Pzena’s investment philosophy 

Caroline Cai: The investment philosophy of Pzena is actually quite straightforward. Every manager wants to buy good businesses and pay a good price for it. So, we think one of the opportunities that investors may have to buy a good business is when something has gone wrong in the company that's obvious to everyone, but the resolution of that something that's gone wrong is not obvious or certain. It's just human psychology that we don't like uncertainties. So, when things aren't going well, it's more likely than not that the market starts discounting no improvement from here or further deterioration in the business.

On the other hand, businesses are run by people. They react to the environment, they take on restructuring, they do all sorts of self-help; and for us, the opportunity resides in if the market is already anticipating the downside case, maybe you only have 20 to 30% potential downside from here.

Pzena’s investment process 

Caroline Cai: Our process is really geared around implementing our philosophy in a systematic, disciplined, and repeatable way. It starts with our proprietary quantitative screening model that essentially tries to find businesses that has a good profitable history, for whatever reason is not making as much money as it used to, has some issues that are going on. And if you believe those issues can be fixed, they're in the cheapest 20% of the potential universe from a valuation standpoint, so priced to that long-term earnings potential. And once the name screens up, we go spend anywhere between two to three months up to four/five months to really figure out what made this business great and profitable to start with, what's going wrong today that's led to the uncertainty and the issue, and do we think management has a reasonable plan for addressing that.

At the end of the process, we look at what's the likely outcome, what's the range of outcomes that can materialize in this company, and we aim to build a portfolio of 30, 40, 50 businesses, all of which ideally are in pain for uncorrelated reasons, so the fixes will be different as well. And then we think that's a very repeatable process to implement the value philosophy that should work out over the long run.

The investment team 

Caroline Cai: Our team structure really reflects our philosophy and the process. For our investment outcome, we think of it as 80% comes from the company-specific research and maybe 20% from the portfolio construction process. So, our whole team is really viewing themselves as research analysts, students of businesses with some of us having additional portfolio manager responsibilities.

We're all global industry analysts. We do not have regional or product specialists because studying how competitors in different parts of the world or how business models evolve in different parts of the world is the best way to understand longer term how this specific business model can evolve. And all of our portfolio management teams have two to four co-PMs. If you want to be the rock star, this is not the place for you. We make decisions collectively. Everyone has equal voting power on buy and sell decisions. And we think that diversity viewpoint the co-PM structure brings in is a critical part of being a successful value manager over the long run.

So, the ideal candidate is someone that reflects how the team is structured, someone who's curious about how business works, somebody who likes, appreciates, and really buys into the team concept, the value of the collaboration, and, obviously, someone who has a natural inclination for value just being sensitive to the price you pay for something. We don't actually look for typical Wall Street or financial background. We really want people who look at potential investment opportunities as businesses run by people not just lines in a spreadsheet.