 7 0 8. There was a gigantic financial price in the United States known by some to some as the Great Recession. What happened to your business then. Our asset center management halved. So we we shrunk precipitously. And at the time Harry Hartford and I had taken out loans to buy out our seed investor. So it was perilous and it was really nerve wracking. It was one of many I'd call significant bumps in the road along the way to 50 billion. Who owns the firm now. We are 100 percent employee owned and one board member who's a former portfolio manager who's retired. What is the biggest challenge you have. Is it getting more money. Getting sure the returns are good. Figure out what's going on the geopolitical situation. What is the biggest challenge you have today. It's always retaining the talent making sure that the people we have think about it at least in our business. It's just layers of succession. There's the senior generation. I'm a part of and there's the generation beneath that one beneath that ensuring every individual no matter the area of causing which he or she works is is on a path a career path that's satisfying and one where that individual will continue to contribute and is motivated. Times have changed and they've improved. But in the 80s and the 90s it wasn't easy being a woman in finance. Lots of closed doors but no longer. So do you get tired of people asking you what it's like to be a woman owned firm and a woman CEO and a money management area. I assume you get tired of that. But what is your non tired answer to that question. Times have changed and they've improved. We have a pipeline of incredibly talented young women coming into research that never even 10 years ago didn't exist. So some of them call me a pioneer which makes me feel ancient which they're absolutely right. But in the 80s and the 90s it wasn't easy being a woman in finance. Lots of closed doors but no longer. So what's the best investment advice you've ever received. I assume your father probably gave you some or maybe Charlie Munger or other people like that. What's the best investment advice you ever got. Well all my mentors were men. I mean mentor aptly named. And often it was. And these aphorisms are as good today as they were decades ago which is don't fall in love with your stocks. Remember if you can just think beyond the market short term viewpoint you can you can be patient. You can see a reasonable return. Never neglect income. Like I don't know if I could rank these. There are so many of them. What do you think the most common mistake that investors make. Is it selling too soon or buying too soon. What's the most common mistake in your observation that investors typically make. Well even institutional investors who I think should know better. They project the present into the future. They extrapolate. So when an investment style with a great team like Causeway where all the talent is intact turns down they panic. And when we do everything in our power to explain to them as we would our mutual fund investors. This is a time when we're doubling down. We're buying more of these stocks that have underperformed because we have conviction in them. So you should think the same of us. So if I come to you and say I have one hundred thousand dollars I don't know what to do with it. What would you recommend I do with one hundred thousand dollars. Let's suppose I'm a middle class person. I've saved up some money. I've got one hundred thousand dollars. I don't want to lose it. I'd like to get more than a Treasury bill rate of return. What should I do with my hundred thousand. My answer would depend on when you want to retire. Do you have any major expenditures. You're going to put kids through school. So knowing when you need the money is very that determines because if you need it sooner rather than later equities can be volatile and cash now pays five plus percent in the US. That might be a place to put whatever you need in the next next two years. So let me ask you today. You look back on your career. Do you think that you have fulfilled what you wanted to do. Build your own money manager firm. What's your ambition now. You're still very young by my standards. So would you like to build it into a bigger company than you have or do something different professionally. What is your professional goal now. I'd like my legacy to be even greater employment. I want to employ more people who are in as I talked about that great career trajectory. I'd like to have more clients who say we really appreciate the service you're providing us. And that's just going to take more time and effort. This idea of bringing more fundamental and quantitative investing together more closely to get a better outcome. There's just more work to do to get there. But you still enjoy what you're doing. Yes. What have you learned about yourself as a leader. So you went into this company started it about 20 years ago. You had not owned a company and run it when yourself you'd been in money management. Now that you've been a leader for 20 years or so what have you learned about yourself that you maybe surprised you. I have learned so much. I think I've made every mistake there is. I've learned on the job in the last 23 years. But one of the biggest lessons that I've taken away is don't underestimate the need to collaborate. Even though I'm convinced I know the answer bringing others along and making sure that they have bought in and they take ownership of the solution that I'd like to implement.