LSV hedge fund was set up in 1994 by three founders. The main person in this picture was Josef Lakonishok. The other two were Robert Vishny and Andrei Shleifer. It is Chicago based firm and has carved a niche for itself within a span of 17 years. It has been in operation, diligently outperforming its competitors since 1994.

The firm specializes in equity management and institutional investments. It boasts a total value of $67 billion under investment. It caters to approximately 400 clients. The minimum requirement for LSV is an investment worth $100,000. Hence this firm is not meant to cater small investors at all.

The interesting feat about LSV is that its composition is primarily that of academics. Its founders are specialists in behavioral finance. Unlike other firms, its founder is not someone who rose through the ranks. Their forte was rather research. They conducted serious amounts of research into market forecasts and based their decisions on that. They still follow this methodology which has proved fruitful and beneficial for them. They barely base their decision on impulse or intuition. They find their method heavily reliable. Hence, it may be safe to assume that this firm plays it safe and unlike other financial industry contemporaries such as Ken Heebner and Peter Lynch, do not plunge into their convictions. They appreciate research to back their convictions to make them stronger.

It is situated in Illinois with a regional office situated in Norwalk, Connecticut. The top holdings of LSV funds are Chevron (CVX), Pfizer (PFE), AT&T (T), Conoco Philips (COP), Bank of America (BAC), and JP Morgan (JPM). It has often been observed by analysts that there is a certain trend that LSV investment follows. It invests where it is able to maintain a high AUM rather than a high Alpha. This is primarily due to the fact that a high AUM pays while a high Alpha does not necessarily always pay.

In 2007, the firm had the honour of being named Chicago’s largest money managers by Craig’s Chicago Business.  Fifteen years ago, LSV had three owners and a venture capitalist (SEI). Today, there are sixteen equity partners whom are actively involved in the business. The employees own a majority of the firm’s equity. The other two founder, Mr. Schleifer and Mr. Vishny embraced retirement. Now only Mr. Lakonishok is active is running the firm. He can rightly be called the team leader on top. These founders have over 200 research papers to their credit. Most of these research papers are published in Finance Magazines. All the founders have a research experience of 25 years behind them. It is this very foundation upon which LSV still stands today.  According to LSV staff, discipline is their mantra and the reason for their continuing success.

Mr. Andrei Shleifer and Mr. Robert Vishny, however no longer attached to the company have had a grave impact on it. Mr. Shleifer is a Russian born American Economist and highly acclaimed. He held a post in Department of Economics at Harvard University from 1991-2001 and from 2001-2006, the Whipple V. N. Jones Professor of Economics. He was awarded the John Bates Clark Award for most promising economist under 40. Mr. Robert Vishny is highly renowned economist. He acquired his A.B from University of Michigan in Economics, Mathematics and Philosophy with distinction and later PhD. Economics from MIT in 1985. He is currently pursuing a career as a professor of Finance at University of Chicago.

LSV caters to institutional investors and manages their accounts via proprietary investment model. The competitive strength of using this model is that it avoids introducing the process to any judgmental biases and behavioral weaknesses that often influence investment decisions. Alongside this approach, it uses quantitative strategy. The crux of that strategy is similar to a bottom up approach. It selects individual securities and further segments it into categories and then make its investments. It has an average turnover of 30% for each strategy it employs.

The genesis of LSV came about in 1994 in such a way that the three founders were in fact highly reputed academics. They were about to publish a paper that very well shape the market and lead great insight into market working. This paper was titled, Contrarian Investment, Extrapolation, and Risk. This paper gave them the groundwork for in fact stepping in to the field themselves. LSV is not a firm that most people have heard of. However, it enjoys its own niche as investing specialist would have at least once in their life gone through their paper and implemented on it.

In recent times, the analysts have observed that despite a high return policy followed by LSV, they recently seem to have tilted more towards growth.

Another interesting feature about LSV is that it used soft dollar only. It firmly believes in socially responsible investments.

Investment Philosophy:

Being a research driven firm, LSV has a very well grounded investment philosophy. As established earlier, it does not base any of its decision on intuition or impulse. Every decision is carefully calculated and forecasted. It is one of the very few firms which have a proper operational academic advisor department in the fore front. This department primarily carries all the research studies.

Essentially it follows two strategies, quantitative investment model based on bottom up approach and a proprietary investment model. They premise their ideology on the fact that creating and following a certain mind set about a particular company will blur your decision regarding it. It believes in achieving long term growth and is affirmative in their belief that this can only be achieved by systematically exploiting the judgmental biases and behavioral weaknesses that the influence and dictate the decision of many investors; creating a mindset of a certain company falls under this banner. Also falling in conjunction with the mindset argument is the tendency to extrapolate the past too far into the future, to ignore statistical evidence and to wrongly equate a good company with a good investment irrespective of price.

LSV used quantitative investment model to choose out of favor (undervalued) stocks in the market place. It purchases it and keeps it till the stock appreciates it. They key to this model is to be able to identify stocks with potential to appreciation in near future. It firmly believes that these stocks bought at a lower price will yield returns upon appreciation of its potential.  The essential factor is to ensure that their future growth exceeds the market’s low expectations.

LSV portfolios usually have a deep value orientation relative to the indices. Market timing is not part of the process and portfolios are fully invested. They usually maintain a cash value below 2%. However, recently analysts have begun attacking this stance. They believe that rather than value orientation, LSV has taken a tilt towards growth orientation. This was analyzed after studying the Alpha values for LSV from Oct 1999-June 2010 period. It was observed that the value tilt was very prominent and evident in the first five years of the firm. It was also observed to be investing in smaller companies.

LSV employs quantitative techniques to select individual securities as part of the bottom up approach. The investment process is similar for each of investment strategy but is further segmented into different capitalization ranges or regions.

The other investment model employed by LSV is a proprietary investment model. This also takes its root from the notion that stocks are predictive if researched properly. Investing in the right potential stocks will yield returns in future. This process is continuously refined and enhanced by their investment team while keeping the basic philosophy intact. They define their basic philosophy as a combination of value and momentum factors overlaid by strict risk controls that limit the over or under exposure of the portfolio to industry and sector concentrations. They also limit exposure to individual securities and ensure that they are as broad and diversified as possible for the sake of reducing risk.
The competitive strength of this strategy is that it avoids introducing the process to any judgmental biases and behavioral weaknesses that often influence investment decisions. These biases and weakness have been observed above. This approach has proved to be lucrative for the company as it is noted that each strategy churns them 30% return annually on an average.

Manager’s Bio:

LSV for fifteen years was being run and managed by its three founders. However, they embraced retirement and resumed their academic pursuit　whereas, Mr. Josef Lakonishok continued in his endeavor and brought his firm a total value of investments encompassing a whopping $67 billion as gauged in 2011. It caters to more than 400 clients. Upon retirement of Mr. Andrew Shleifer and Mr. Robert Vishny, the company is being run by sixteen equity partners. The employees own the majority of firm’s funds.

Mr. Lakonishok holds the position of a CEO, Chief Investment and Founding Partner. His job description includes overall management, portfolio management and research. The emphasis on research may be gauged by the fact that the firm operates an academic advisor department. He obtained his BA in Economics and Stats from University of Tel Aviv in 1970. In 1972, he obtained his MBA from the same university. By 1974, he had obtained his MS in statistics from the prestigious Cornell University. He later pursued his PhD. in Finance from Cornell University too. With an almost perfect combination of statistics and Economics he began his career as an academic and wrote numerous papers on this topic.

He started his career at Tel Aviv University where he was appointed as a Professor for Economics and Accounting. He continued teaching there for nine years for the period 1976-1987. Meanwhile, he began his US career by acting as a visiting faculty in Cornell University for Johnson Graduate School for Management. 1987 onwards he moved to Chicago and made his footing there. To date he has been teaching at University of Illinois at Urbana Champaign as a Professor of Finance. His entry into the world of asset management and financial institutions was not until 1994. He has also been acting as a visiting faculty for University of North Carolina, Chapel Hill and University of British Columbia, Canada.

Being an academic, his forte certainly lies in research papers and forecasting of market trends and patterns. He is a frequent contributor and a highly sought one at all major financial journals. He has published more than 80 articles. His research topics are wide scoped. They encompass analyst forecasts, determinants of trading of activity, execution cost measurement, performance evaluation, technical trading strategies, fundamental trading strategies, seasonality’s in stock returns, size effect and share repurchases.

His papers have earned him a lot of respect and accolade. He has received many awards in recognition of his work. The most important award was received for his paper, “Contrarian Investment, Exploration and Risk.” It was co-written with his then colleagues Dr. Shleifer and Dr. Vishny. He was awarded the prestigious Roger F. Murrary Award for this paper. He has also been graced with American Association of Individual Investors Award for his article “Fundamentals and Stock Returns in Japan,” co-written with Dr. Louis K. C Chan and Dr. Yasushi Hamao.
In line with his academic pursuits he is also acting as an associate editor for some of these journals. The most notable being the Journal of Finance.

SHAREHOLDER LETTERS

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MEDIA

Turbulent stocks affect funds: report (Business Spectator – July 15, 2011)

SEI Q1 Earnings Increase (RTT News – April 28, 2010)

US pension fund overhauls portfolio (Financial News – February 27, 2012)

Quantitative strategies face downgrading (Financial News – January 08, 2007)

VIDEOS

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QUOTES

“We are quantitative value money managers. There are more and more quantitative money managers today, but I think that when we started, which was about seven years ago, you didn’t really have that many active value money managers. We probably were relatively early in this game. A lot of things that we do came out of academia. The company was founded by Rob Vishny, a professor at the University of Chicago, Andrei Shleifer, a professor at Harvard University, and myself. We tried to incorporate a lot of ideas from behavioral finance, and all sorts of inefficiencies and anomalies that we saw in the literature.”

“I always believed that if people are getting too excited about a performance of a company that is doing well for a prolonged time period, as did Cisco, Microsoft, etc., investors extrapolate past performance too far into the future and push prices up too high. Eventually these companies will disappoint investors. We like to buy value stocks, stocks that are out of favor, that have disappointed investors for quite some time. Investors will eventually be rewarded not because the companies are great, but because they bought the stock at a cheap price. I never could understand why anybody would buy a company and pay huge multiples for it. You need a lot of luck to be able to justify such prices, because markets are competitive. If you have a good product, you will attract competition. It’s very difficult to sustain your edge and continue to grow at high rates. Therefore, it made a lot of sense for me to be a contrarian investor and stay away from companies where there is too much optimism.”

“The efficient market theory tells you that prices more or less reflect the value of the company”

“The Internet bubble, the media telecom bubble, how can you explain in a rational way valuations that made absolutely no sense?”