- Jim Cullen stays disciplined while peers chase growth trades
- Money manager has endured market cycles over six-decade career
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By Lu Wang
September 13, 2024 at 19:07 GMT+7
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Jim Cullen knows the urge. Embattled cheap-stock managers sense their careers are under siege, ignore their mandate — and grab a few expensive companies to catch up with a rollicking technology-led rally.
Particularly when a slew of money managers are doing it, just like today.
Out of 141 mutual funds focused on large-cap value, only about one in 20 is a pure bet on this bargain-chasing investing style, per data compiled by Bloomberg Intelligence. A handful of them have even sunk half of their money in companies that don’t formally qualify as value at all — often allocating to mega-cap equities that promise big earnings growth ahead.
“The cheating becomes so extreme that you can’t tell the difference between a value stock portfolio and a growth portfolio,” said the co-founder of New York-based Schafer Cullen Capital Management, which oversees $23 billion.
The 86-year-old fund boss has been in money management for six decades, founding his own firm in 1984 and trading through multiple stretches in which value was pronounced extinct by the Wall Street cognoscenti — again and again.
While selling out offers a quick fix in a pinch, giving into the pressure is a recipe for long-term failure, per Cullen. The problem comes when value recovers and a style-drifting fund finds itself with a shortage of cheap names to ride back up.
“The way to get around that whole danger of volatility is have a discipline,” said Cullen, who started his financial career with Merrill Lynch in 1965. His industry renown is arguably less about his raw returns, and more thanks to a steadfast adherence to the investing style through thick and thin.
While beating the Russell 1000 Value Index over the past three decades, his flagship high-dividend value strategy has returned roughly half the S&P 500 and trailed the value benchmark since 2019.
Unlike many peers, clients have largely stuck with him, a show of faith at a time when other managers are getting chased out of a market dominated by a small coterie of tech mega-firms.
The Russell value index has lagged its growth counterpart in all but two years since 2012. Earlier in 2024, it sank to a record relative low as chipmakers and software stocks rallied amid the artificial-intelligence craze.
In turn, the population of actively managed funds dedicated to value peaked near 1,100 in 2015 and has since fallen 15%, according to data compiled by Bloomberg Intelligence mutual fund analyst David Cohne.
Those that survived have been leaning into technology equities, mostly growth names. As of the end of June, the average large-cap value fund was over-exposed to the group — which includes Apple, Microsoft, Nvidia, Amazon.com, Meta Platforms and Alphabet — by 426 basis points, the second highest quarterly reading since at least 2012, data compiled by Goldman Sachs Group Inc. show.
Value Managers Dip Into Growth Stocks
Exposure to Big Tech names sits near record highhttps://www.bloomberg.com/toaster/v2/charts/7d39075bc796dd6015bcbde35c2e6416.html?brand=markets&webTheme=markets&web=true&hideTitles=true
Source: Goldman Sachs Global Investment Research
Still, whether a stock is a bargain depends on who’s judging it. Value can be sliced and diced endlessly and index providers can’t agree on a definition. Some value managers appear to have taken advantage of selloffs in recent years to snap up tech stocks seen as more reasonably priced and held them since.
Yet the widespread practice by this cohort going after growth stocks highlights stresses in momentum-driven markets, like today.
Managers who underperform “lose assets, they lose their jobs,” said Cullen. “There’s pressure on people to cheat or what have you — to stretch it.”
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Cullen hasn’t been spared. The firm’s high dividend value equity strategy has returned only 7.6% annually in the past five years, compared with 15% for the S&P 500. But he hasn’t wavered. He’s avoiding Big Tech except Microsoft, a stock he’s owned for roughly a decade and trimmed aggressively.
His mantra is generally to buy companies whose price-earnings ratio is in the bottom 20 percentile and to hold them for the long run. A trade employing the strategy has shown a perfect record of positive returns over any 10-year period since 1968, according to data compiled by Schafer Cullen. Over the same stretch, buying and holding the S&P 500 saw losses twice.
“Maybe you weren’t up 25% for one year or whatever period, but you are up consistently,” Cullen said.