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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 materialScharf 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.