Pierre Py isn’t your average fund jockey. The manager of Phaeacian Accent International Value grew up in Africa and France; traveled the world; studied political science, law, international taxes, and finance; worked in Paris, London, and New York; and restructured the debt of one of the largest bankruptcies in U.S. history—telecommunications company WorldCom.
“I read all these stories about people who started trading stocks when they were 2-year-olds and their first ETF when they were 5,” the 44-year-old Py jokes. “That’s not the story here.” He credits his diverse resume with giving him a unique perspective on investing that other managers lack. It has also helped him sidestep companies with suspect financials and so-called “value traps”—stocks that look cheap numerically, but have no future. And that has enabled his
$324 million fund
Phaeacian Accent International Value’s (ticker: PPIVX) 10.9% five-year annualized return bests 99% of its Morningstar Foreign Small/Mid Blend fund category peers, which averaged 6.6%. Although Morningstar categorizes it as a small- and mid-cap fund, it actually can buy stocks of any size. The fund also has beaten its large-cap benchmark, the MSCI All-Country World Index ex US index, by a wide margin since its 2011 inception.
The fund recently underwent a name and parent-company change, though its management team and strategy have remained identical. Formerly, it was FPA International Value.
Py learned a valuable lesson when he was an investment banker at Salomon Brothers from 2000-03. During that time, WorldCom wanted to refinance roughly $20 billion. “We went through the due-diligence process when things started to get very difficult for the company,” he recalls. “What was originally the refinancing turned into managing the bankruptcy of the business.”
That experience made Py “very averse to companies that have to resort to high financial leverage to deliver a return.” As a result, he and his three analysts intensively research potential investments for their concentrated portfolio, which usually holds 25 to 35 stocks. That includes employing “a forensic approach” to companies’ financials, as well as meeting—now videoconferencing—with each company’s management, competitors, suppliers, and consumers. If not enough stocks are up to snuff, the fund holds cash, currently 20% of assets.
After getting his M.B.A. from Harvard University in 2005, Py worked as a senior analyst for famed value manager David Herro at
(OAKIX), until 2011. Yet Py thinks about value investing differently from his mentor, steering clear of leveraged companies like banks, which most value managers favor. He instead invests heavily in tech stocks that seem pricey by traditional valuation metrics.
“We are managers of assets at a time when the world is experiencing one of the most significant technology disruptions,” Py says. “There’s been dramatic changes in the way business is done across the board.”
The fund manager is wary of just looking in the “rearview mirror” with regard to valuation metrics and business fundamentals: “We need to understand what is going to happen to businesses going forward. Is there going to be a new product that competes with them?”
That helps explain why, in the past, Py invested profitably in auto maker
(DAI.Germany), but not today, as electric vehicles upend the industry. Similarly, he has owned traditional advertising company
(WPP), but won’t now, because Google parent
(GOOGL) has disrupted the business. Instead, the fund has recently held internet-focused market-research and advertising companies like
Note: Holdings as of Sept. 30. Returns through Nov. 16; three- and five-year returns are annualized.
Sources: Morningstar; Phaeacian Partners
Perhaps Py’s most controversial holding for a value manager is Chinese technology conglomerate
(700.Hong Kong). He first became interested in it in 2013, after extensive research into the videogame industry, which Tencent dominates in China. “Historically, we’ve looked at videogame development as a bad business with a very small demographic [of consumers],” he says. “But the industry has evolved because the demographic has expanded. It’s not just 15-year-old boys that are playing, but adults and women.” Moreover, the distribution platform has shifted from one-time software purchases to streaming directly to consumers with a more profitable subscription model, allowing for upgrades and add-on purchases.
Tencent has a price-to-earnings ratio of 45, hardly cheap by traditional measures. Yet as a conglomerate, it also has a dominant social-media platform in China, including
and a “black box” of hard-to-value assets that aren’t factored into the company’s P/E ratio.
This isn’t to say Py avoids traditional value stocks. A top holding is
(ISS.Denmark), a building cleaning-service and maintenance company. Its stock is down 32% in 2020, as Covid-19 led to many empty buildings. “We don’t think that shared spaces will be permanently abandoned,” Py says. Moreover, the company also cleans health-care facilities, which desperately need its services right now. “Cleaning services are going to be in very high demand going forward,” Py adds.
Yet Py recently sold other building-outsourcing companies like
(CPG.UK), which focus on food services rather than cleaning. Because their business model involves crowding employees and visitors into building cafeterias, it exposes them to pandemic risks, Py observes, though there is evidence these companies are adapting.
“If offices reopen [after the pandemic], is it likely that model will be permanently impacted? Very much so.” Like with every stock in his portfolio, Py is always keeping his eyes on the future.
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