A Thing of Value

CT_Fitzpatrick-and-Kelly-touch-up

 

Written by Bill Hansen

Stable capital, a long-term time horizon, and an unshakeable belief in the principles of value investing have underpinned the career of C.T. Fitzpatrick, founder, CEO, and chief investment officer at Vulcan Value Partners. But the drive to succeed in the world of finance and business stretches all the way back to his childhood.

“I am doing right now what I wanted to do from a very young age,” Fitzpatrick says. “My career has been evolving since college, and it has led to this. I just feel very, very fortunate that I get to do everyday what I dreamed of doing as a kid. Some kids want to grow up to be firemen or an astronaut. I was a nerdy kid and wanted to be an investment manager.”

“I was attracted to value investing at a very young age, learning things from my father who was an entrepreneur but was primarily in the real estate business. I learned just by osmosis, just by the way he would describe things and talk about his business. I don’t know that he would describe himself as a value investor, but that is what he was, as are many business people in various lines of business. It is just the way they think.”

At the University of Alabama and later at the Owen Graduate School of Management at Vanderbilt University, Fitzpatrick built upon those earliest lessons. From his classwork in business and finance, he learned the classic theories of investing from the efficient market hypothesis to the capital asset pricing model, but it was the concept of value investing as espoused by economist and professor Ben Graham and his student, famed investor Warren Buffett, that most intrigued him. “Here was another school of thought that ran counter to the mainstream, that said, ‘Wait a minute, you can actually make more money by taking on less risk, not more,’” Fitzpatrick says.

“Risk reduction is what attracted me to value investing, that concept that was laid down by the father of value investing, Benjamin Graham, way back in the 1930s,” he says. “Warren Buffett has been an advocate of that way of thinking and has carried a torch for Ben Graham from those early days. I hope that people will look back at Vulcan 50 years from now and see that we carried the torch from there. That is our big vision for the company.

“What we are all about is reducing the risks and the returns will take care of themselves. When we look at the same information that a lot of other people look at, we may come to a very different conclusion because we have stable capital and a long-term time horizon. With that, we can afford to take the long view and do things in the short run that might be painful, maybe too painful for a lot of people to do. But we can withstand that, and that creates opportunities to buy fantastic businesses at deep discounts. You get both the great business at a lower price and an enhanced margin of safety, so that there is less risk in the investment over the long term. When other people are fearful and are selling, with a long-term view we will say we might lose money on this for the next month or the next year, but we don’t care. We can make money over the next five years. Since we and our clients have that time horizon, it enables us to do things that other people are unwilling or unable to do, and that is what has created the returns we are able to generate.”

Those returns have made Vulcan Value Partners, founded by Fitzpatrick in 2007, a major player in the world of value investing with more than $11.5 billion in assets under management for their core client base of endowments, foundations, and pension plans. Fitzpatrick’s company ranks in the top 1 percent of peer group ratings for all investment strategies it manages.

“Our core client is a large, sophisticated institution,” he says. “Most of our clients are very large and have billions and billions of dollars to manage, and we are part of their tool kit, one of the tools they use to manage their portfolios.

“We don’t look for cheap stocks. We look for fantastic businesses that we understand. We value them. We follow them. They are not undervalued most of the time, but we are ready so that when they do become discounted we can have an opportunity to buy them on attractive terms.

“Most value investors look for cheap stocks, we don’t. We look for good businesses, and then we are patient.”

Perhaps the mission statement of the firm says it best: “We are value investors—business analysts with a long-term time horizon focused on purchasing publicly traded companies that are competitively entrenched at significant discounts to intrinsic worth. Performance is our mission. We believe performance is best achieved through disciplined commitment to our long-term investment philosophy and the highest set of core values. Our goal is to compound capital at real rates of return significantly in excess of inflation over our five-year time horizon. Believing that as owners and operators of the firm, our capital should be invested alongside our client partners, Vulcan Value Partners is the exclusive investment vehicle for all of our employees’ public equity investments.”

Fitzpatrick honed his investment philosophy through almost two decades of work with Southeastern Asset Management (also known as Long Leaf Partners). “I was a partner there,” he recalls. “It was a relatively small company when I joined it, and it had become quite large by the time I left it. I was fortunate enough as a value investor to cash out in early 2007 and use the proceeds from that, basically my life’s savings, to start Vulcan.”

Fitzpatrick and his wife, Kelley, chose Birmingham as the home for the new enterprise. The couple met in New York when Fitzpatrick was an investment banker and Kelley was a trader. He grew up in Montgomery, she in Tuscaloosa. “We could have located anywhere, but we chose Birmingham very deliberately,” Fitzpatrick says. “We had never lived in Alabama since we’d been married, and when we started Vulcan, we looked in a lot of places. We wanted Vulcan to be here in Birmingham, and it has been a great, great decision. Birmingham has been the perfect place for our company. I don’t think we would have been as successful as we’ve been if we had picked another location.”

As a value investor Fitzpatrick finds it easy to look at Birmingham as an underappreciated asset. “It is a bargain,” he says. “We travel and get a chance to compare places all over the world. There are a lot of great places out there, but at the end of the day, I am so glad to be back home. I think Birmingham is an even better place than it is perceived to be. And what is really encouraging to us is that it keeps getting better. We loved it when we moved here, but now that we’ve been here 10 years, we realize it is a much better city today than it was a decade ago.”

Many of Vulcan’s clients fly in to visit the company, Fitzpatrick says, and they use professional drivers from the local company Over the Mountain to pick guests up at the airport and deliver them to Vulcan’s headquarters in the Protective Life Center off Highway 280.

“Our clients walk in here, and the ones who have never been here don’t know what to expect. They are used to New York, and they come in here and it blows them away. They come through the airport and the villages in Mountain Brook, and they say, ‘Wow, we get it. We know why you are here.’”

Fitzpatrick’s fealty to central Alabama also extends beyond Birmingham to Tuscaloosa. In January of 2015, C.T. and Kelley Fitzpatrick announced announced a $3 million gift to The University of Alabama’s Culverhouse College of Commerce. The gift positions the college to become the first business school in the nation to offer a value investing specialization at both the undergraduate and graduate level. The gift allows the college to create the Vulcan Value Partners Research Library and Trading Room that will offer students a curriculum that provides real-world experience with investing. The donation will also be used to create the Fitzpatrick Endowed Chair and a second Fitzpatrick endowed professorship in value investing.

The research library and trading room will be located in Bidgood Hall along with another recent addition to the college, the first-in-the-nation Business Analytics Lab. The trading room will include computers, stock tickers, a conference table, office space, and access to Bloomberg, where students will conduct live trades with actual funds donated by Culverhouse alumni.

Dr. Shane Underwood, the associate professor of finance/Fitzpatrick endowed professor, says, “There are few schools who teach value investing the way C.T. Fitzpatrick practices it. Columbia University in New York has a big value investing program, but there are no schools in the Southeast who have any such program at all. It’s exciting. We’re going to be the Columbia of the South.”