Pzena and Fannie Mae

Richard Pzena is a well-known value investor.  His firm, Pzena Investment Management, Inc. (Ticker PZN) is one of the few value shops that's public.  Joel Greenblatt, a very very well-known value investor, is on the board and is a big shareholder.  I attended the company's annual meeting a few weeks ago and was impressed with Mr. Pzena and his team.  He does not pay himself outlandishly, unlike some public "value investors", redefined as:  you the shareholder do the investing and the CEO gets all the value. 

PZN's stock is way down recently.  This is because its AUM is way down, which in turn is because its performance is way down.  Its performance is way down largely because it has made a big bet on financials. 

I'm very intrigued by PZN and plan to do more research.  If all goes well there is the potential for a "quadruple dip" in the stock price:

1. Its performance record improves, increasing its "organic" AUM and revenue
2. Improved performance attracts new AUM and revenue
3. The inherent operating leverage of the asset management industry produces disproportionate gains in income--you get more than a dollar of increased income per additional dollar of revenue generated
4. The market re-evaluates PZN's future earnings potential based on its new and improved AUM and income profile

I know in some ways PZN follows a "naive" value investing strategy.  In this case I don't use the word "naive" in the sense of being unintelligent, but rather in the sense that their first filter is to look only at stocks that are statistically cheap, without paying much attention to the type of business they're looking at.  Having done that, they then zero in on the business itself.  I believe you can probably beat the market by following only a naive value strategy--I think Fama and French showed this--but before I'd invest in PZN I'd like to get a sense of how well it does the second part: the analysis of businesses.

Fortunately for me, PZN has "gone public" with its business analysis on a number of occasions.  They did a presentation on Citigroup for a conference a few months ago (you can ask Whitney Tilson to email it to you), and they wrote this letter to Barron's on Fannie Mae in March, back when it was trading at $22 a share.  If I can convince myself PZN is a smart business analyst, even if it ends up being wrong on FNM and C, then I'd likely invest.