Scott Barbee on Indexing, Regulation, and Deep Value

We had the pleasure of interviewing Scott L. Barbee, portfolio manager of the Aegis Value Fund (AVALX), one of the most successful Graham-and-Dodd-style mutual funds in the U.S.

Scott L. Barbee is Managing Director of Berno, Gambal and Barbee, Inc. His responsibilities with the firm include research and portfolio management of the Aegis Value Fund. Mr. Barbee was previously employed by Simmons & Company, a premier energy boutique investment bank, where he worked as an oil-service equity research analyst, assisting the company with the successful launch of its institutional brokerage effort in 1993. In 1996, he worked at Donald Smith & Company. In 1993 Mr. Barbee earned a BS degree in Mechanical Engineering and a BA degree in Economics from Rice University. In 1997 he earned an MBA degree in Finance from The Wharton School. Mr. Barbee is a Chartered Financial Analyst and a member of the Washington Society of Investment Analysts.

MOI Global: How did the Aegis Value Fund get started and what was the tipping point at which you felt like you had a sustainable, growing business?

Scott Barbee: The Aegis Value Fund grew out of my interest in deep value stocks that began while I was working at Simmons & Company, an oil-service investment-banking boutique. When I started in the Securities Group at Simmons, one of my tasks was to gather statistics on a variety of oil-service companies. I purchased a stock screening tool and began looking at and purchasing Benjamin Graham type net-net companies of various kinds for my personal account. Soon after, I decided to attend Wharton where I was lucky enough to have John Neff as one of my professors. While I was in school, I started working with Donald Smith & Co. who has used a deep value strategy very successfully for many years. After school, I joined a small firm based in Arlington, VA that had once been an office of Kahn Brothers. Irving Kahn, who founded Kahn Brothers, was once Benjamin Graham’s teaching assistant at Columbia. The year after I joined the firm, I wanted to start a primary investment vehicle, so we started the Aegis Value Fund.

The tipping point probably came in 2001, when money started flowing back into value funds after the tech bubble had burst. We had started the Fund in the spring of 1998, just prior to Long-Term Capital’s implosion, and the first few years were a particularly difficult time for value investors. Tech stocks had gone wild in the ensuing low interest rate environment as the Fed bailed out the LTCM lenders. We didn’t own much tech in those years, as those companies were so expensive at the time, and it was very difficult to get any client interest in what we were doing. Fortunately, we stuck to our guns. When the tech party ended, our remaining clients were perfectly positioned in the crown jewels of the “old economy,” and we ended up doing very well in 2001 and 2002, years which were quite difficult for the broader market.

MOI: In the fickle investment business, thirteen years is a long time to have managed the same investment vehicle. Your market-beating track record could have steered you toward the higher-fee hedge fund model. Why have you stayed loyal to mutual funds?

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