Investment Strategies
Value Investing Turns Up Trumps For Veteran US Stock Picker

Investment managers and clients often yearn for a new angle on how to find market-beating ideas but sometimes just sticking to traditional tests of value works best. And so says veteran stock-picker from the US, James Cullen.
Investment managers and clients often yearn for a new angle on how to find market-beating ideas but sometimes just sticking to traditional tests of value works best. And so says veteran stock-picker from the US, James Cullen. He has some strong numbers behind him to make his case.
Cullen, known to everyone as Jim, has been at the helm of Schafer Cullen Capital Management since he helped to found it in 1983 in the era of Ronald Reagan, supply side economics and trade spats between the US and Japan.
A quarter of a century on, having endured the worst recession since the 1930s, bailouts and the dotcom boom, Cullen says his fierce concentration on price-earnings ratios, dividend yields and out-of-favour stocks is delivering solid returns. He gave his views to WealthBriefing recently during a trip to Europe. His firm has recently rolled out UCITS versions of US-listed products.
The key, Cullen says, is to think of investments over a five-year horizon because shorter time-spans, he says, can be misleading given the amount of volatility and “noise” in markets. “Markets over a one year horizon are irrational and volatile...but that’s not so over five years. If you have a five-year horizon, then it [the strategy] works. If you don’t have a five-year perspective, then you shouldn’t be in the stock market,” he said.
The Global High Dividend Value Equity Fund, a new UCITS-compliant product, has delivered cumulative total returns - including reinvested dividends - of 10.27 per cent over five years, easily beating the MSCI World Index of equities, at just 2.87 per cent.
To reach such figures, Cullen and his colleagues use price-earnings multiples, dividend yields, debt-to-capital ratios, price-to-book, and other metrics.
Another fund now open as a UCITS product has done even better using this approach. The North American High Dividend Value Equity Fund has made total returns of 65.75 per cent over 10 years, while the S&P 500 index has fallen by 16.7 per cent over that time.
Cullen lets some other figures spell out his philosophy. He points out that between 2000 and 2004, a period when stocks crashed at the end of the dotcom boom and later recovered in March 2003, the returns to be had from holding the cheapest 20 per cent of S&P 500 stocks, as measured by their P/E ratios, were 16 per cent; in 1989-93, which covered the US recession of the early 90s, the figure was 14.5 per cent. In some years, the figures are even more impressive: for 1975-1979 – usually seen as miserable years for stocks – the rolling five-year result was 34.3 per cent.
These sort of figures may sometimes surprise people who are accustomed to reading, for example, that P/E ratios are a crude, even flawed measure of valuing stocks, and as Cullen said, this yardstick has sometimes fallen out of fashion. This explains why Cullen likes to use more than one measure before choosing to hold a stock. As an ex-Navy man, he likens the approach to getting a “three-point fix” in navigating a vessel into a fogbound harbour.
“But our approach is not so much about dividends as about the discipline it brings to the investment process. The results can be dramatic,” says Cullen. For instance, a study done by S&P dating back to its inception showed that buying the highest 20 per cent yielding stocks of the S&P outperformed (adjusted annually) the S&P 500 itself by an amazing 350 per cent.
The beauty of his investment approach, Cullen says, is that he is not prone to panic about short term market gyrations, which is just as well given the volatility of recent years. And the focus on value seems to work; in the chart on five-year rolling performance of the cheapest stocks by P/E, which starts in 1968, in only one period – 2004 to 2008 – was there a negative result (-2.6 per cent).
Cullen, who started out in the investment business in the mid-1960s, now oversees a business with around $11 billion of assets for individual and institutional clients. His track record of making money come rain or shine is sure to find new adherents while the economic weather remains subject to sudden squalls. Cullen’s performance as an asset manager is a tremendous advertisement for the benefits of active fund management.