Joseph Huber is a cheapskate. Even after growing Los Angeles–based Hotchkis & Wiley Capital Management’s value investments from $2 billion to $40 billion in seven years and opening his own firm, Huber gets his hair trimmed at Supercuts. The founder of Huber Capital Management laughs that his desire for a good deal applies as much to hair care as to stock picking.
“This is serious, though,” says Huber, 46, who sent a reporter a selfie from a Supercuts styling chair. “Your instincts don’t turn off when you walk out the door of your office.”
George Athanassakos, a finance professor at the Ivey School of Business at Western University in London, Ontario, notes that the best value investors share traits, in part because successful value investing depends on virtues like patience and a willingness to go against the crowd. His research has found that, regardless of their wealth, value investors drive the same car year after year and live in the same house for decades. Athanassakos is not surprised that Huber remains thrifty despite his material success.
Huber, who uses the same investment process he developed for Hotchkis & Wiley, believes most people can’t learn the tenets of value investing. What’s more, they can’t stop making mistakes that behavioral finance research has found are disastrous to good stock picking, such as herding into certain stocks and chasing the momentum of the market.
Huber says his path to investing was not preordained. He grew up in San Francisco, son of a tow-truck salesman and a homemaker. At 13, while Huber was working as a caddie, a golfer offered to give him his clubs in lieu of payment. “At first, I just wanted the cash and said no. Plus, I’m a lefty and they were right-handed clubs,” recalls Huber, who eventually accepted the deal. The longer-term perspective paid off: He taught himself to play the game with his weaker hand and was eventually recruited by Northwestern University’s golf team. Mathematically minded, Huber ended up majoring in statistics and econometrics, and graduated from Northwestern in 1991. After a stint as an actuary, he earned an MBA from the University of Chicago in 1996.
That year Huber joined Goldman Sachs Asset Management (GSAM). He quickly bought into the philosophy of ROE reversion, which says that a company’s return on equity tends to normalize, or revert to the mean, over time. Most investors, however, bid up the prices of well-performing companies and shun those with any troubles, thinking that the patterns will continue, even though studies show that how a company is doing today has nothing to do with how it will do in the future. Value investors capitalize on the natural arbitrage between what they believe a company is worth and how investors trapped by their own behavioral biases are valuing it. If a company is doing poorly, for example, investors will extrapolate that poor performance far into the future and ignore sustainable advantages like strong brands, economies of scale and solid balance sheets.
While at GSAM, Huber became fascinated with behavioral finance; when in 1999 he was offered the chance to design a value process for Hotchkis, he jumped at it. The principals at Hotchkis had all walked out the door that year as their contracts expired, leaving Huber a blank slate with which to work.
At Hotchkis, Huber started integrating more research on investors’ behavioral biases into his investment philosophy. Few were doing that at the time; most investors watched measures he thinks are simplistic, such as changes to dividend policies or stock purchases by insiders. Huber tinkered, and success followed. In 2000 his large-cap value separate accounts returned 10.14 percent, beating the Russell 1000 Value Index by 3 full percentage points. From 2001 to 2005, Huber outperformed the benchmark by 8.8 percentage points a year, on average.
In 2007 he decided to go out on his own, wanting to build a firm around character and an ability to keep his funds small. The firm has attracted $4.2 billion in mostly institutional assets from the likes of the California Public Employees’ Retirement System, Massachusetts Pension Reserves Investment Management and the New York State Teachers’ Retirement System.
Huber wanted his firm to be 100 percent employee-owned so outsiders like public shareholders or a corporate owner wouldn’t get rich at the expense of investors in his funds. He believes that only an independent firm can keep funds small enough to deliver fat returns long-term.
“Capacity is a big deal for an active manager,” Huber says. “When you’re partially owned by a private equity firm or a bank, or if you’re publicly traded, you have fiduciaries that you are legally obligated to outside of your clients.” But he admits that shutting down strategies at a point that is good for investors means leaving profits on the table.
Although independently owned firms weren’t specifically studied, in early 2015 Affiliated Managers Group (AMG) released proprietary research on 1,200 investment management firms that found boutiques outperformed larger firms in institutional equity strategies by an average of 51 basis points a year from 1995 to 2014.
“One of the reasons boutiques outperform is they tend to have a disciplined approach to capacity management,” says Andrew Dyson, head of global distribution at AMG. “The industry is littered with capacity problems.”
Already, Huber has proved he will shut down a strategy when it reaches capacity. In 2013 his firm shuttered its small-cap value strategy at about $800 million, even though it had been in the top 1 percent of its Lipper category for five years. Huber Capital estimates that it can handle about $1 billion in small-cap equity and $10 billion in large-cap equity.
Huber’s natural penchant for patience is currently being tested. By some measures, value has underperformed since he founded his firm. And as money has flowed to traditional index funds and exchange-traded funds — and out of actively managed funds, which use buy-low-sell-high strategies — value stock pickers like Huber have lagged the market. Although the companies in his funds are doing well from an earnings perspective, their stock prices haven’t kept up with the market. In 2014, for example, the most expensive companies based on the price-to-book ratio, a common value measure, have outperformed the least expensive companies by 10.2 percentage points, according to asset management firm AllianceBernstein. That’s a trend that few fans of cheap stocks can go against. Huber’s large-cap strategy was down 1.55 percent in 2015 through October, beating the Russell 1000 Value Index by 54 basis points. But that’s not where Huber wants it to be. During the past seven years, the strategy has beaten its benchmark by more than 300 basis points.
Even though times are tough for value managers, Huber wants to be No. 1 in his relevant categories. “I doubt the Yankees in preseason every year get together and say, ‘Let’s try and be 82 and 80,’” Huber says. “They want to win the World Series.”
If the Kansas City Royals can win the World Series after a 30-year drought, maybe it’s time for value to turn around as well. •
Follow Julie Segal on Twitter at @julie_segal.
