Archive for October, 2014

Gregg Fisher – Foreign Opportunities

October 24, 2014

This page is here for technical reasons. To watch this episode, please click here for the episode page.


October 24, 2014

The U.S. stock market has been one of the strongest performers in the world since the financial crisis, but some question if its days of market leadership are numbered. This week’s guest is starting to look in battered down international markets. Gregg Fisher, a top-rated financial advisor explains the diversification benefits of small company foreign stocks and international real estate.

GREGG FISHER Founder & Chief Investment Officer Gerstein Fisher

CONSUELO MACK: This week on WEALTHTRACK, multi-tasking Gregg Fisher, one of Barron’s Top 100 Financial Advisors and a four-star fund manager explains why he is fishing overseas for bargains, dabbling in global real estate and doing tax planning… Gerstein Fisher’s Gregg Fisher is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack.

Talk to just about any CEO of an American corporation and they will tell you their first responsibility is to the shareholders, who are the true owners of the company. And one of their top, if not the top priority is to maximize shareholder value. Not everyone agrees with that sentiment, but that’s a topic we will tackle another day…

Major U.S. corporations take their mission very seriously.

According to a recent article in Bloomberg, companies in the Standard and Poor’s 500 Index, the who’s who of corporate America are poised to spend $915 billion on share buybacks and dividends this year, that’s about 95 percent of earnings. And money returned to stockholders in the form of dividends and buybacks actually exceeded profits in the first quarter of this year and might have also done so in the third quarter.

Those policies have paid off for shareholders. According to Bloomberg, stocks with the most buybacks have gained more than 300 percent since the March ‘09 bottom, far exceeding the very strong returns of the overall market. And the pressure is increasing to continue those and other stock price boosting policies. Activist hedge funds have amassed war chests of more than $111 billion to invest in companies and pressure them to act.

For many reasons the U.S. stock market has been one of the strongest performers in the world since the financial crisis. But many question whether its days of market leadership are numbered.

This week’s guest is one of those starting to look in battered down international markets, but he is also constantly adjusting his own and his clients’ portfolios as conditions change.

He is Gregg Fisher, Founder and Chief Investment Officer of the independent investment management and advisory firm, Gerstein Fisher which he launched in 1993 and now has over $3 billion dollars under management. He has been named one of Barron’s Top 100 Financial Advisors, among other distinctions.

In 2009 he also established the Gerstein Fisher Research Center which does research on finance and investment risk with noted academics.

In addition he is the Portfolio Manager of the 4-star rated Gerstein Fisher Multi-Factor Growth Equity Fund which he launched in 2010. It is in the top quartile of its large growth category for the last three years.

In a wide ranging interview I asked Fisher what he is telling clients about valuations in the U.S. market.

GREGG FISHER: So a lot of clients are asking us, you know, what’s going on in the market? We’ve just seen something like 10,000 points on the Dow in the last five or so years. Is it a good time to invest? Should we trim down the winnings? What should we do?


GREGG FISHER: And that’s the bazillion dollar question. Right? I do think that investors should be mindful of the fact that we’ve seen a major move in the U.S. equity market particularly, but when you’re in a diversified portfolio, you’ve got to answer that question in a bigger way. You’ve got to look around the globe, and what we’ve seen actually is that the growth that we’ve had here in the U.S. market has been significant, but we haven’t seen that kind of growth over the last five years in other parts of the world. You know, we’ve had the European crisis. We had the emerging market challenges, and when you look at things like price to book ratios, price to earnings ratios, price to anything ratios, the rest of the world looks a bit more attractive than the U.S. does from a valuation point of view. So I don’t think it’s a good idea for investors to get out of the stock market, but what they might want to do is take a fresh look at where their exposures are and perhaps consider trimming down their U.S. holdings and adding more exposure to the foreign markets.

CONSUELO MACK: Even if they’re early in the foreign markets. We’ve just had lengthy discussions with Nancy Lazar at Cornerstone Macro who’s a very well thought of macro research firm, and their point of view basically is that there are huge headwinds in Europe. There are huge headwinds in China and, therefore, that the fundamental picture doesn’t make those stock markets attractive. From your, our perspective in valuations maybe they are, but as far as what’s going to really appreciate, their feeling is that this is the time to be more U.S.-centric. Your response.

GREGG FISHER: Well, I think most Americans have this home bias right now anyhow. So any move in this direction I think would be good. You know, I would take a different view. I would say that most people do feel that way, that in fact there are these major headwinds in the foreign markets and, because of the sunlight being shined on those risks, is it possible that those risks are being priced and that the return that an investor would receive from this point in time could be better than it would be from a period where it seemed like everything was wonderful? On the issue of home bias, most investors typically have 70, 80 percent of their portfolios in the U.S. markets in some form, and if you add to that their business interests, their home, most investors have probably 90 percent of their wealth in the U.S. in the dollar. I think it makes sense to just have some money in other countries regardless of all of this to diversify currency, diversify across the globe.

CONSUELO MACK: And so some money. What would you say? Ten percent, twenty percent? Obviously if you own large cap multinationals, you’ve got a lot of foreign exposure there anyhow.

GREGG FISHER: Well, I’ll answer…there’s sort of two questions there I’d think about. First is right now when you look at the world, by market capitalization the U.S. is about 50 percent of the world. The rest of the world is the other 50 percent. So if you were totally market neutral, you’d be roughly 50 percent U.S., 50 percent not U.S., but then you’re going to pick up a bunch of volatility because of currency and some other things. So perhaps an investor could consider having 30 percent in the foreign markets. It’s less than the world market cap, so you’re underweight foreign markets but you still have exposure. So that’s something that I think we should start by thinking about, too. Here’s the world equity allocation. May I have some position relative to that? But again, I think in terms of taking this position that markets are overvalued or undervalued, it’s to take the position that the market’s got the price wrong. So I think for most investors they should stay invested in the equity markets but perhaps it’s time to consider reducing your exposure to the U.S. a little bit. This point about the big U.S. companies doing business overseas gives you foreign exposure, it is relevant, but actually if you want foreign exposure you’re better off owning companies that are in those countries who prepare their financial statements in those countries, whose most of their revenues are in those countries, and the way to do that would actually be buying smaller companies that are doing less business across the globe. From a portfolio point of view, the reason why that’s important is, smaller companies across two different countries have a lower correlation with one another than larger countries across …

CONSUELO MACK: Larger companies.

GREGG FISHER: … Larger companies across countries. So if you want to have foreign exposure, and that’s a choice you’re making within your portfolio, I would say buy smaller companies in each country, and that will add more value to your portfolio from a diversification point of view than these large conglomerates that are all doing business with one another.

CONSUELO MACK: Let’s talk about what you’re doing. You wear a couple of hats. You’re the Chief Investment Officer of Gerstein Fisher, but you’re also the Lead Portfolio Manager on three different funds. They’re called Multi-Factor Funds. You’ve got Multi-Factor Growth Equity Fund, Multi-Factor Global Real Estate Securities Fund and Global Factor International Growth Equity Fund. What does Multi-Factor mean for starters?

GREGG FISHER: The way we see the world is that there are multiple factors that drive the returns of markets and portfolios. So our funds, the multi-factor equity funds, embrace these principles that markets may be reasonably efficient, doing a good job of pricing risk, and that investors are rewarded for taking these risks, these multiple sources of risk. Now on the other hand, there are often risks that investors are not paid for taking, and these are those idiosyncratic business-specific risks we all talk about. So our portfolios are baskets of large quantities of securities. Each of our funds have somewhere between 100 and 300 securities in them. Our goal is not to necessarily outperform markets through security selection but instead to outperform markets through these risk exposures. An example of this might be something such as small companies. We’ve all seen the research that over long periods of time small companies have outperformed large companies. Now some would argue that’s because of risk. Others would argue it’s because of behavior. Our view is, whether it’s the behavioral thought or the efficient market thought or risk, we don’t really care what it is. The fact is, it’s been happening.

CONSUELO MACK: It just is, so accept the reality.

GREGG FISHER: Exactly. The average investor is going to be the market portfolio, and that’s not a bad place to be, but if you’re an investor who’s willing to be different than the average through these sources of risk, and you believe that risk and return are related, well, then over time we should be able to outperform the flat market using a multiple factor approach.

CONSUELO MACK: Therefore, according to research, so small caps is one area that no matter what the reason is that it outperforms over time, another area or characteristic in investing in value stocks have outperformed growth stocks over time. You’ve recently written a report called “The Growth and Value Pendulum in the Markets”. Explain what your findings are between those dynamics.

GREGG FISHER: You know if an investor took their money and put 100 percent of it in small company value stocks and locked it away for 50 years and held it for 50 years and woke up 50 years later, probably they would do pretty well and probably they’d do better than most other things they could do, and certainly that’d been the case. The problem is I don’t know anyone who’s ever done that including the academics who have created these theories. No one does that. Most investors are human. We live real lives. We can’t stand 80 percent swings in our money from time to time. So instead we diversify. Now I would argue that 100 percent value is 100 percent wrong. The average investor…


GREGG FISHER: …Because the average investor experience is going to influence a large percentage of their return over time.

CONSUELO MACK: So this is where your behavioral finance analysis comes in.

GREGG FISHER: This is where behavior meets efficient markets. You can imagine that or you could believe that value stocks do better than growth. You could believe that small companies do better than large, but if you’re a human being, you’re probably not going to put your money into these things that work over 50-year periods of time. One academic that I know who’s well known about these concepts and theories suggested to me once that when it comes to investing, five-year periods of time is like white noise, and then I said to that academic, “Well, then you’ve probably never sat across the table from a real person before.” Most of us don’t have five years. We don’t think in those terms. As investors we should. At any rate, behavioral finance does get incorporated into this, but there is another point which is that there are many periods where growth does better than value, and a portfolio of growth and value, based on our research, would outperform a portfolio of value only for many reasons.

CONSUELO MACK: How do I apply that in real life with real clients sitting across the table from me? What is the kind of portfolio that you would advise we invest in?

GREGG FISHER: What an investor could consider doing is having a little more value, maybe 60, 70 percent value, based on this idea that over time value may do better than growth, but you’d still also have growth in your portfolio at maybe 30 to 40 percent of the total allocation, and then what’s important is that since these things move differently from one another over periods of time is that from time to time you rebalance these things back to those target weightings.


GREGG FISHER: We think in terms of percent deviation. So maybe you would say if at any point in time either one of those things was off by more than maybe five percent from where we started, you’d bring them back.

CONSUELO MACK: That sounds like a very reasonable approach. As far as looking at the Multi-Factor portfolios that you run, we had talked earlier about international exposure. What’s the strategy in the Multi-Factor International Growth Equity Fund right now?

GREGG FISHER: So imagine thinking that a small country should potentially earn a greater rate of return than a large country. Like for example, the United States can probably get away with borrowing at a lower rate than perhaps some other countries, or particularly right now most of Europe looks a little more challenging perhaps than the United States does. So the rate of return that I would demand from a company in Europe right now as an investor would be higher than the rate of return I might demand from a similar company in the U.S., so whether it’s companies or countries, we apply this size exposure. So one of the ways we do that is rather than using a market capitalization weighted strategy at the country level, we actually don’t allow any one country to become more than 12 percent of our portfolio. So big countries like Japan or the U.K. may end up being underweight in our strategy versus small countries might end up being overweight, and the idea is not that we’re timing what country to be in. We just don’t want any one country to be too large a percentage of the portfolio, and we want to have more exposure to the riskier small countries and less exposure to what the markets perceive to be the safer, stronger, bigger countries.

CONSUELO MACK: Therefore, if I’m looking at your International Growth Equity Fund, which countries am I seeing that have the largest overweights relative to what their market capitalization is for instance?

GREGG FISHER: You’re going to see a lot of parts of Europe, whether it be Spain, Italy, things like that that…

CONSUELO MACK: Peripheral.

GREGG FISHER: Peripheral parts, because if you think about it, if we had a 20 percent country like Japan or the U.K., and we brought that down to 10 or 12 percent, well, the excess is going to be spread across the remaining smaller countries based on their remaining market cap weights. So you end up overweighting the small countries and underweighting the large countries.

CONSUELO MACK: Another one of your portfolios, the Global Real Estate Security Fund, again Multi-Factor, we had had a conversation well over a year ago about international REITs. What is your view now of international REITs, Real Estate Investment Trusts? GREGG FISHER: Well, the idea around investing in global real estate as it relates to investors’ portfolios, we went ahead and we looked at the market capitalization of REITs all over the world and divide that by the market capitalization of equities all over the world, and you have about a two percent allocation. In other words, on average the investors have about two percent of their portfolios in REITs. Now we don’t…


GREGG FISHER: Globally. I mean, it’s tiny, but real estate is significant. We don’t know exactly what it’s worth, but we think it’s worth something like $30 trillion. So the potential for the public markets within real estate to continue to develop and grow we think are significant.

CONSUELO MACK: And as far as your REIT holdings, where are you seeing the greatest opportunity right now in global REITs?

GREGG FISHER: Well, our portfolio is global, so we are about 50 percent in the U.S., and that’s actually done quite well, but…

CONSUELO MACK: And as far as the valuations in the U.S. in the Real Estate Investment Trusts, what’s your view?

GREGG FISHER: I mean, many people would feel the valuations are very high, and if you …

CONSUELO MACK: Because they’re income-producing securities.

GREGG FISHER: They’re income-producing. People are…

CONSUELO MACK: That’s where everyone went.

GREGG FISHER: That’s right, and people are concerned about you know, discount rates and what if interest rates rise. People assume that if interest rates rise, REITs go down. Actually we’ve done research on that, and it isn’t that clear. There have been plenty of periods where rate rise and REITs go up. There have been plenty of periods where rates rise and REITs go down, and actually if you’re concerned about rates rising, you might look at your equity portfolios, because they react very similarly. It’s really ambiguous as to what happens with rates and REITs, but if you’re concerned about interest rates rising in the U.S., that gets to your question about global investing. Our position is you might as well diversify across multiple inflation regimes, multiple interest rate environments. So by diversifying across yield curves, you can reduce this inflation risk. It may not be the case that just because rates rise in the U.S. that that same change would occur in other countries. So our view is to not necessarily find whether you should be investing in Hong Kong, which I know is a little interesting right now and/or parts of Europe, but instead have a diversified portfolio across all countries. Have a diversified basket of real estate in your portfolio, and do it in a way that’s sensible. Picking what particular country to be invested in we think would be a mistake.

CONSUELO MACK: If REITs are basically two percent of total market cap, what percentage would you say that we should have exposure to in a portfolio? Five percent? Ten percent?

GREGG FISHER: Yeah, I think somewhere in the neighborhood of four to ten percent depending on investors.

CONSUELO MACK: Four to ten, and where are you now in that range?

GREGG FISHER: We’re at about five, five percent, and if an investor can choose … If you’re going to own REITs and you have the luxury of choosing, should I own them in a retirement account or should I own them in a taxable account, all else equal I’d put them in a retirement account because of their tax issues. So you have a high expected return asset that over a long period of time should be able to keep up with inflation, that adds a correlation benefit to your portfolio and from our perspective that makes sense. Add that to the idea that if you ask a typical investor, “Hey, how much money do you have in real estate outside of the United States?”


GREGG FISHER: The answer is probably zero. So if you put two, three, four percent of your portfolio in global REITs and you divide that by your net worth which probably includes your business or your home, so maybe the average investor goes from zero to one or two percent. My grandmother told me when I was a kid too much of anything is no good, but a sprinkling of real estate securities in a global environment like the one we’re in, in our view makes perfect sense.

CONSUELO MACK: Tax rates. We are in a tax environment now where taxes have gone up significant for middle and upper income Americans. What are the tax strategies that you’re advising this year?

GREGG FISHER: Well, I think taxes are such a critical factor in returns. We think of them as another factor. Just a point of fact, if you went back to 1976, and you bought an index fund … I won’t mention which one, but imagine buying an index fund in 1976 and holding it through today. That would arguably be one of the most tax-efficient things you could have ever done, and over that period of time the investor in that strategy would have given up about one and a half percentage points per year in taxes, and if you do the math, one and a half percent over almost 40 years, that’s about a 45 percent reduction in market value due to this one and a half percent drag. So I find it shocking when investors don’t pay attention to taxes. It’s so important. Anyway, some of the things to consider when it comes to tax planning. Well, for those folks that are doing things like charitable contributions, we’ve just gone through a period where your U.S. stocks have probably done really well up until maybe recently, but U.S. stocks have done very, very well. You might want to consider gifting some of your appreciated stocks to the charities that you have an interest in. You could think about direct gifts to charity. You could think about donor-advised funds. Lots of ways to give to charity.

CONSUELO MACK: And the reason is because you don’t get taxed on a sale, number one. If you donate it to charity you also get the tax deduction. Right?

GREGG FISHER: That’s right. You’re avoiding the tax on the capital gain had you sold it, and also you’re in addition to that getting the charitable deduction, and that’s an easy one to consider for those that are making charitable contributions. Now from a portfolio perspective, you might want to look through your portfolio. In a diversified portfolio, no matter how hard you try, something you own is probably down, and if that’s the case, you might want to consider selling some of those things and taking tax losses.

However, you also want to be very thoughtful about replacing them immediately with something that you believe has similar risk and return characteristics but satisfied the IRS wash sale rules. So to be able to do this, you have to take the position that if you own investment A and you sell it at a loss and you replace it with investment B, you have to believe that B and A are equivalent, but they have to be different enough so that you can take the tax loss without the IRS suggesting that you’re not allowed to, because if you buy back the same security, you’re not allowed to take the loss.

So sell investment A. Buy investment B. Take a tax loss. That tax loss can offset the capital gains that you may have in your portfolio throughout this year, but to the extent you have no capital gains, you can take those tax losses, bank them on your tax return and carry them forward into future years. Investors can also take $3,000 per year of those losses and use them to offset ordinary income which for an average person is going to save them about 1,000 bucks in taxes. Now in investing we know there’s never a free lunch, but that’s about as close as you can get. Actually in our view, adding value through careful tax management is often easier than adding value through picking good stocks or hiring good money managers, and as a money manager myself, I’m happy to share that.

CONSUELO MACK: Gregg, one investment for a long-term, diversified portfolio? What should we all own some of?

GREGG FISHER: I would say global real estate. And, I answer in that way because it’s the thing that I find most investors just don’t own. So most investors already are covering most styles and asset classes, stocks and bonds, growth and value, international and domestic, in some form they’ve probably got a lot of that, but just based on the data we find that very few investors own real estate securities globally, and that would be the one thing I believe people should have in their portfolio, because it’s most different from what they probably already own.

CONSUELO MACK: We will end it there. Gregg Fisher of Gerstein Fisher, thank you so much for joining us on WEALTHTRACK.

GREGG FISHER: Thank you, thank you very much.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one suggestion

to help you build and protect your wealth over the long term. This week’s Action Point is a response to Gregg Fisher’s question… how much money do you have in real estate outside of the U.S.? Since most of us would say none, this week’s Action Point seeks to change that. So it is: consider buying an international real estate investment trust or REIT. It is certainly an asset class that would add diversity to most of our portfolios. And real estate is desired and valued around the world.

One of Morningstar’s favorites in the REIT category is the Vanguard Global ex-U.S. Real Estate ETF, which it describes as offering “..the most-diversified, lowest-cost exposure to real estate securities from 35 countries around the world. Morningstar adds “it is the only internatinal real estate ETF to also include emerging-market stocks.” Which makes it more volatile than domestic REITs. International real estate- it’s worth a look.

Next week we are going to have that discussion I mentioned in my opening remarks. We are going to look at the state of corporate values. Should maximizing shareholder returns be the number one priority of corporate America? It was not always the case. Financial historian Richard Sylla and award winning financial journalist Paul Steiger will weigh in.

For more of this week’s interview with Gregg Fisher go to our website, and click on our EXTRA feature.

While you are there please visit our WEALTHTRACK WOMEN section where we have financial advice specifically for women from our panel of award winning women financial advisors.

Have a great weekend and make the week ahead a profitable and a productive one.



October 24, 2014

The U.S. stock market has been one of the strongest performers in the world since the financial crisis, but some question if its days of market leadership are numbered. This week’s guest is starting to look in battered down international markets. Gregg Fisher, a top rated financial advisor explains the diversification benefits of small company foreign stocks and international real estate. Continue Reading »

de Lardemelle: Scarce Value

October 17, 2014

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If you’re looking for the actual episode, click here.


October 17, 2014

For most investors, both amateur and professional, the primary goal of investing is to make money. However a handful of our guests have another top priority – capital preservation. IVA Worldwide Fund’s co-portfolio manager Charles de Lardemelle is one of them. On this week’s WEALTHTRACK he explains why he is now holding more cash and fewer stocks in his value seeking portfolios.

CONSUELO MACK: This week on WEALTHTRACK, a value investor who is willing to sit on large piles of cash while others invest in what he considers to be overvalued markets. IVA Worldwide and International funds’ Co-Portfolio Manager Charles de Lardemelle explains why patience is a virtue, next on CONSUELO MACK WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. There is no question that the world’s economy is slowing down. The international monetary fund recently trimmed its estimates for this year and next due to more weakness in Europe, Japan, and Russia, as well as a modest deceleration in China. The biggest exception? The us, where the IMF forecasts the expansion will pick up.

The IMF also warned about rising geopolitical tensions and a potential correction in the financial markets, describing stock prices as “frothy.”

That is also the view of some of our guests, who look forward to a market correction so they can buy securities at lower prices.

For most investors, both amateur and professional the primary goal of investing is to make money. However there are a handful in the WEALTHTRACK universe who have another top priority: capital preservation.

The most famous among them is Jean Marie Eveillard, the legendary former portfolio manager of the First Eagle Global fund, which is now ably steered by WEALTHTRACK regular Matthew McLennan. This week’s guest is an alumnus of the Eveillard school of investing, having worked at First Eagle for many years before leaving with a colleague to launch their own firm, International Value Advisors in 2007.

He is Charles “Chuck” de Lardemelle Co-Founder and Co-Portfolio Manager of the IVA Worldwide fund and IVA International fund which he launched with Co-Portfolio Manager Charles de Vaulx in October of 2008, the depths of the financial crisis and it turns out the month the market bottomed. Both funds closed to new shareholders in early 2011 after the firm surpassedg $15 billion in combined assets. Since inception the flagship IVA Worldwide fund is in the top quartile of its world allocation category with 11% annual returns beating both its benchmark and its competitors by a sizable margin. De Lardemelle says capital preservation is his firm’s first priority. I began the interview by asking him to explain why he is holding so much cash, more than 30% in both fund portfolios.

CHARLES DE LARDEMELLE: Well, because there is a dearth of opportunities in the stock market today in our opinion, so it’s very difficult to find quality companies with large discounts to intrinsic values where a knowledgeable buyer would pay in cash for the whole business, and it’s in part due probably to quantitative easing and the fact that interest rates are so low, but we’re not willing to take the bait, and we’re not willing to play the game.

CONSUELO MACK: Now not willing to take the bait. When you and I talked early in 2013, cash levels were at 25 percent I think in the IVA Worldwide fund, and you said the same thing, that that was a very contrarian position at the time. Needless to say, the markets have done extremely well since then, so you missed some opportunities. Right?

CHARLES DE LARDEMELLE: Well, we’ve continued to compound nicely and faster than nominal GDP, and we do offer a cautious approach to value investing, and so to us the first goal is to preserve capital. Not everybody can afford to take on volatility. We have a number of clients who need this money either for retirement or to pay for the kids’ education. So we always look at the down side, and the stock picking has really helped us compound nicely over these years, and so far our clients seem to be satisfied.

CONSUELO MACK: Capital preservation, however, you’re getting on cash basically nothing.


CONSUELO MACK: So you’re actually, on a real return basis, you’re actually losing money on that cash.


CONSUELO MACK: So how do you view that as a capital preservation tool?

CHARLES DE LARDEMELLE: Well, we view that as an option on tomorrow’s bargains, and so hopefully we have opportunities to put that cash to work at much better valuations at some point in the market cycle, and so it’s really an option. There is some option value embedded in that cash.

CONSUELO MACK: What about gold which I know has also been a longstanding holding of your shop, and what, it’s down to about three percent of the portfolio now.


CONSUELO MACK: From five over a year ago?


CONSUELO MACK: I mean, gold obviously has declined. It’s not been a great time for gold.

CHARLES DE LARDEMELLE: It’s a hedge. It’s a hedge against equities, and it’s a hedge against cash. So when there is uncertainty in the world, equities tend to go down and gold tends to go up, and that was definitely the case at the beginning of the year with Ukraine, with China being a bit wobbly. Recently gold has been under some pressure, and that’s due to, in our opinion, the U.S. dollar going up strongly, and so you have a very negative correlation there, but I think it makes sense in these times of money printing to have a little bit of gold to hedge your equities, to hedge your cash.

CONSUELO MACK: Is three percent the bottom of the range of what you consider to be a hedge position in gold?

CHARLES DE LARDEMELLE: Correct. I think that’s correct. Our weight in gold depends on how much we have in equities, and we don’t have that much in equities these days, about 50 percent in the worldwide and 60 percent in international, and so as a consequence we don’t have much gold either.

CONSUELO MACK: The 50 percent allocation to stocks. Explain how you’re investing your stock.

CHARLES DE LARDEMELLE: Well, that’s really driven by the bottom up. We have 10 analysts who are very gifted and help us determining intrinsic values, worst case scenarios. We always do a worst case scenario. What’s the down side if we’re wrong?

CONSUELO MACK: In each specific security.

CHARLES DE LARDEMELLE: In each specific security we own, and that will guide the size of our position. If we have a lot of leverage, there might be more down side and, therefore, if we were to make an investment in that security, it would be a much smaller weight than if you don’t have any leverage. So it’s stock-by-stock basis which is unusual for asset allocators. We don’t view ourselves as asset allocators. We view ourselves as stock pickers, and then if we can’t find anything that fits our criteria, then we’ll sit in cash. So you end up with an asset allocation, but we don’t wake up in the morning saying we’re going to have this much or that much in cash or in other parts of the market. High yield we only use when it provides equity-like returns, and so we used to have during the crisis of ’09 we went as high as 30 percent in high yield with yields to maturity of 12 to 15, 20 percent. Today we have almost nothing in high yield. There are no opportunities whatsoever.

CONSUELO MACK: What opportunities are there in the bond market?

CHARLES DE LARDEMELLE: Here is how I see our allocation today in the bond market. Most of it are those bonds we bought back in ’08, ’09, and they are getting very close to maturity. So part of that 10 points of allocation is what I would call long-term commercial paper, you know, maturity of a year or two max, yielding one or two percent, but I’d rather keep those rather than take the gains and recycle that in cash yielding even less. And then we have about five or six points in Singapore government bonds.

CONSUELO MACK: Singapore. Why?

CHARLES DE LARDEMELLE: Yes. Well, it’s really a way to park some of our cash outside the U.S. Dollar. So it’s quasi cash as well. So I would tack on this to our cash position rather than see it as … There is very little interest rate risk in that remnant of those investments that were done in ’08, ’09, and there is very little credit risk in our opinion as well.

CONSUELO MACK: Your emphasis on capital preservation first and then capital appreciation …


CONSUELO MACK: So how do you address the capital preservation question when you’re talking about equities and your equity positions?

CHARLES DE LARDEMELLE: First as I mentioned earlier. We always do a worst case scenario, and if we see a lot of down side, then the size of the position will be small. Second, we do not overly concentrate in our equity positions, and so that’s one of the puzzle of the worldwide fund is that even though we own 100 to 150 securities, we tend to not correlate with benchmarks. How do you do that? Well, it’s because we’re very willing to have very a large what I would call negative allocation. So having zero in a big part of the benchmark? No problem. Jean-Marie Eveillard and Charles de Vaulx had zero in Japan back in ’87, and then Japan doubled and became the largest market in the world, and they had zero in what was the largest market in the world, and it just doubled. They had zero from ’87 to ’85.

CONSUELO MACK: In the First Eagle days.

CHARLES DE LARDEMELLE: Correct. Then during the TMT, Telecom/Media/Technology bubble we had zero in those sectors, and then in banking, ’06, ’07, we had zero as well. So where are the big zeros is always a question that investors should ask about allocation.

CONSUELO MACK: Where are the big zeros?

CHARLES DE LARDEMELLE: Exactly, exactly.

CONSUELO MACK: You just fed me a question. I will respond to you.

CHARLES DE LARDEMELLE: So up until recently, the big zero was in BRICs, Brazil, Russia, India, China.

CONSUELO MACK: Up until recently?

CHARLES DE LARDEMELLE: Yes, and so we’ve started to dabble a little bit in China.


CHARLES DE LARDEMELLE: No, not Russia. Not Russia.

CONSUELO MACK: Oh, good. All right, I was going to say. You are really crazy.

CHARLES DE LARDEMELLE: Not Russia, although I would say the most contrarian bets today would be Russia and Chinese banks, but we have started to find a few investments in Hong Kong that are related to China, and so the Chinese market and the Hong Kong stock market have gone nowhere in a number of years now, yet the Chinese economy has continued to grow, and we…

CONSUELO MACK: More slowly.

CHARLES DE LARDEMELLE: More slowly, yes, but the price is starting to meet value in some of those smaller companies in China. So they go mostly for now in the international fund because they tend to be less than a billion of float, but…

CONSUELO MACK: Are these mid-cap, small-cap?

CHARLES DE LARDEMELLE: Mid to small-cap, yes.

CONSUELO MACK: Listed in Hong Kong.


CONSUELO MACK: What are you investing in in Hong Kong?

CHARLES DE LARDEMELLE: In Hong Kong, to just give a few examples, we own two satellite companies in Hong Kong, APT Satellite and AsiaSat. Satellite business is a good business because basically at core we view it as a real estate business. You have slots in the sky. There are only so many slots for geostationary satellites, and they’re all occupied, and once you understand that, you understand the pricing power behind having a satellite up in space. We have a company that masquerades as a department store company, Springland, but basically they own the real estate, and it’s not a model where you have inventory and you have to run the stores. You just take 17 percent of your tenents’ revenues as income, and so it’s really a real estate company, and it gets priced as a department store company but you don’t have the same risks at all. So I think it’s one that is completely misperceived, misunderstood by investors, so that’s an example. Another one would be Digital China where they distribute it products throughout China, and Dell, Cisco, HP are clients, and both Dell and HP at some point tried to do without Digital China, but they couldn’t. Interestingly enough, on some of the positive basis, they have some cash. They have a stake in an it services company that’s listed on the Shanghai Stock Exchange, and the two together are more than the market cap, and then you get the core business for free basically which is distribution of it products and Digital China seems to be.

CONSUELO MACK: Are these small holdings?

CHARLES DE LARDEMELLE: In the International fund, they’re starting to show up as about six percent of total assets, so in the context of…

CONSUELO MACK: And that’s what … you’ve got three billion…

CHARLES DE LARDEMELLE: Three and a half billion in the International. That’s right.

CONSUELO MACK: Three and a half billion in the International fund.

CHARLES DE LARDEMELLE: Yes, so Hong Kong’s starting to show up. Hong Kong/China is starting to show up as an allocation there, and it surprises even us because obviously the Chinese economy has a number of issues but, hey, when the price is right we’re willing to step in.

CONSUELO MACK: What was your view of Alibaba, just out of curiosity.

CHARLES DE LARDEMELLE: I think it’s another sign that the market cycle is fairly advanced. So you have the high-yield bond market is very lax. You have the largest IPO ever with Alibaba. You have buybacks which I view as a contrarian indicator.

CONSUELO MACK: And explain that.

CHARLES DE LARDEMELLE: Reaching new highs.

CONSUELO MACK: Why are stock buybacks a contrarian indicator? And you said they were at records now?

CHARLES DE LARDEMELLE: Yeah, they’re very close to records, and so they were at records at the last peak, you know, in ‘07, and they troughed in ’09 at the trough of the market, and so it looks like boards don’t do a much better job than some investors, and they tend to buy at the top when everything feels right, but that’s not usually when you get the best prices.

CONSUELO MACK: Warren Buffett recently informed the public much to everyone’s surprise that he would advise his wife’s trust to be 90 percent in an S&P 500 index fund possibly run by Vanguard and 10 percent in U.S. Treasuries, and you addressed that issue in a recent shareholder letter to clients and, in fact, said that now kind of more than ever or more than in recent years that this is the time to be with an active manager.


CONSUELO MACK: And a stock picker. Of course, every active manager always says that, but why is this the time?

CHARLES DE LARDEMELLE: For two reasons. One, if you’ve got a billion dollars, you can afford the volatility, but not everybody…

CONSUELO MACK: You can afford the volatility.

CHARLES DE LARDEMELLE: You can. You can. Absolutely, and so you put your money in a trust. Instead of the T-bills I would probably put 10 percent gold. I think it’s a better hedge and then go to beach. That’s fine. You live off the dividends. You’re fine, but not everybody is in that position, and so our clients for the most part cannot tolerate the volatility, and the other reason why I think today may not be the best time to do this is that we see markets as very elevated across the globe in good part because of QE.

CONSUELO MACK: Interest rates are so low globally…

CHARLES DE LARDEMELLE: That they have pushed…

CONSUELO MACK: In just about…

CHARLES DE LARDEMELLE: Yes, and then they have pushed everything up, and what’s…

CONSUELO MACK: You have to go into other assets to get any returns at all.

CHARLES DE LARDEMELLE: Or hide in cash. You don’t have to be fully invested all the time, and what’s also different from previous cycles perhaps is that we’ve seen correlated cycles in Japan, in Europe and in the U.S. In other words, in all three big regions prices are being manipulated by central bankers. Usually you find a region that’s doing better than another, so one is depressed and as value investors you can go and sift through the rubble in a depressed part of the globe, but today because QE has been prevalent throughout developed markets, it’s very difficult to do that, and I would say that today if you look at again market cap to GDP in the U.S. but in other markets as well, you are at quite elevated levels. One question we get a lot these days is about Europe. Europe seems to be, if you look at market indices, a lot more depressed.

CONSUELO MACK: MSCI Europe for instance.

CHARLES DE LARDEMELLE: Correct, and we think that’s somewhat misleading. If you were to take out of the Europe, the MSCI Europe index, the banks, telecom and utilities, really the market recovery in Europe has been almost as good as in the U.S. since ’09.

CONSUELO MACK: Oh, interesting.

CHARLES DE LARDEMELLE: And so really if you think that Europe is going to catch up, well, the high-quality companies are as expensive as the high-quality U.S. companies if not more expensive in Europe, and you’re really making a bet on banks, utilities and telecom catching up, and I could argue why that may not be the case, but you’re not buying a market as a whole that’s depressed. You’re buying three sectors.

CONSUELO MACK: One of the companies that you and I have talked about in the past is Berkshire Hathaway which is one of your top five holdings, but as you said you don’t run a concentrated portfolio, so I don’t know. It’s four percent of your portfolio or five percent, something like that.

CHARLES DE LARDEMELLE: It used to be. It’s been cut to two and a half, three.

CONSUELO MACK: Oh, cut to two and a half or three? And at the time I remember you saying that kind of the intrinsic value that were valuing Berkshire Hathaway was at $175,000, and now it’s over $200,000, so that’s why you’ve cut your holdings.

CHARLES DE LARDEMELLE: That’s correct. The discount to intrinsic value at Berkshire Hathaway has shrunk very substantially.

CONSUELO MACK: That was your one investment in early 2013. What would your one investment be today?

CHARLES DE LARDEMELLE: With a long-term view, something I could put in a trust for the kids and forget about it?


CHARLES DE LARDEMELLE: Today I would pick Nestlé.

CONSUELO MACK: Nestlé, another one of your top five holdings.

CHARLES DE LARDEMELLE: Yes, and I think what might be missed is that about 40 percent of the profits come from emerging markets. So you get emerging market exposure for a very reasonable price. The balance sheet is solid, and obviously the business is rock solid. The worst thing that could happen probably would be food poisoning that would taint the brand globally, but they are well diversified in terms of geographies, in terms of products. The balance sheet is strong. Management is great. It will do fine with a long-term view.

CONSUELO MACK: And value now is decent?

CHARLES DE LARDEMELLE: Well, the discount used to be very large back in the late ‘90s, and at the time you had big discrepancies between the Cokes of the world and food and beverage in Europe, and a lot of these values have arbitrage over time because of hedge funds, because of more global investors. So value has been better for Nestlé, but still with a long-term view that’s definitely something that I would be very comfortable holding.

CONSUELO MACK: What are the two companies that you’re most excited about that you think offer the most appreciation value and at the best price in your portfolio today?

CHARLES DE LARDEMELLE: I would mention maybe two additional names, Expeditors in the U.S. which is a freight forwarding company. Freight forwarding company, what they do is they take a commission to move a container from say China to Chicago. Okay? And so it’s asset light. You don’t have to make too many investments. Top-notch management. Used to trade at very brilliant multiples. Since the great financial crisis, global trade is still down substantially, and that company has deteriorated substantially in terms of multiples and today trades as if global trade was never going to pick up. So if it doesn’t pick up, it’ll compound nicely, and if global trade does pick up, I think you make an even better return on your investment. Again, very strong management, very strong balance sheet. I would be very comfortable holding this for the long term as well, put into that same trust for the kids and forget about it. And the last one I will mention then is Samsung Electronics, and that one is a bit more of a contrarian play. Samsung is a very strong company obviously, many different legs.

CONSUELO MACK: Conglomerate, huge, just a lot of different businesses.

CHARLES DE LARDEMELLE: Yes, that’s right. Semiconductors and smart phones are today the big legs on which Samsung stands. In smart phones, there are issues. There is competition coming from the Chinese, and margins are going to come down. There is no doubt in our mind.



CONSUELO MACK: You consider that to be different?

CHARLES DE LARDEMELLE: Yes, and I’ll explain, but we think that basically markets have been too harsh with Samsung that they’ll survive in the smart phone business and they’ll survive with decent margins. The difference between Apple and Samsung, Apple to me is the Gillette business model in reverse, i.e., Gillette, you know, they give you the razor and then they sell you the blades for a crazy price.

CONSUELO MACK: A very high price.

CHARLES DE LARDEMELLE: Yes. Apple is the reverse. They sell you the blades which are the phones for a very high price, and then they give you the blades, the songs and the videos and the movies for reasonable prices. You’re kind of stuck once you go on iTunes. Unfortunately, their use is streaming now, so they’re not buying any content anymore, but for me who bought an iPhone, I’m stuck with them and I have to pony up for the expensive razor every couple years.

CONSUELO MACK: Because you’re in their universe.

CHARLES DE LARDEMELLE: That’s right. At Samsung it’s different. If you want to toss the Samsung phone, you can. I can’t toss my Apple phone because I’m stuck with my library of songs and movies, but Samsung has shown an ability to fight dogfights and win these fights. I would say that the smart phone business at Samsung is very akin to Dell 10 years ago when Dell had very high margins, and Dell refused to fight the dogfight. They refused to bury HP in 2000. They could have buried HP which was losing money hand over fist in their PC business. Instead Dell decided to make very fat margins. I think Samsung will not make that mistake. Samsung will fight the Chinese. Actually they churn out 100 million cell phones a year with zero margin, but there is no capital

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