David Winters Transcript 7/19/2013 #1004

July 19, 2013

CONSUELO MACK: This week on WealthTrack, investing in a global shopping spree. Wintergreen Fund’s Great Investor David Winters looks for bargains among the high end luxury brands favored by the up and coming emerging market consumer. Where is he finding the most valuable jewels? That’s next on Consuelo Mack WealthTrack.


Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. Contrary to popular belief, the grass is not always greener on the other side. As a matter of fact when it comes to the economy and stock markets right now the U.S. is looking relatively rosy.

A recent report from economic research star Nancy Lazar sums it up nicely: “The U.S. outlook is pretty positive” and my favorite line of hers, “and Middle America remains our favorite merging market. Lazar and her team at their new macro research firm, Cornerstone Macro site a number of American positives including:

–“U.S. employment is increasing at a pretty steady pace.”

–“U.S Manufacturing renaissance is helping to lift U.S. vehicle production.”

–“Housing is likely to continue to be a driver of GDP…”

–“U.S. domestic company profits have led profit increases”


Contrast that to these observations:

–“Italian recession: banks’ bad debt is rising, and industrial production is in a severe recession.”

–“China new normal: both exports and imports are down sharply over the past 5 months.”

–and “The S&P and EM stock markets have decoupled.”


Have they ever! As this chart shows comparing the performance of the MSCI Emerging Markets Index ETF and the S&P 500 over the last two years, the U.S. has been winning hands-down, despite the fact that investors have been shunning U.S. stocks and favoring emerging market ones.


There is one area however where emerging markets continue to shine: demand for luxury goods. According to a recent report by Bain & Company, sales of worldwide luxury goods will grow as much as 50% faster than global GDP, led by emerging market consumers in Southeast Asia and South America in particular, with annual growth in China downshifting to a still impressive 7%. Bain notes the increasing purchasing power of so called “HENRY’s”, -high earnings, not rich yet- consumers who are becoming a new baby boom sized generation in emerging markets. That is the sweet spot this week’s Great Investor guest is targeting.


He is David Winters, portfolio manager of the value oriented Wintergreen Fund which he founded in 2005. Since its launch this go anywhere, invest in anything, value-oriented fund has outperformed the market and its mutual fund category. Winters himself was nominated for Morningstar’s International Stock Fund Manager of the Year Award in 2011 and 2010. Wintergreen is one of WealthTrack’s sponsors but his track record speaks for itself. To begin, I asked Winters the leading question of our time- is the recent rise in interest rates for real and what difference will it make.


DAVID WINTERS: I think it’s for real. I think interest rates will go a lot higher over many years. It’s inevitable. It’s happened before. It’ll happen again. I think it’s a huge opportunity for the few of us who are focused on getting rich, because stocks–nobody really looks at them anymore. Nobody cares. Everybody’s trading them. They’re not interested in buying individual businesses with growing coupons.


CONSUELO MACK: So what difference is a rising interest rate environment going to make to your investment strategy, or the kinds of companies that you invest in?


DAVID WINTERS: Well, we love companies that have what we call the trifecta, which have, you know, a good improving economic situation, management that’s good, and a cheap price. And we can kind lots of those opportunities today. And we want a company that has a business with a growing coupon. So even though if interest rates go up, our coupon goes up a lot faster.


CONSUELO MACK: So when you say a growing coupon, what do you mean?


DAVID WINTERS: That they can grow earnings, free cash flow, grow business values. And that’s really the key thing.


CONSUELO MACK: There are a number of people who are out there saying that in fact stocks are either fairly valued, or they’re getting expensive. What’s your view in the universe that you’re looking at?


DAVID WINTERS: At Wintergreen, the work that we do on the companies that we love, we think a lot of them are very, very undervalued. So it’s a stock picker’s market, a security selector’s market. It’s not just show up and buy the index.


CONSUELO MACK: But are they more inexpensive, more valuable now than they were, let’s say three or four years ago?


DAVID WINTERS: Well, in the crash it was just wild because you could buy and it just kept going down, and you had to have the courage of conviction, which we did. The difference is, the economy’s actually getting better in the U.S. It’s getting better in Asia. So you’re going to have the wind at your back, and if you can own the right kind of businesses, some of them just trade at absolutely the wrong price.


CONSUELO MACK: And the wrong price being the right price as far as you’re concerned. One of your contrarian views has also been that you think that inflation is going to go higher. Now, there is no one out there who is concerned about inflation, or think that inflation is going to suddenly occur, whether it’s globally or domestically. Why do you think inflation is an issue that we should be paying attention to?


DAVID WINTERS: I know in my life, in everybody’s life that I know, everything costs more. You know, whether it be feeding your family, feeding your pets, health care, whatever it is, it costs more. So that’s why we love businesses that have pricing power, that can raise the price at which they charge for their products, and people will gladly buy them.


CONSUELO MACK: So that’s an interesting point, because of course, a lot of companies have not had pricing power. And in fact, if you look at the government statistics, Ben Bernanke, for instance, is very concerned still about deflation. So, but you’re saying in selective places, that pricing power is still very much a fact of life and those are the companies you want to invest in.


DAVID WINTERS: We are focused on trying to find those wonderful gems. And build them into a portfolio, the Wintergreen Fund, you know, we feel like we’ve got an express train, a long term value creation express train. And it’s not a guarantee or a warranty, but I’m all in. All my friends and family are all in. And we think by having the right companies in an intelligent portfolio, you can get rich.


CONSUELO MACK: So what kinds of companies have pricing power, then, that you find are benefitting, that you own at Wintergreen?


DAVID WINTERS: Well, we love the watch and jewelry business. You’ve heard me talk about this before.


CONSUELO MACK: I’d love to hear it again, number one, and for viewers who haven’t heard you before, talk to us about it.


DAVID WINTERS: Well, for men, the only acceptable form of jewelry besides a wedding ring is a watch. And most guys, it’s the way they can distinguish themselves. We saw it in China, very much so. And even if they don’t buy the most expensive watch, they’ll buy a Tissot. So Swatch has low, medium and high end watches, and it’s a fabulous business.


CONSUELO MACK: And Swatch, of course, being one of your major holdings.


DAVID WINTERS: Correct. And so we think it’s a fabulous business because they can raise prices, sell more units, and it’s super shareholder oriented. And it’s run by a management team that, you know, eats, breathes, sleeps watches. You know? So that’s one example.


Another big example is Nestle. You know, Nestle is in the pet food business. People in America love their pets more than their relatives, generally, and they’ll spend anything for Fido. Because Fido doesn’t care if you’ve had a bad hair day. I have a friend of mine who has a new dog. She loves the dog. Dog makes her so happy. She’ll spend anything on that dog. And so, you know, if we can find these niches, especially niches that are global, have free cash flow and, you know, multi-currency, that you can sleep well at night, we really feel that the money that we’re investing today, Consuelo, will create sustainable wealth for our investors tomorrow.


CONSUELO MACK: Is this on a capital appreciation basis, or is it a reinvesting dividends and share buyback basis? What’s the kind of the total package that you look for in addition to the trifecta that you mentioned?


DAVID WINTERS: Well, first of all, we love business values growing. So ultimately you’ve got to have earnings growth, or you’ve got to have a company that sells out. But we really like businesses that grow in value. We like dividends. It’s nice to get paid to wait. Reinvestment back in the company is fine. Buy backs. If stocks and companies are really cheap, the stock is undervalued, we always encourage companies to retire their shares. But sometimes they have other things to do with the money. But it’s an unusual situation today where most of the public is in cash, and institutions. We think they’re going to get crushed.


CONSUELO MACK: And in bonds, right.


DAVID WINTERS: And bonds, just annihilated in the next five years.


CONSUELO MACK: So let me ask you about that. So why do you think that the bond market, for instance in particular, or cash, why are those dangerous places to be?


DAVID WINTERS: Well, rates are going up. So if you have a 30 year bond it’s going to be worth less. And people have been scrambling for income since the crash. So I can’t give you an exact, but a lot of folks are in fixed income. And I think it’s going to be an awful place to be. And then inflation will erode your purchasing power over time. And then all these folks are trying to play in these other things that are going to make them money. And the reality…


CONSUELO MACK: You mean alternative investments, then.


DAVID WINTERS: Alternatives, all kinds of mirages. But at the end of the day, it’s a great business with pricing power that’s global.


CONSUELO MACK: And David, that’s key. Because I was looking at your top five holdings, the most recent top five holdings in Jardine Matheson and Swatch, and British American Tobacco. I mean, Berkshire’s in there, too. But if I looked at your top ten holdings, there are a lot of globally based companies as well as companies that do a global business. So why is that? And from the get-go at Wintergreen you’ve emphasized global businesses.


DAVID WINTERS: I think the key thing is the U.S. is a mature economy, and we have a lot of debt. Same thing is true for the EU. And so the big opportunities are going to be the four or five billion people out there who want what we have. And they want it.


CONSUELO MACK: And let me pick up on that, because I know that you just returned from one of your many trips to Asia. And you said you came back with a very strong impression, stronger than even before.




CONSUELO MACK: So what was that impression?


DAVID WINTERS: Well, I’ve gone for 20 years in a row. And this year I was a there for a month, and I went to places like Surabaya in Indonesia. And you see that people really want a better tomorrow; and that this idea, you know, partially because of the internet, partially because of just “My friend has a scooter. I want a scooter.” “My friend has a Tissot watch. I want a Longines watch.” And it’s really happening.


So the consumer environment that really started here is now spreading this idea, is spreading everywhere. So what we want to do, we want to position Wintergreen as a catcher’s mitt for the capital appreciation that has happened, already, and we think is head of us.


CONSUELO MACK: Another interesting thing, of course, if you look at the newspaper and the headlines, I mean, take China for instance, I mean, everybody’s fixated on what the Peoples Bank of China is going to do. You know, are they tightening or they loosening? Is China cracking down on human rights? Are they loosening up on human rights? I mean, we just talked off camera about the pollution issues. There are all sorts of issues, you know, we’re focused on the problems. So what are the headlines that you pay attention to that might affect whether you are going to invest in companies that, for instance, are dependent upon China or Asia? What do you pay attention to?


DAVID WINTERS: I can’t tell you exactly what’s going to be. But I know two very important facts that are, you know, over and above the headlines. The government wants prosperity and stability. And those two things create a long term opportunity and, you know, all kinds of perils along the way. But if you’re positioned properly in the right businesses, which we believe we are, and we keep looking for more, that’s what we think’s important about China.


CONSUELO MACK: So David, is there one company that’s kind of emblematic of the kinds of company that really benefits tremendously from this aspirational Asian consumer?


DAVID WINTERS: Richemont is the owner of Cartier. It’s listed in Switzerland. It’s sort of a multidimensional company. But they own Cartier, and Cartier is a French company. And people love Cartier. It’s the most aspirational jewelry brand and it’s the most global. And so you find Cartier stores, you know, in the Wynn Macau they had to have two. Two. Because the one couldn’t sell the jewelry fast enough. So we love businesses like that.


CONSUELO MACK: Well, talk about Wynn Macau, because that’s also one of your holdings. And I know that you hold companies long term, average holding period of what is five years, still, four to five years? But when Macau is a company that I know you’re very enthusiastic about, so tell us about that story.


DAVID WINTERS: Well, Macau is this enclave. It’s a special administrative region. It’s controlled by the People’s Republic of China, but it’s the only legal place to gamble in China. There’s six operators. Wynn is one of them. So unlike Las Vegas, where anybody can basically show up and get a license, I mean, that’s an exaggeration, but you have a lot of competition, you only have six players. And there are more and more people who want to come to Macau to play.


CONSUELO MACK: Now, the Chinese are notorious for loving gambling.


DAVID WINTERS: Gambling for the ethnic Chinese, there is no social sigma. Grandma gambles. It’s fun. It’s part of the budget. And so, you know, it’s really Macau is just a wonderfully wild place to see because the Chinese have a lot of fun.


CONSUELO MACK: Yeah. And so, but the Wynn Macau, what is it about that company in particular?


DAVID WINTERS: Well, we think Steve Wynn’s a very smart guy, and he’s got a proven record. He’s very shareholder focused. This a controlled company in Macau, so it’s controlled by the parent company, but we have the money at Wynn Macau level, which trades in Hong Kong. So it’s purely focused on Macau. And they have a building which, give or take, makes a billion dollars a year in cash. They do very high quality job. They’re really essentially the high end provider of gaming in Macau. And they’re obsessed on the details. And it’s really a US company that’s operating there, and we think the management’s excellent. And so we’re very comfortable. We get paid five percent to wait. And they’re going to build out something called the Cotai strip.


CONSUELO MACK: And you said you get paid five percent to wait because that’s the dividend yield?






DAVID WINTERS: So you get paid to wait, you know, talking about interest rates before, and they’re building another whole branch of the gaming in … 15 minutes away in Cotai. And it’s 51 acres. And it’ll take a couple years to build out. But it’s going to be big. You know, or it should be big.


CONSUELO MACK: And you’re not worried about the market being saturated or Wynn overextending itself or …


DAVID WINTERS: They have a conservative balance sheet. It’s their money, too. There’s 28, 32 million visitors now. They think they’ll go to 100 million. So people want to go. So we love these situations where the demand is going up like this, the supply is like this, and they have pricing power. So we’re just trying to stack the deck in the Wintergreen investor’s favor.


CONSUELO MACK: So what about the political risks in China, for instance? And when Wintergreen runs a pretty focused portfolio, and your top five holdings, of which Wynn Macau is not one of the top five, is 30% of the portfolio, so you know, if one of these companies blows up, that’s going to hurt you.




CONSUELO MACK: So are you worried about any of your companies blowing up, or has that happened in your Wintergreen experience since 2005?


DAVID WINTERS: You know, things can always go wrong. But most of our companies have no debt, or very little debt, net cash, free cash flow, are diversified globally, and if something happens in China it’s going to affect us.




DAVID WINTERS: The world is a small place today. But most of these businesses we own are super resilient. And we’ve studied them, we’ve crawled through them, and they’re conservatively managed, and most everybody who runs the companies has almost all their own wealth side by side with you. People behave … this is your show. You care on a whole different level because your name is on the door. And it’s the same thing that’s true with Jardine Matheson. And they’re just first rate.


CONSUELO MACK: Jardine Matheson. That’s the story there that is still a growth and value story?


DAVID WINTERS: They have three principle businesses. One is basic- … is small, essentially convenience stores, food stores, a dairy farm. That’s a growing business. It’s very hard to get space. They control something called Astra, which is in Indonesia. It’s the biggest company in Indonesia. There’s 240 million people in Indonesia who all want things that Astra sells. It’s a very well-run company, locally-run company. And then they control Hong Kong land, which is some of the most valuable real estate in the world, and it’s very ably managed as well. And then they have a smaller, diversified portfolio. It’s undervalued. They’re focused on creating long term value for shareholders. They’ve bought back stock. They’re honest. They’re conservative. They’re good people.


CONSUELO MACK: And you’ve been with them for a long time. Right.


DAVID WINTERS: Right. We believe.


CONSUELO MACK: Yes. So some of the newer companies that you’ve been investing in, and I know, we talked about Wynn Macau, but there’s a Brazilian company that you now own, and I’m not sure I’m going to … I’m going to botch the pronunciation. Is it “Cello” or


DAVID WINTERS: Cello, or Cielo or…


CONSUELO MACK: Cielo. Right.


DAVID WINTERS: Yes. We’ve learned, you know, we invested in MasterCard. We made a lot of money in MasterCard. And we still like it.


CONSUELO MACK: Are you out of MasterCard?


DAVID WINTERS: No, no, we still like it. And part of the reason we like MasterCard is the world is going to plastic. It used to be you went to the super market, you paid in cash. Now, almost everybody slides a card through. And so MasterCard’s grown globally and so we’ve tried to look at what are opportunities to get in that same business? So we came across this company in Brazil, 190 million people in Brazil. They’re all getting interested in credit cards, and debit cards, and swiping with your phone. And Cielo’s got 50% market share.




DAVID WINTERS: Trades at 13 times earnings, next year’s earnings, it’s had a good year. And it’s a good business. And we know it’s going to happen. And as long as they execute we’ll make money. And every day I can sort of think about, oh, 190 million Brazilians, you know.


CONSUELO MACK: And more of them having the credit cards.




CONSUELO MACK: But you look at the headlines again, and people are saying Brazil, it’s… you know, a functioning democracy, but you have these massive protests now among people who are in the middle class. So I mean, how do you figure that into your equation?


DAVID WINTERS: You know, it’s very hard not to get shaken up by headlines. And I think Brazil will have its problems, but it also has enormous opportunities. And we think that whatever the short term troubles are, people will still want to use plastic. It’s inevitable. And part of the issues in Brazil are that’s… it’s happened with iron ore prices and that’ll change. But headlines are often an opportunity. Because people today focus on the negative. And we’re very much focused on, ah … where can we make money out of this?


CONSUELO MACK: Why aren’t you more wary about what the markets can do to you, even if you do your homework?


DAVID WINTERS: I’m optimistic because I feel like we’ve really done the work. We continue to do the work. And we find these things that are… companies that are wildly mispriced. And what’s so different about today, it used to be we had to buy dented soup cans in the old days, you know, and turn the label around.


CONSUELO MACK: Right, as a deep value investor. Right.


DAVID WINTERS: Yeah, that’s what we had to do. Today we can find first class merchandise trading at, you know, 50, 60% discounts… I’ve never seen anything. So what I try to do is steal myself, and get the encouragement sometimes, so just, and you keep going, stay focused, and you go to Macau. You go see what’s going on. And you get out of your chair, you turn off the television, and you go on the road.


CONSUELO MACK: That’s so interesting. So that really is a big change as far as the dented can versus the great merchandise selling at discounted values. That’s such an interesting observation. One last question, which we always end our interviews with is, if there’s One Investment that we should all own in a diversified, long term portfolio, what would it be?


DAVID WINTERS: I would own Nestle.


CONSUELO MACK: Really, still?




CONSUELO MACK: So that’s been…


DAVID WINTERS: And Nestlé’s become controversial because they’re growing a little slower. You know, they own L’Oreal. People don’t know what’s going to happen. But it has a three, three-and-a-half percent yield. They sell products that the world needs. And I was in Indonesia, in all these little places. Nestle products everywhere. You know? And I think that you could own Nestle, put it in your back pocket, or your safety deposit box, and come back in ten years, and it’ll be worth more. And that’s the way we feel about Wintergreen as well, is that people should get their focus long term. And that’s how to get wealthy.


CONSUELO MACK: All right, well, I look forward to… you know, 2005, you launched Wintergreen. I look forward to another decade talking to you about what’s… your optimism about the world…




CONSUELO MACK: …and finding great companies. David, thank you so much for joining us.


DAVID WINTERS: So nice to see you, Consuelo.


CONSUELO MACK:At the conclusion of every WealthTrack we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point takes a page from Winters and most of our other Great Investor guests: it is look for the positive trends.


In investing that means regardless of the negative headlines, and let’s face it 99% of headlines are negative, Great Investors search for what is working and will work in the years ahead. Winters’ focus on companies that cater to the aspirational consumers, the HENRY’s or “high earnings, not rich yet” populations in emerging markets, who are working and spending toward a better life is a classic example.


Next week we are exploring another universal goal: for a financially secure retirement. We will discuss the need for a new retirement conversation and why insurance is going to be a key component with retirement pros Mary Beth Franklin and Kim Lankford. If you have missed any of our past Great Investor or Financial Thought Leader guests you can find them on our website wealthtrack.com as well as additional interviews and information in our WealthTrack Extra Feature. In the meantime, have a great weekend and make the week ahead a profitable and a productive one.


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