You can’t have a discussion about markets without the word “disruption” coming into it, says Richard Pzena, the US-based global value manager. He also says value managers no longer invest solely in under-priced old-fashioned companies. There is value to be found in old(ish) technology stocks too.
Pzena, who started to come to Australia from his New York headquarters about 10 years ago, is the founder, chairman and chief executive of Pzena Investment Management, a Nasdaq-listed firm with US$36 billion under management – but majority owned by staff – which first started investing in 1996.
The Australian office, in Melbourne, is staffed by David Taylor, a principal, Claire Garrett, client services and marketing manager, and staff support. In Sydney, the firm has Paul Whymper-Williams, director of business development, as well. Australia and New Zealand are important markets for Pzena. It also has a London office.
Rich Pzena said in Sydney last week, on the current investor perceptions of investment opportunities in technology: “Anyone who has an interesting idea is viewed as successful, even before they have a viable business, and the incumbents are seen as the losers.”
Even though value investing has had a tough time in the past few years compared with growth and momentum, due to the continued trajectory of tech giants such as Google, Facebook, Amazon and Microsoft, recent cracks in some tech companies’ armour indicate the tide may be turning.
Rich Pzena tells a story that, about four years ago, he was speaking with the chief executive of a big bank who said that 26-year olds were coming to see him and saying how they would disrupt his bank. He would respond: ‘good luck getting a banking licence’. Today, the same budding entrepreneurs and tech geniuses would come to see him and ask if he was interested in buying their technology. They’d decided that they didn’t want to start a bank. Banking is about more than the latest technology. For example:
- Big banks outspend everyone on new technology by a wide margin. They are able to offer lower interest rates on their deposits because of the trust in the franchise. In fact, millennials value technology more than older generations and are prepared to leave their money with the incumbents to avail themselves of the new technology banks are offering.
- Auto manufacturers are trading at their lowest multiples for years or decades. But their balance sheets are strong. In the US, Ford has high margins and good cashflows. They are investing heavily in new technology, especially in the area of trucks, which they dominate. “Why are they selling if they are going out of business?” Rich Pzena asks. “The biggest mistake Tesla made was deciding to build a car. They came up with great battery technology but making a car is not the same. There are many more moving parts.”
Pzena IM did well about five years ago with an opportunistic investment in Microsoft. They were viewed as a loser against Apple and others but their Windows and Office systems were ubiquitous. “We thought those systems represented an amazing franchise,” Rich Pzena said. “It was very difficult for anyone to assail them… Whenever anyone bought an iPhone, he or she triggered a new purchase for Windows. As it turned out we were vilified. And now Microsoft practically owns ‘the cloud’.”
Like many successful investors, Rich Pzena’s career really started in his teenage years, with a family upbringing where his father, an engineer, had become a part-time investor and discussed his strategies around the dinner table. He completed a university degree and went to work in the oil industry but kept up his interest in stocks. He was offered a job as an oil analyst by Sanford Bernstein and worked there for about 10 years, initially on the sell side and later in funds management. With some old friends he started Pzena IM in 1995.