People often hear value investing and assume it’s just an investment with a low P/E ratio or owning the shares of a proven business in perfectly cyclical industries that don’t have much growth.

However, according to Steve Romick, Portfolio Manager at FPA which is known for its Contrarian Value investment philosophy, this need to pigeon hole investment approaches as one or the other is ignoring some important nuances – especially when it comes to the value versus growth debate.

“Buying growing businesses with an adequate margin of safety is just as much a value investment as, say, buying a financial firm at a discount to tangible book, or a holding company at a discount to readily ascertainable Net Asset Value. We have held all three times of investments in our portfolio over the last decade.

Value investing to us is simply investing with a margin of safety -believing that you have made an investment where it is hard to lose money over time, says Romick, who together with the Contrarian Value team at FPA, have been sub-advisors to the Nedgroup Investments Global Flexible Fund since mid-2013.

Traditionally that protection comes from a big company’s balance sheet - that is buying below book value or getting unrecognised real estate value or some other hidden asset. But Romick says blindly practising this traditional approach to value investing is dangerous - particularly today - as many of those types of companies have been disrupted by some of the most prolific technological innovations the world has ever seen.

“Value investing has morphed over the years. If we didn’t evolve with the rapidly changing landscape and recognise that a margin of safety could be established by understanding and properly evaluating a business and not just its balance sheet, we wouldn’t feel that we would have a lot to offer our investors today.”

“We call ourselves contrarian value investors. To us, this means that we are buying stuff and we are getting more than what we paid for. That might be because a good business is facing a cyclical challenge or investors don’t fully recognise the quality of that business, but either way - buying such a mispriced asset should result in a rate of return that is better than a market as a whole,” he explains.  

Staying tied to a narrow definition of ‘value’ is extremely limiting, warns Romick. “Our job is to understand what the likely changes down the road could be, and asses who is likely to win and lose against this backdrop. It is as important to avoid the losers as it is to find the winners, but it’s also important to avoid overpaying even for a really great company. A winning business does not necessarily translate to a winning stock. Price matters and that is one thing that will never change for us.”

It’s also very important to separate cyclical from secular change. The recent global pandemic stopped many businesses in their tracks, but at the same time many businesses have benefitted from the changing environment – so we are constantly forced to examine what businesses are more likely to thrive a decade from now and those that could be struggling,” he says.  

For Romick and his team, when it comes to finding value there are a couple of key points. “The bottom line for us is that price matters and the margin of safety matters and so that is a framework and an intellectual approach that we’re going to apply to an individual company as well as a portfolio at large.  That’s something that’s evergreen and underpins any sort of sensible investing.”

The other thing is that the world has changed a lot in the last 15 years. “As people are looking to invest capital, protect it and deploy it, we have to be continuously learning and respectful of what’s going on in the world and continue to be dynamic.”