John Reese believes that U.S. stocks are fairly valued, based on measures such as price-earnings ratios. This bodes well for investors, provided they take a long-term view.
"I've noticed that every year for the last 25, there have been doom-and-gloom headlines," says Reese, manager of the $82.8-million Omega Consensus International Equity and CEO of West Hartford, Connecticut-based Validea Capital Management LLC. "The economy and the stock market have a way of bouncing back."
A bottom-up, quantitative manager, Reese shies away from short-term predictions. "The long term is far more predictable, especially after coming off a decade like 2000-2010," says Reese, co-author of The Market Gurus: Stock Investing Strategies You Can Use from Wall Street's Best. "There is no guarantee but the probability is very high that you will experience above-average returns, following a period of below-average returns."
Reese is a fervent student of investment gurus such as Benjamin Graham and Warren Buffett, and uses their models to select stocks. In fact, he relies on up to 17 investment models, although he declines to be specific about the mix in the international equity fund and in the $140.4-million Omega Consensus American Equity.
"I don't reinvent the wheel; I try to take the most successful market strategies and implement them," says Reese, adding that on balance he tends to favour value-based models over growth methodologies. "Then I combine several guru strategies in different ways."
One representative holding in the 50-name international-equity fund is NTT DoCoMo Inc., a leading Japanese telecommunications company. Acquired in November 2011, it ranked highly according to value strategies created by Graham and James O'Shaughnessy, head of O'Shaughnessy Asset Management LLC.
"The company is in a very solid financial position," says Reese, adding that its long-term debt is very small compared to its assets. DoCoMo stock recently traded at 11.4 times earnings, with a 1.04 price-to-book ratio and 4.4% dividend yield.
Reese re-balances Omega Consensus International Equity every November and disposes of names that no longer meet his valuation criteria. Individual holdings in the fund are limited to about 3% of the portfolio. Turnover was 82.8% last year.
Omega Consensus American Equity relies on five investment models that generate 100 positions which are limited to about 1.5% each. Turnover was moderate last year at 89.6%. "We won't say which models we use, although we do include Buffett," says Reese, noting that the fund is rebalanced every two and a half months. "It's part of our secret sauce."
A native of Los Angeles, Reese is a pioneer of the personal-computer industry who came to the investment game in a circuitous fashion. After graduating from MIT in 1974 with a bachelor's degree in electrical engineering and computer science, he joined ADC Telecommunications Inc., in Minnesota. "I was probably one of the first 100 engineers in the country to work with these Intel microprocessors."
After two years, Reese went to Harvard University and in 1979 completed his MBA. He went to work for Texas Instruments as a software-product manager. Two years later, he left to join GTE (now Verizon Inc.) and worked as director of strategic and technical planning for telephone products and data communications.
Then a former Texas Instruments colleague invited Reese to join Coleco Electronics Inc., where he worked as a marketing manager of electronics products. In 1984, Reese founded Micro Networks of America, which built local area networks. Nine years later, he sold the firm to GE Capital.
Between 1993 and 1996, Reese researched ways to invest his own money and tracked the performance of published recommendations. "I always had a fascination with stocks and believed you can pick stocks to outperform the market," says Reese, adding that in 1997 he established www.validea.com, which evolved from a free database service to one that relied on paid subscriptions.
In 2004, encouraged by the success of the model strategies, Reese set up Validea Capital Management. Besides acting as a sub-advisor to fund sponsor Fiera Capital Corp. (formerly Natcan Investment Management Inc.), the firm oversees individual accounts. Validea manages about US$280 million.
Launched in November 2007, Omega Consensus International Equity has a 5-star rating from Morningstar. It had an annualized 5% return over the three years ended Aug. 31 versus a 1% loss for the median fund in the International Equity category.
However, the 2-star rated Omega Consensus American Equity has lagged its peers. For the three years ended Aug 31, it had an annualized 7.1% return, compared with 10.2% for the median fund in the U.S. Small/Mid Cap Equity category. The performance gap is attributable to the fact that the fund is not a pure small-cap play and includes about 35 large-cap names.
Looking ahead, Reese reiterates that equities are priced at levels that will reward long-term investors. In his own case, however, he argues that the key is blending a mix of successful strategies. "When I first began researching this many years ago, I was looking for the Holy Grail, the one best strategy. But I found there are many successful strategies -- as long as you stick to them over the long term."
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