Sticking to your guns isn’t always easy. Just ask famed contrarian investor David Dreman, founder and chairman of Dreman Value Management. In the wake of the 2008 crash, Dreman watched his funds, which were heavy on bank and other financial stocks, plunge 35 to 45 percent. He had chosen those stocks because they were cheaply valued and had low price-earnings ratios, in line with his value investment philosophy.
Dreman’s Jersey City, New Jersey, firm lost more than three quarters of its assets under management, dropping from $22 billion in late 2007 to $4.7 billion by year-end 2009. “We didn’t realize how deeply the banks were invested in real estate,” he admits. “They didn’t realize themselves, and like lots of money managers, we got hurt.”
Dreman, 74, has made a career of beating the market. He’s also weathered several upheavals since launching his own shop in 1977. For the Winnipeg, Canada, native, nothing compares to the latest one: “It really was the worst panic I’ve ever seen.” But Dreman refused to sell his bank stocks, seeing long-term value in institutions such as Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.
Investors weren’t so confident. In June 2009, DWS Investments, a retail unit of Deutsche Asset Management, fired Dreman as subadviser of its then – $2.9 billion DWS Dreman High Return Equity Fund, 21 percent of which was invested in financials.
Dreman, the author of four books on contrarian investing and co-editor of the Journal of Behavioral Finance, got the last laugh. “They sold at the bottom,” he says, chuckling. The $118 million large-cap Dreman Contrarian High Opportunity Fund, his firm’s equivalent of the renamed DWS Strategic Value Fund, has gained almost 140 percent since the market lows of March 2009. By comparison, the Standard & Poor’s 500 index has climbed just over 100 percent, while the DWS fund is up roughly 115 percent. Dreman’s fund still holds many of those same bank stocks. “We knew we were dealing with survivors,” he says.
Today, Dreman Value Management invests in small-, mid- and large-cap stocks, managing $5.5 billion in mutual funds, subadvised funds and separate accounts. The firm has an impressive track record. From April 1988 through this January, its large-cap strategies posted a 10.8 percent annualized return.
Before going out on his own, Dreman was director of New York research for Dallas-based Rauscher Pierce Refsnes and senior investment officer at New York’s J. & W. Seligman & Co. In 1995 he sold Dreman Value Management to what was then Kemper Financial Services, only to buy it back two years later. Last September, Dreman, the firm’s CIO since 1977, handed the reins to E. Clifton Hoover, his co-CIO for the previous four years.
The two think alike: Buy stocks that offer low P/E, price-to-book-value and price-to-cash-flow ratios, combined with higher-than-average yields. They invest for the long term and never veer from their contrarian strategy, even when it costs them. “There are times when you have to decide between making a business decision and an investment decision,” explains Hoover, who joined Dreman in 2006 after serving as CIO of Dallas-based NFJ Investment Group. “We make true investment decisions every time.”
Dreman seeks companies with strong fundamentals that are undervalued because of special situations like lower-than-expected earnings reports or bad press. One such company is British oil giant BP. In Dreman’s view investors overdiscounted BP’s stock after last year’s oil spill. “The market price was assuming a future liability of $115 billion, while our estimate was $30 billion,” Hoover notes. (For potential liabilities, BP has taken a charge of about $41 billion against income.) Dreman started buying BP in June 2010 at an average price of $36.92. As of March 1, the stock was trading at about $48.
Another profitable pick for Dreman: Ryanair. The asset manager began snapping up the Irish discount airline’s stock in May 2010, when it had plunged to 12 from 20 times earnings in response to the volcanic eruption in Iceland, which grounded many Ryanair flights. Dreman paid an average of $25.20 and sold in September at $31.18, after receiving a $1.81 special cash dividend. Although the firm doesn’t usually unload stock so quickly, it made an exception for this opportunity.
Dreman is looking for bargains in the technology and financial sectors, and holding on to its energy stocks until they have fully recovered in value. This strategy is getting results. The $65 million all-cap Dreman Value Equity separate account finished 2010 up 22.6 percent, compared with 16.2 percent for the Russell value 3000 index.
“We have a rigorous investment process, and our screens are always up,” Hoover says. “That is really how we make money, over time.”
