century partners 1970 barron's interview -- part two

7/16/2015 Century Partners 1970 Barron's Interview -- Part Two

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Posted By: Rupert Hargreaves (http://www.valuewalk.com/author/rupert-h/)

Posted date: July 03, 2015 12:00:33 PM In: Business (http://www.valuewalk.com/category/business/)

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[From The Archives] Century PartnersBarrons Interview Part Two

Continued from part one (http://www.valuewalk.com/2015/06/from-the-achieves-

century-partners-barrons-interview-part-one).

Towards the end of 1968, many of the pressures Century Partners noticed during the

second half of 1967 began to reappear. Inflation started to rise, putting pressure on

costs, bond prices started to look attractive once again and towards the end of 1968,

Centurys analysis started to warn of deteriorating levels of corporate liquidity

(http://www.valuewalk.com/2015/06/on-bond-market-illiquidity-and-more-

redux/).

...From 1964 to 1969, the debt-equity ratio of U.S. manufacturing

corporations went from 22% to 37%. During the same time, their

return on equity declined. This has some rather horrifying

implications.

Century Partners: Getting ahead of themselves

Harpel believed that these figures showed U.S. corporations had lost sight of the fact

that economic growth (http://www.valuewalk.com/2015/06/household-debt-

redistribution-and-monetary-policy-during-the-economic-slump/) is linked to

population growth -- meaning that growth is limited to around 3% - 4% per year. A lot

of corporations believed that they could continue growing at 15% - 20% per annum

indefinitely and they borrowed on that basis.

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Many also made acquisitions which proved to be unsound. As a

result, rather than increasing, return on equity actually

declined...This leaves many companies with high debt structures,

low earnings, little liquidity and a need for equity financing at what

amounts to be the most unfavorable time.

You can see a little of this sort of thing in a company like Revere

Copper & Brass...five years ago, Revere earned something in the

neighborhood of $11 million after taxes and it had $59 million long-

term debt. Last year it also earned $11 million after taxes, but it

now has $211 million in debt.

Century Partners: Market positioning

The interview then moves on to talk about Century Partners positioning throughout

1969. Hokin and Harpel weren't entirely comfortable being 100% short during this

period. So Century made do with a large cash position

(http://www.valuewalk.com/2015/06/cash-debt-pe-ratio/), rather than taking hefty

short bets.

B: Doesnt a hedge fund have to hedge?

Hokin: We dont consider ourselves to be a hedge fund. Were

money managers who have the ability to short or long as we see

fit. We also see nothing wrong in holding cash, particularly in the

sort of climate weve been experiencing. Weve felt the growth

stocks as a group were significantly overpriced on a multiple basis

for over two years, but we would have lost our shirt if we had

shorted them during much of 1969.



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ABOUT THE AUTHOR

Rupert Hargreaves

(http://www.valuewalk.com/author/rupert-h/)

Rupert is a committed value investor and regularly writes and invests

following the principles set out by Benjamin Graham. Prior to his investing

and writing career, Rupert began his career as a proprietary currency

trader. Now, as well as writing for ValueWalk he trades on a daily basis

and writes regularly for The Motley Fool, Stockopedia and Seeking Alpha.

Rupert holds qualifications from the Chartered Institute For Securities &

Investment and the CFA Society of the UK, including the Private Client

Investment Advice & Management exam. You can find a collection of

(http://www.valuewalk.com/2015/07/should-

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5-or-iphone-

7/)

(http://www.valuewalk.com/2015/07/stop-

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theyre-the-

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century partners 1970 barron's interview -- part two

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