An important concept is "international deep value,” often used by Grantham, Mayo, Van Otterloo & Co. LLC (GMO) fund.
The GMO fund holds approximately $84 billion in assets at the time of writing. Out of the curated funds I may invest my clients in, GMO is one of them. As you imagine, I have spent numerous hours researching their fund, speaking with managers, and keeping a pulse on their perspectives of the market.
I am not seeking to advertise GMO, but for curious investors and retirees seeking to understand their retirement savings, I’d like to touch on a useful term for long-term investors.
Let’s look at the technical definition and then an actual human definition of what this concept entails.
Essentially, international deep value is described as the cheapest 20% of the MSCI World ex-U.S. Universe based stock valuations calculated on a blend of metrics like Price/Sales and Price/Economic Book and weighted by the square root of market cap.
In standard English:
International deep value stocks are low-cost, potentially high-value assets bought with the hopes of diversification and growth. These cheap non-US stocks with solid balance sheets may offer investors markets for high-growth options at attractive prices, thus maximizing returns and minimizing risks.
Each fund manager likely has their own set of principles regarding “deep value.” I think that common principles typically amount to:
Advisors and fund managers using “deep value” or “value investing” strategies tend to focus more on company balance sheets, reporting, and fundamentals and compare them with prices and long-term returns.
The idea is this: If the company is sound and provides real value, the price and returns will eventually reflect this. In an ideal scenario, an investor buys these valuable stocks when they are cheap, and sells them when they are expensive or if returns diminish.
Deep value approaches are commonly long-term investment strategies, even as each fund manager or investor has their own criteria. Most individuals and advisors, however, find the original value investing tactics more useful. The good news is that this information is easy to find.
If you’ve read The Intelligent Investor, you may know of Benjamin Graham. Known as the “Father of Value Investing”, it’s no surprise that we can trace some core concepts of deep value back to his stock selection approach.
While it is not as extensive and modernized as today’s models of value, many investors still find some benefit in using Graham’s 10 original rules for determining high-value stocks:
These are not hard-and-fast rules. As with any investment, it’s possible that a stock that meets this criteria might still be a dud. However, analyzing a stock with these criteria can help you to better understand its fundamentals, whether it’s mispriced, and identify potential opportunities for long-term investments.
Deep value investments, whether domestic or international, face similar risks as any other equity. Historical performance cannot dictate future returns, nor can an accurate analysis always predict the success of a company.
However, for investors and advisors, deep value approaches to equities may be seen as a method for identifying undervalued opportunities. In GMO, we often see references to deep value in their analysis of Japanese equities, but these are not the only options out there and many fund managers will have their own variation to determine what is undervalued and quality in terms of a stock.
What I encourage you to take from this is whether or not the deep value strategy resonances with your portfolio, and the ability to understand it in context when speaking with your advisors.
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