Pzena Investment Management Inc.'s assets under management jumped almost 26% following a $3.4 billion allocation from Vanguard's Windsor mutual fund, but the deep value money manager also needs a financial market embrace of its investment philosophy to show it can produce positive returns for shareholders and clients.
Pzena, New York, which went public in October 2007, has seen its stock price decline to about $5 today from an initial public offering price of $18. Its assets under management, meanwhile, tumbled to $13.1 billion as of July 31; around $11 billion is institutional. Five years ago, Pzena had $28 billion under management.
Its strict adherence to deep value has resulted in faltering returns in markets that haven't been kind to that approach. The company's two biggest strategies — U.S. and global value, with combined assets of more than $8 billion — trailed their respective benchmarks by more than 700 basis points for the year ended June 30, according to eVestment Alliance, Marietta, Ga.
Firm executives say if history is any guide, the next positive cycle for value equity investing is coming soon. Since February 1969, every 5½ years, on average, the cycle has turned positive for value investing, according to William Lipsey, the firm's president.
“We believe people committed to deep value investing will be rewarded,” he said.
Mr. Lipsey said each of the last four positive value cycles has lasted 6½ years.
Even if the calculation doesn't match up exactly this time, it's bound to do so at some point in the not-too-distant future, he said, as investors realize the logic of investing in underpriced companies with good fundamentals.
In the meantime, Pzena officials have to convince clients and prospects that they, too, should be true believers in the value approach.
Not everyone has the patience. For example, the $6.3 billion Sacramento County (Calif.) Employees Retirement System terminated Pzena earlier this year. The firm had managed $140 million in domestic large-cap value equities since October 2004.
Pzena was terminated as part of a board restructuring of the system's $1.3 billion domestic large-cap portfolio, said Chief Investment Officer Scott Chan. Mr. Chan said Pzena's underperformance was an issue, as were concerns about future performance.
In addition, the firm has continued to suffer large retail outflows, particularly in the $1.6 billion John Hancock Classic Mutual fund. Pzena is the sole subadviser for the fund, whose assets were as high as $10 billion in 2007.
“Retail clients are the most (afraid) of the near-term market volatility,” Mr. Lipsey said. He said most institutional clients have stayed with the firm. He also said Pzena gained two new pension clients late last year — one in the U.K. and one in Australia — but couldn't name them.
In their second-quarter earnings call with analysts, Pzena executives said the firm's $13.1 billion is down 11% from the previous quarter and 18% from the second quarter of 2011.