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iMGP US Value

Eric Lynch
Managing Director of Scharf Investments

Focusing on 25-30 of our best ideas

Eric Lynch, managing director of Scharf Investments speaks to David Barfoot about how the iMGP US Value fund is manically focused on protecting clients’ capital and why it is not a typical value fund.

What distinguishes your approach compared to other value investors ?

Most traditional value managers concentrate exclusively on mean reversion of the value of a company’s assets or earnings. Since cyclical businesses naturally present wider earnings variability and higher reversion potential, value managers often over-index to lower quality, or cyclical businesses. In addition, traditional value investors are often attracted to similarly very low multiple “value traps,” or companies facing permanent secular decline. Timing the purchase of a cyclical business correctly is very difficult. Betting against structural competitive forces even more so.

Scharf Investments also believes in mean reversion. However, the firm asserts that mean reversion potential improves considerably when limiting stock selection to high quality businesses, or companies with superior earnings sustainability over an economic cycle, superior capital returns, strong balance sheets and shareholder-oriented management. The firm believes quality value tends to deliver material
Scharf Investments also believes in mean reversion. However, the firm asserts that mean reversion potential improves considerably when limiting stock selection to high quality businesses, or companies with superior earnings sustainability over an economic cycle, superior capital returns, strong balance sheets and shareholder-oriented management. The firm believes quality value tends to deliver material outperformance in adverse and consolidating markets and result in risk-adjusted outperformance over complete market cycles.

David Barfoot,
Director - Distribution (UK & Ireland)

Why do you have such a concentrated portfolio?

Three reasons:
1) Quality businesses are not often discounted at value prices;
2) A portfolio of 25-30 stocks is sufficient to eliminate nearly all non-systemic risk; and
3) A portfolio of best ideas allows deeper research, improves risk management and increases the potential for greater returns than a portfolio with a plethora of lower conviction holdings.

A portfolio of 25-30 stocks is sufficient to eliminate nearly all non-systemic risk

How do you identify companies with a strong outlook?

History does not repeat itself, but it sometimes rhymes. Pursuing a Hippocratic Oath derivation of investing, Scharf Investments is maniacally focused on first protecting client capital. The investment team generally limits stock selection to companies with top decile to quartile earnings predictability over the last economic cycle and performs deep research on stock and operating performance over decades of history, if available. All business change or evolve, most deteriorate. Some, however, have sustainable competitive advantages that the market temporarily misprices. The firm does deep research on a select group of businesses to separate the two.
Equity market participants sometimes focus more on forward one-year or less company performance and less on a company’s long-term prospects. Scharf Investments seeks to exploit near-term “dead money” opportunities by extending the investment time horizon and investing in the continued strong normalized earnings power of a quality business at a reduced valuation. All stocks purchased must have 30% plus upside to assessed base case fair value and, just as importantly, only a 10-15% downside potential. This 3-to-1 Favorability Ratio is a portfolio requirement and helps ensure the investment team purchases businesses with a sufficient margin of safety while also demanding compelling future returns. A superior earnings predictability requirement - past and future - helps preclude investments in value traps.

How do you see the evolution of ESG in your portfolio?

Scharf Investments currently incorporates ESG financial risk (via Morningstar’s Sustainalytics ESG data service) into the investment process as a risk management and investment tool. However, the strategy’s historical focus on earnings resilience and durable growth has always resulted in a portfolio of generally sustainable businesses. The firm’s origins and clients located in progressive-minded Northern California has also kept the investment team historically geared towards ESG even before ESG became so prevalent and “quantified”. Two of Scharf’s US mutual funds have a Morningstar Sustainalytics ESG risk rating in the top 10% of their universe. The investment team has historically excluded Tobacco and Gaming and tends to avoid businesses that present serious societal issues. For example, we have excluded Facebook to date, despite a compelling valuation at times, due in no small part to concerns about false information and self-esteem and mental health impacts to users.

The strategy’s historical focus on earnings resilience and durable growth has always resulted in a portfolio of generally sustainable businesses

Do you want to know more about iMGP US Value?

The investment philosophy

Fund performance

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Managed by

Founded in 1983 and based in Los Gatos (CA, USA), the firm manages US and global equity strategies with a concentrated quality value approach.

The firm had $4.5bn AUM at the end of December 2023.

Visit Scharf Investments