Rob Osborn was warned early on in his career, by his mentor Peter Pedley that once he entered the church of value investing, he'd never be able to leave.
"Everything you do will be about buying things at a fraction of the price in the dollar," he was told.
Value investing may be a permanent state of mind, but it falls in and out of favour with the broader investment community..
After a strong final quarter of 2016 for the market's bargain hunters, the call is that value is back in vogue. For Osborn, who helps oversee the $4.7 billion of Australian equity assets at Lazard Asset Management, the value renaissance is only just beginning.
Osborn is one of several South African ex-pats that now run money in Australia. There's Platinum founder Kerr Neilson, Simon Mawhinney of Allan Gray fund and Maple Brown Abbott's Garth Rossler.
They all tend to be value-oriented – that is, seeking stocks that are overlooked and underestimated to the point where they're too cheap to fall further in price.
"In South Africa, things change month to month. You are more nimble and more risk-averse because things can get taken away from you, so you have to buy cheap," says Osborn.
Australia, by contrast, is a stable environment that is more likely to reward rather than punish risk-takers. This has fostered growth-focused investors.
"You're pretty safe to bet that if you set your business on a course based on the current environment, it will be very much the same over seven to eight years," Osborn says.
Questions of value
It's recognition that there's more than one way to invest, and often it's a function of individual and collective experiences of the investor.
Many of the world's most successful investors would call themselves value managers who are versed in ways of Benjamin Graham and Warren Buffett.
But it's an approach that doesn't always work. Fuelled by low growth and low interest rates, cheap businesses tended to get cheaper and value investors lagged the benchmark and their peers, testing their resolve and the patience of their investors.
Over a coffee near Lazard's offices at Circular Quay, Osborn pulled out a chart that showed just how prolonged the period in which value investing has underperformed the market has persisted.
Lazard tracked investment styles, combining the "value-indices" of Citi, Macquarie and Goldman Sachs to track the relative performance of value versus the rest of the market.
The chart shows that value began losing ground to growth stocks in about 2003, three years after it stormed back in fashion in the wake of the tech-bubble. The effective "draw-down" of value versus growth got as low as 30 per cent in 2009 before rising to about negative 10 per cent.
Even after the run in value stocks, there's still a large gap that can still be closed of about 15 per cent before value stocks have recovered the underperformance to growth stocks that began in a 2003. Osborn believes it will inevitably happen.
Eyes to the future
It's not as though the team at Lazard has struggled in the value valley of death.
The Lazard Select Australian Equities ranks in the top three over five years in the Mercer rankings with an 18.4 per cent return, while the Australian Equities Fund ranks eighth over the period.
"We have to have a three- to five-year view and we don't expect things to come good in one year," he says.
The 27.6 per cent return in 2016 was helped by some calls that even Osborn admits were tough to make.
Heading into 2016 they held the view that overcapacity in resource markets would keep commodity prices depressed for a while yet.
They assumed an ultra-bearish case in which commodity prices would remain 80 per cent cheaper than they have ever been, and stay there for two years.
"We put that in our assumptions, and they [the miners] were still cheap."
But Lazard trusted its valuations, and bought the well capitalised producers such as Rio Tinto, who were lower down the cost curve and would still make money in a world of low iron ore prices.
"It felt far too early for us," he says.
In hindsight, he says, had they been less bearish they may have found better value in higher cost producers.
But he believes there are more gains ahead from the big miners who will be spinning off cash for years to come.
"If you look at Rio, BHP and even Fortescue, they have spent packets of money building these mines, and they can never spend the depreciation."
Sharp falls
This implies they will be booking large expenses as they periodically write down the value of the mining investments. But that will reduce their tax bill and will not have any impact on their cash flows.
"The actual cash flow EPS is going to be lot more attractive. That will play out over the next two to three years."
While Lazard has revised its ultra-bearish forecasts on commodities, Osborn says there's still a reluctance among analysts to adjust their resource price forecasts, which may be another sign that despite the run in the miners, they're still under-owned.
Osborn explains that Lazard's portfolio can broadly be split into three – the stocks they've owned for about two to three years, the stocks that were out of favour and are slowly becoming less disliked, and those that the market reviles.
On the day The Australian Financial Review caught up with Osborn logistics firm Brambles and real estate agent McGrath plunged after downgrading their earnings.
It's these sharp falls that naturally captures the attention of bargain hunters.
Lazard holding Brambles is certainly worth a look after 15 per cent fall on eroded its premium status.
He's less enthused about McGrath. It's hard to find a value investor that is anything other than bewildered with Australian property prices. Naturally, he's staying away anything housing-related and is avoiding the banks.
The debate among analysts is whether bank stocks should trade at a discount to the broader market.
"If you're a widget maker your ability to make widgets is a factor of much money you have in machinery but with banks their ability to grow is depends on how much capital.
"The problem with capital is if you blow it up you have to go and get more and you dilute everyone that is there. The funding gets harder and harder. And that's why they should trade at a discount."
