A long-term relationship with Vanguard Windsor Fund
David Palmer: When I was a young child, my mother was actually an analyst on the fund working for John Neff, the portfolio manager of Windsor, for well over three decades. When I was a young child, we had investment research for Windsor, littering the kitchen table. This was part of my life even when I was four, five, six years old.
It's something sort of full circle about being able to know Windsor from its early days, have it be a key touchstone of my life, and then years later joining Wellington Management, working on Windsor now for 25 years, and finally being the team leader and portfolio manager.
Now I'm in my 26th year and so the first 20 years that I was on the team, I was a primary analyst, creating earnings estimates and assumptions about the future for the companies that I followed. Having that background in multiple different industries on both a U.S. and a global basis really help me understand how business cycles work and what it means to bet against the prevailing wisdom.
Value as a philosophy
David Palmer: Value is all about buying an asset that is trading for lower than its fundamental value would suggest, beyond just its cheapness and the low price. We're looking for companies that are at a very controversial moment in their corporate history that have had some sort of pivot point recently where there's been a disappointment to the investment community, and we look at the way that investors receive disappointment.
People are just not hard wired to deal with this with big dislocations of fundamentals from what they were expecting. And the natural reaction that people have to disappointment is just to say, “Oh my God, I need to run away from this before it becomes a career ending injury or a bigger problem to my portfolio.”
So, we're looking for companies at that dynamic moment of their corporate history where the range of future outcomes has widened way out and where there's a lot of value being put out there in the market that we can take advantage of.
Wellington’s approach to investing over time
David Palmer: The Windsor fund approach has been more consistent than different over time. One thing that I think has evolved over the 25 years that I've been part of the fund is to try to focus rather than look at the deepest value. We have tried to focus more on distributable free cash flows being generated by the business that help companies survive those tough times, and also to think about the future cash flow growth, so that we're staying in the flow of the global economy and not being left behind just because something is cheap relative to the cost of its assets at some point in history.
David Palmer: Our active edge on the team is really about developing a skill set for looking at companies at a very specific point in their history and looking at companies that have had a disappointment, understanding, triaging and appreciating the set of possible future outcomes for what could happen to that company. I think it's all about isolating certain situations that we can see happening across the economy, being able to evaluate them in a very short period of time, using the benefit of being part of a very large research organization at Wellington.
Having access to our central research analysts, having access to portfolio managers around the world, often with very different investment disciplines to ours, but where we can use their knowledge at the point of maximum controversy. For the company to be out on the front foot, investing at the time of greatest uncertainty, to be able to look for those capitulation moments and act at the moment of greatest potential upside, I think that really is our edge and isolating out all of the wonderful potential investments there might be in the world for those with different investment disciplines. But for us finding our skill set serially, acting on it again and again through time.
David Palmer: On the fund itself, we have eight of us working specifically on this product and then we also use the relationships that we have around the firm. Our central research group has over 50 sector specific analysts located all around the world plus hundreds of other investors who are analysts, their portfolio managers, their macro analysts etcetera, who are widely dispersed around the globe. And the way that we work is we sort of put ourselves at the nexus of that conversation that's happening globally at Wellington. And we have our antenna up. And we're listening for that kind of cry of the heart from a colleague who's saying you would not believe what just happened to this company. You know, it's a really good company. It has great intellectual property, a good business model and it fell on hard times because of this situation and now everybody's running away from it. And you know that's what we're looking for. We're looking for not only companies that have slipped on a banana peel, but also where we have meaningful resources within Wellington's large investment network where we can be not just in a footrace with the market trying to figure out what's happened, but we can be further along in our starting point in that footrace because we have so many colleagues we can use and their experience with the company to give us a head start on that analysis.
Opportunities in the current market
David Palmer: We're looking for companies that have had a disappointment recently and we try and focus our research on de-risking the negative. So if the investment community has all of a sudden shifted all of its weight to one side of the boat and they're putting a lot of probability on the negative scenarios, we're looking to focus our research on those negative scenarios to see if we can de-risk even just a little bit the negative outcome spread over an entire portfolio of diverse opportunities.
We're looking for a way for the company to rehabilitate itself and to have people have that sigh of relief and say, “Okay, it's not as bad as I thought.” And actually the first move from, “Oh my God, it's terrible,” to “Maybe it's not as bad as I thought.” Actually that price move can be quite extraordinary and sharp when it occurs.
David Palmer: As we go from the optimism of reopening post pandemic to some missteps that have been happening in the corporate world where we have either an inventory overage or whether we are seeing just the consumer being exhausted, whether they have spent all the funds that they saved or they've just bought enough of the thing.
We're seeing right now a lot of resets where company stocks are taking large moves downward. As we have gone through the pandemic, we've gone through the reopening of the pandemic and now we're trying to understand what is the new normal for companies and industries. That offers a lot of opportunity for somebody who does what we do, which is to look for dislocations, understand what the real underlying trend is over the longer term, look for companies that we believe in over the medium to long term and find out when the near-term sentiment is terrible.
The pandemic has sort of expanded and contracted rubber bands over time. We went for a long period when we were locked down where we couldn't buy anything and then all of a sudden, we were let out of our homes and the rubber band snaps back together again and we go out and buy everything and then we say Oh well I don't need that anymore. So, there are a lot of companies going through this, where they're saying what is our new normal, what is our new, what is our future going to look like? People are willing to pay a lot for certainty. So, when you get into a realm of uncertainty, there's a massive condensation of valuation from high to conservative. We're seeing a lot of that in the market today. That's offering us a really wonderful opportunity and a very wide set of differentiated opportunities to look at.