Among investment managers there are generally two camps of stock pickers. There are Benjamin Graham value investors, who do intense fundamental analysis in search of stocks selling well below their own calculations of intrinsic value, and then there are quants, who rely on probabilities and computer screens of publicly available data on thousands of stocks in an effort to produce winning portfolios.
Both strategies can be successful, but rarely do the two groups mix in practice. It's kind of like the differences between Christianity and Judaism. They have different liturgies, but their end games are identical.
On the 15th floor of a Los Angeles office tower not far from UCLA's Westwood campus, there's a fast-growing money management firm that has achieved a kumbaya equilibrium between managers who practice the art of deep value investing and math nerds who are immersed in the science of quantitative analysis.
The firm is Causeway Capital Management, and it's headed by a value-quant matchmaker named Sarah Ketterer. Today Ketterer, 53, is probably the most successful female money manager in the business. In the last 18 months assets in her firm have more than doubled, from $16 billion to $33 billion, thanks largely to the company's stellar performance. For example, her firm's flagship mutual fund, Causeway International Value, has a five-year average annual return of 14% versus 10% for its benchmark index. The $6 billion fund gained 25% in 2012 and another 24% in 2013.
Sitting in the firm's sunny L.A. conference room wearing a red leather jacket and sporting a brown pixie haircut, Ketterer is determined to convince a visitor of the firm's team approach. But if it were not for her own serendipitous path into the business of money management, this successful quant/value experiment might have never occurred.
Ketterer comes from West Coast investing royalty. She is the daughter of John Hotchkis, 81, one of the founders of asset management giant Trust Company of the West as well as of über-successful value boutique Hotchkis & Wiley.
After a few boring summer jobs in the back office of her father's firm, Sarah wanted nothing to do with stock picking. She started at Stanford as a premed student, switched to political science and economics, and eventually went to Dartmouth for an M.B.A. After business school she took a job in corporate finance at Bankers Trust in New York. But instead of becoming enamored by big mergers and investment banking, she shifted her focus to data–or more precisely, the Tower of Babel that was the state of European company databases in the late 1980s.
"I remember visiting a company in Italy that made sports equipment, and they were pulling their data out of a drawer, and I was thinking, What are they doing? This is not good," says Ketterer. "I think he was smoking, too."
So Ketterer quit her M&A advisory job to create a new company that would scrub and organize European data and sell it to investment managers.
Her first stop was her father's firm, Hotchkis & Wiley, back in L.A. But instead of seeding her business or becoming a client, her father and his partner, George Wiley, asked her to join the firm and help them start a new international equity arm.
"I had never really thought of being in asset management before that," says Ketterer, "but I had spent a lot of time in Europe talking to database owners. I recognized that the data was imperfect, and it struck me as quite obvious that there must be price inefficiencies in these markets."
Ketterer's career pivot inadvertently set her on a path to developing a new model of money management and ultimately prompted her and her Irish-born comanager, Harry Hartford, to break away from Hotchkis & Wiley (then owned by Merrill Lynch) and start their own internationally focused asset management firm in 2001.
In data-lover Ketterer's value-investing operation, numbers geeks share equal power with the tire-kicking fundamental analysts, and not a single stock can be purchased unless a consensus is arrived at by the team. Indeed, all picks must first pass muster with the quants, who screen 3,000 global stocks with market caps greater than $1 billion each week.
"They are looking for a subset of stocks that are already biased to outperform the market," says Ketterer. In other words, which stocks are selling at historically low enterprise value (market capitalization plus debt) to cash flow multiples and are beginning to see positive earnings estimate momentum from the most statistically accurate brokerage analysts. They also seek companies that are returning capital to shareholders, mostly through dividends or buybacks.
"We identify stocks that others are truly not interested in, when earnings look flat and there seems to be no prospect of improvement on the horizon," says Ketterer.
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