Hidden Forces: "A Turning Point for Value Investing"

Episode Date: February 17, 2025
Host: Demetri Kofinas
Guest: Mark Holowesko, CEO, Holowesko Partners

Overview

This episode explores the evolving landscape of value investing with renowned investor Mark Holowesko. Demetri Kofinas and Holowesko delve into Mark’s unique investment philosophy, discuss the macroeconomic context shaping global markets, and examine why value investing may be poised for a resurgence following a decade of underperformance. Key themes include the impact of interest rates, liquidity, government debt, the role of benchmarks, and the geo-strategic environment influencing investment decisions.

Guest Background: Mark Holowesko's Path to Value Investing

Early Career and Mentors (03:39–13:53)

• Grew up in the Bahamas, from a family long-established there.
• Started career at a local trust company while still in high school and college.
• Sought mentorship from legendary investor Sir John Templeton, who initially rejected his job application but agreed to sponsor him for his CFA.
• Gained Sir John’s trust after passing the CFA Level I and was hired after a character-focused interview:
  • “He didn’t ask me any investment questions... I guess he felt that because I passed the first level of CFA and I got a master’s degree, technically, I should know what I’m doing. His first question was, ‘Where did I go to church?’” — Mark Holowesko (08:44)
• Progressed rapidly at Templeton, managing funds by 1987.
• Values hard work and credits his athletic background (rowing) for instilling persistence:
  • “I always like to tell people I'm not really smarter than most people. I'm just willing to go the extra distance.” — Mark (12:58)

Launching Holowesko Partners (13:53–16:38)

• Advanced to Director and Head of Global Equities at Templeton; managed $30B+ funds.
• Left after Templeton's sale to Franklin, preferring stock picking over people management:
  • “I wanted to concentrate on picking stocks and doing it with a few people for a few clients. And that's what I truly love.” — Mark (13:53)

Key Investment Frameworks & Philosophies

Value Investing Defined (17:13–23:01)

• Intrinsic Value Focus:
  • “We try to compare a company’s price to its intrinsic value. And intrinsic is an important part of the phrase.” — Mark (17:13)
  • Not just about low P/E; looks at potential growth, breakup value, and true worth.
• Risk Management:
  • Emphasizes estimating both upside and downside for every holding.
  • “If you have a collection of stocks and your upside is 50% and your downside is 10%, you don’t have to be right more than half the time to make good money.” — Mark (18:00)
  • Risk defined as the possibility of losing money (not just volatility).
  • Adapts portfolios based on available upside/downside across markets and regions.
• Downside Sensitivity:
  • Mark’s early exposure to market crises has made him conservative:
    • “I was somewhat conditioned by the environment that I grew up in professionally, where I’m perhaps too concerned about the downside... we're too much of a nervous Nelly sometimes.” — Mark (23:01)

Macro Context: Why Value Has Lagged and Why It May Turn

The Lost Decade for Value (24:42–26:50)

• Primary Culprits:
  • Unprecedented low interest rates and excess liquidity since the Global Financial Crisis.
  • “When you have massive liquidity and when you have interest rates to the extent they are... unfortunately had these periods like this.” — Mark (24:42)
• Growth vs. Value Extremes:
  • Enormous performance divergence, especially in the U.S.:
    • “Last year, the Mag 7... earnings grew 36%. The other 493 companies in the S&P 500 grew earnings low single digits.” — Mark (24:42)

A Turning Point for Value? (26:50–34:45)

• Thesis:
  • 2022/2023 marked a bottom in rates and a peak in liquidity; environment now shifting.
  • “The things that have caused this disparity in performance have changed.” — Mark (26:50)
  • Mark expects “structurally higher rates” and tighter liquidity to reverse value’s long period of underperformance.

Debt, Inflation, and the Role of the Dollar (29:02–34:45)

• High government debt levels globally echo the post-WWII era.
• “There are very few ways of solving the debt problem other than growing the economy and trying to inflate your way out of the problem. To me, that argues for sustainably higher rates.” — Mark (28:40)
• On inflation: “The only way you’re going to get out of this debt problem is to let inflation help and inflate your way out.” — Mark (30:20)
• Currency risk can be managed through hedging in today’s interest environment.
• The dollar is likely “overcrowded;" Mark is gradually increasing non-dollar exposures.

Contrarianism, Benchmarks, and Career Risk

Disregard for Consensus and Benchmarks (36:52–39:32)

• Mark doesn’t target specific regional weights; ownership in the U.S. is low despite benchmark dominance.
• Willingness to deviate dramatically from indices, based on valuation signals, even under client pressure.
  • “You can only get different results from other people by doing things that are different from other people.” — Mark (38:51)
• Prides himself on rationality and independence vs. crowd behavior:
  • “You have to sort of enjoy being off on your own... if you enjoy waking up... and going playing golf with everybody... I find that incredibly uncomfortable. Quite honestly, I'd rather be out sailing on a windsurfer by myself.” — Mark (37:20)

Career Risk and Client Longevity (39:32–40:17)

• Long-term client partnerships (80% of clients remain since fund inception) give Mark leeway to stick with his process:
  • “It's easier to do that if you're financially comfortable and if your clients have been with you for a long time.” — Mark (39:37)

US Macro Risks: Rates, Tariffs, and Policy (40:17–46:36)

• Negative real rates likely as a consequence of debt monetization (“it would be better for the government if we had negative real rates” — Mark, 40:49)
• Tariffs are seen as short-term, tactical—not strategic—and often harm U.S. companies too:
  • “I believe that a better scenario … is to remove regulations … keep the tax rate low … and not keep the dollar so strong.” — Mark (44:30)
  • Tariffs induce confusion and volatility, which “is good if you’re a long term investor because it creates abnormal price movements.”
• On the strong dollar: No administration will ever openly call for a weaker dollar, but “I think it would be to their benefit to have a weak dollar and it would be much better longer term than tariffs.” — Mark (45:49)

Global Opportunity Set & Geopolitical Considerations

Why U.S. Valuations Are So High (46:36–49:27)

• “The overvaluations in the U.S. is just liquidity and low rates and the concentration around the world and the fact that the United States has been a place dominated by companies that are growing.” — Mark (46:57)
• Momentum and passive flows accentuate these trends but could reverse sharply.
  • “The percentage of companies in America that don't make money is at an all time high while the market is at an all time high valuation. That's interesting.” — Mark (48:28)

Politics, National Security & Indirect China Exposure (49:27–55:12)

• “The greatest example today is China and Taiwan... The risk to your Chinese investments is that a situation happens like Russian investments.” — Mark (50:24)
• Even if you don’t directly invest in China, many multinational holdings (e.g. BMW, 40% of business from China) create indirect exposure.
• On due diligence: “A lot of information is available if you’re just willing to read through annual reports and go visit companies.” — Mark (53:06)
• Mark’s direct China exposure is ~4.5%, indirect is “closer to 15%.”

Notable Quotes & Memorable Moments

• On Defining Value:
  • “Intrinsic value as opposed to [just] value, and sometimes that incorporates growth, sometimes it doesn’t.” (19:50)
• On the Downside:
  • “We're too much of a nervous Nelly sometimes.” (23:01)
• On Contrarianism:
  • “If you want to beat the market, you have to do different things than the market.” (38:51)

Timestamps for Key Segments

• Mark's Early Career/Education: 03:39–13:53
• The Launch of Holowesko Partners: 13:53–16:38
• Investment Frameworks and Risk Philosophy: 17:13–23:01
• The Macro Shift for Value Investing: 24:42–26:50
• Analysis of Interest Rates, Debt, and the Dollar: 29:02–34:45
• Regional Weighting & Benchmark Defiance: 36:52–39:32
• Contrarianism & Career Risk: 37:20–40:17
• On Tariffs and Currency Policy: 40:17–46:36
• Valuations, Passive Flows & Market Structure: 46:36–49:27
• Geopolitics, Security & Indirect China Exposure: 49:27–55:12

Final Thoughts

Mark Holowesko’s perspective—shaped by decades in global value investing—suggests that after an historic stretch of underperformance, value investors are now well positioned for a regime shift. With macro conditions evolving, investors who rigorously analyze downside risk, maintain independent thinking, and avoid index “groupthink” may reap substantial rewards. The conversation also highlighted the complex web of global exposures and the critical need for deep research and adaptability in today’s fluid, interconnected markets.

For more insights—including Holowesko’s thoughts on specific opportunities in the UK, Japan, and the US energy sector, as well as his detailed process and views on gold—listeners can access the second hour via the Hidden Forces premium feed.