Harris Associates: An insight into their value approach
Client portfolio manager, Daniel Nicholas, gives an insight into Harris Associates’ investment business and process.
What’s your role at Harris Associates and what is unique about the company?
I joined Harris Associates in 2012. My job as client portfolio manager is to represent the investment team to really allow them to do their fundamental research work. To meet with managements rather than visit with clients.
The unique thing about Harris Associates is, we populate approve lists of 300 stocks. My job is to understand those 300 stocks and be able to articulate why we own those stocks and why those are in those portfolios. So, my role enables me to speak to all of our funds and all of our strategies.
How is Harris Associates different from its peers?
Harris Associates in a way, flips the investment approach on its head versus the way that other asset managers do. All of our ideas start from an analyst’s idea. We don’t have decision-makers that dictate the work that are done by our research team. Rather, we have our investment analysts have great freedom to go out and seek value where they find it across the globe, across to all sectors. So, we structure our investment team as generalists. We also don’t want to have structured knowledge with one person, we want to have great debate and be able to challenge conventional wisdom and challenge the thesis of each of our analysts, to make sure we put the risks and opportunities on the table before we put our investment client’s money at risk.
What are the steps in the investment process?
So, our approach is to identify quality businesses that we would want to own that are growing intrinsic value per share and also, run by management teams that think and act as owners. Our job is to identify those businesses and then monitor those businesses. We screen the universe for quality first and then we look to price those businesses. We buy those businesses at a discount to intrinsic value, a margin of safety. What we do is then as a team, we vet each of those ideas that are brought to the investment committee each week and we have voters vote. Those voters are the most senior investment professionals at our firm. We call them the stock selection group voting members. This stringent vetting of every single idea gives us confidence in our process that its repeatable. Then we can use our investment process to judge the discount to intrinsic value of each of the companies we’re looking at. We can rank our approval list and we can build our portfolios based on names that have the most upside to intrinsic value. So, it really is our investment process driving a price target of intrinsic value, done as a team and then that drives our portfolio construction.
Where does the research/analysis come from?
All of our investment professionals attend all of our meetings each week. We think that’s crucial. We want to have the most input from a wide range of diverse views. At the end of our discussions, which can be very confrontational, we bring the idea to a vote. We have three voting members for every single stock. Two out of three members need to approve the stock for it to go on the approved list.
What is the buy/sell approach?
We have a due diligence process that requires us to meet with management. At that time, when we raise our hand to work on a name, it goes on a projects list, which is monitored by our directors of research. That due diligence includes taking into account all material risks and opportunities. That includes ESG, for instance. It requires us to meet with management. We take a private equity approach to valuing this business by meeting with suppliers, competitors, customers. We get great access to the board, as well as the senior level management. So, for us, that all develops a mosaic of information that determines the intrinsic value of these businesses. We continue to monitor these businesses over time and meet with managements and take an engagement approach with these managements as we go on. Portfolios are not systematically created. Our portfolios managers use discretion to find the best risk rewards of the names from our approve list. In our global portfolios, we’re able to go to any sector, any region, but the output of that process is about a 40-stock portfolio which is highly concentrated, which is built irregardless of benchmark weights, with a very high active share and a low turnover of about once every five years for a stock.
You’ll hear our same investment philosophy articulated by many investors. What I think is different is our discipline to stick to that investment philosophy especially, when value’s out of favour like it has been. Our discipline resides around our yardstick. Our yardstick is, what is the measure of intrinsic value? We have a team process to determine intrinsic value. Once we have that yardstick, that gives us the confidence to act when others may be fearful, when there’s negative headlines in the market or the stock price may be trading down, we are able to measure that discount to intrinsic value and take action. If a stock is trending towards intrinsic value, we’ll start to trim that name. We think it’s riskier to own a name that’s fully valued or overvalued, then a company that’s trading at half of its value. So, we’ll redeploy those assets into cheaper companies trading at a bigger discount to intrinsic value. Now, if a name hits intrinsic value, we must sell. That’s that discipline in managing risk and we’ll deploy those assets into less risky names.
The strategy in a nutshell.
So, for us, we’ve had one investment philosophy since 1976, the founding of our firm, which is a value philosophy.
We have three investment tenants that must be met for every investment. Number one, the company must be growing its per share value, growing its intrinsic value. Growth is a necessary criteria, for us. Number two, we must invest with management teams that think and act as owners. That helps us screen for quality and number three, we must determine the intrinsic value of the business, but only buy that business at a significant discount to intrinsic value.
Active share indicates the proportion of portfolio's holdings that are different from the benchmark. A higher active share indicates a larger difference between the benchmark and the portfolio.
Concentrated investments in a particular region, sector, or industry may be more vulnerable to adverse changes in that industry or the market as a whole.
Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.
Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Natixis Distribution, L.P. (fund distributor, member FINRA | SIPC) and Harris Associates are affiliated.