In your latest quarterly commentary, you wrote that you prefer to own “high quality businesses” and gave Air Liquide as an example. What is the case for owning Air Liquide as a value investor?

Air Liquide provides industrial gases and services to a wide range of industries. It has long-duration assets and long-duration customer relationships. Its air separation assets last 40 years and they have 15-year contracts with their customers.

I also like that it has stable pricing because its customers sign long-term contracts. There’s growth potential because its main competitors are companies that produce their own gases As Air Liquide gets bigger, they get more scale. They become more competitive versus [insourced production, and they have a lot of potential there. So most of its competitors are actually potential clients.

Finally, it just purchased a company called Airgas in the United States which helps them to vertically integrate in the United States. For a long-duration business with good customer relationships, good contracts, and the pricing and the scale advantages, I believe the valuation is attractive.

You also own Emerson Electric which you noted has thrived in highly cyclical industry. What makes Emerson Electric attractive as a high-quality company?

The main business for Emerson is process management. It offers flow-control capabilities for a wide range of industries from pharmaceuticals to oil and gas to water treatment, food and beverage companies. They provide integrated solutions and services to those industries, not just parts.

It also tends to be very integrated into the actual plant itself. It tends to have service centers that are co-located nearby its customers, so it has a very close relationship with its clients. Its part of the production process tends to be very, very critical, even if it’s not the most expensive part of it – valves and actuators, for example. It is critical to the production process.

There are very high switching costs as well. As a result, the customers tend to be highly loyal and it has very high retention rate. It has a massive $85 billion-plus installed base that provides recurring revenue. Even though the end market, energy, oil and gas tends to be very volatile, it is able to generate some stability because they are providing services. It also has a high portion of maintenance revenue. That increases the predictability of the revenue. All of that makes it a very stable business; albeit in an end market that is cyclical. It’s reflected in the numbers and stock price.

But we believe, at this price, the stock is undervalued.

In Europe, you own two companies, Matas and ICA Gruppen, which have dominated what are relatively small markets. What will be the catalyst that will drive the share prices of those companies higher?

Those are two great businesses, as you noted. They’re in different industries. Matas is a beauty and cosmetics retailer, and ICA is essentially a grocery store chain.

We’re not catalyst-driven investors. We look for businesses that can generate an attractive return for us regardless of catalyst. A catalyst is a cherry on top. If something happens, great, but we don’t try to pre-judge that. A lot of times if there is a catalyst, or if we’re looking for a catalyst, the apparent catalyst increases the price of the stock.

In that commentary, you wrote, “a significant portion of our analysis relates to avoiding errors.” What is the risk management discipline that you impose on your funds?

There are two levels of risk management. One is a security-by-security risk management, which is trying to avoid paying too much for something, but also avoiding companies that exhibit risky traits, such as too much leverage on or off the balance sheet, management teams that don’t do any work on behalf of the shareholders, and probably most importantly, a business model that may be at risk of dislocation by new technology and competition. We avoid those three or four things, the most important part of which is careful individual security analysis. Of course we would like to be diversified on a portfolio basis as well, so we know we’re not unduly exposed to any individual security.

You noted in your commentary that we just marked the eight anniversary of the Lehman bankruptcy. The last eight years have been generally tough for traditional Graham and Dodd value investors. Why has that been the case, and what will need to happen before we see better performance among value investors?

The traditional Graham and Dodd value investors tend to be very specifically oriented toward low price-to-book ratios and that kind of thing. If you’re stuck on that, what ends up happening is that you have a bias towards financial-services companies. You have a bias towards asset-heavy companies, like resources. You tend to be a contrarian as well, and that can lead you to turn-arounds and value traps.

We’re talking about banks, energy companies and retailers, for example. Things that have lagged the last five years for obvious reasons. Energy costs and resource prices went down. Banks have had to cope with more government regulation.

It’s not surprising that in that narrative that the traditional Graham value investor would have lagged. That’s not to say that all value investors have lagged. Those that have tilted towards quality have done well.

Has the outcome of the presidential election changed your outlook on which regions you expect to find attractive opportunities in? For example, there’s been a sell-off in emerging markets. Has this created opportunities for your funds?

It’s been a very modest sell-off. Emerging markets have rebounded quite strongly this year as well, so it’s a sell-off from a rebound. I’m starting to find things here and there in emerging markets, in Europe and Asia. For instance, in Southeast Asia, there are some things popping up that look interesting.

The mutual fund industry has seen substantial flows from active to passive products. That trend may accelerate when the DOL fiduciary rule goes into effect in April 2017, because of the level of due diligence and research imposed on advisors who manage retirement funds. Is active management in a secular decline?

It has been happening for quite some time now. The passive funds have been gaining share. However, truly active management, such as my firm, exemplifies the belief that we’re investors first and foremost. We’re a small part of the market and there’s a need for people like us. But if you’re in the middle, such as a closet-index or high-cost mutual fund, you are probably more at risk.

Many advisors believe they can capture value-like returns with quantitatively driven products that tilt to the value factor. What guidance do you offer to advisors who are choosing between a quantitative value fund and an active value fund such as yours?

Anything that’s quantitative tends to be backwards-looking and back-tested. In fact, the standard language applies, “past performance does not guarantee future results.” Many of these smart-beta funds are exactly that. I caution against using products that are dependent on back-tested returns. Actively managed funds, whether it’s me or other people, show that it is best to have some judgment at the wheel, rather than hand it all off to the robot.

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