I recently had the pleasure of hearing Charles de Vaulx speak at the CFA Society of Washington, D.C. De Vaulx is a legendary French value investor, a former protege of Jean-Marie Eveillard. De Vaulx manages the IVA Worldwide Fund and IVA International Fund along with Charles de Lardemelle.
If you want to invest in de Vaulx's funds, however, you're out of luck: Both his funds recently closed to new investors.
At the CFA event, de Vaulx amused the audience with his flamboyant takes on Microsoft
Going for gold
As a rule, value investors abhor gold. One of the most reliable ways of networking and building rapport with a value investor is to bring up what a bunch of idiots gold speculators are. (Note to angry mob: I've already relocated my family into witness protection.) It's a sure way to get one to buy you lunch.
But it turns out that de Vaulx is the rare value investor who likes the shiny metal, and in a big way. Gold makes up about 6% of both his funds, making it their biggest holdings besides cash and/or currency contracts.
Cognizant of the chief objection his value colleagues levy against the metal, de Vaulx rhetorically asked the audience whether gold has an intrinsic value. Of course it does, he said. It's earned a positive real (after-inflation) return over very long periods.
De Vaulx then decided to add a little bit of humor at Washington's expense, asking whether 10-year Treasuries have an intrinsic value. Of course not, he said. As I recall it, he answered that "You give me money now and I don't give you any real return later on!"
That got a big laugh. De Vaulx referenced PIMCO's Bill Gross' and James Grant's skepticism of Treasury valuations, and bonds in general. If you share their view, you may want to sell -- or even short -- popular Treasury ETFs like iShares Lehman 7-10 Year Treasury
De Vaulx further explained to the D.C. crowd that he sees gold as insurance against extremes in monetary policy. He thinks that gold should do well in either deflation or inflation, with only benign disinflation being a real bummer for the metal. He also talked about how the gold ETFs SPDR Gold Trust
De Vaulx then provided the audience with a story of how some value investors got burned in 2008 by investing in the oil stocks that appeared cheap but really weren't. The stock prices were simply reflecting a correct expectation of lower oil prices later on.
The message was that if gold stocks, like those represented by Market Vectors Gold Mining ETF
"The Question" about Microsoft
I've been bullish on Microsoft since the beginning, so my ears perked up when an attendee asked why Microsoft was IVA Worldwide's largest U.S. equity position, despite its stock having gone nowhere over the past decade.
This was a variation of what I like to call "The Question." Every value investor eventually comes up against some variation of it, as critics argue that the stock is a value-trap dud, jeering, "Why won't you admit you're wrong and move on?" You may recall that Longleaf Partners' Staley Cates defended such a question about Dell
How managers answer this question depends on their fortitude and their relationship with their clients. True value investors will respond by metaphorically gritting their teeth, and then politely explaining that they will not sell a stock just because it has performed poorly. Fundamentals determine future stock performance, not the other way around.
That'sessentially what de Vaulx did, beautifully. A value trap is not a value stock that has performed poorly, de Vaulx said, but rather one whose fundamentals turned out to be far worse than expected, making it no value at all.
He's sticking with Microsoft.